This practice note has been prepared under a programme of cooperation between the Organisation for Economic Co-operation and Development (OECD) Centre for Tax Policy and Administration Secretariat and the Intergovernmental Forum on Mining, Minerals, Metals and Sustainable Development (IGF), as part of a wider effort to address some of the challenges developing countries are facing in raising revenue from their mining sectors. It complements action by the Platform for Collaboration on Tax and others to produce toolkits on top priority tax issues facing developing countries. It reflects a broad consensus between the OECD and IGF, but should not be regarded as the officially endorsed view of either organization or of their member countries. The lead organisation for this practice note was the OECD. It is currently a consultation draft.
On 19 February 2018, interested parties were invited to provide comments on a consultation document on misuse of residence by investment schemes to circumvent the Common Reporting Standard. The consultation document assessed how these schemes are used in an attempt to circumvent the CRS; identified the types of schemes that present a high risk of abuse; reminded stakeholders of the importance of correctly applying relevant CRS due diligence procedures in order to help prevent such abuse; and explained next steps the OECD will undertake to further address the issue, assisted by public input.
OECD/G20 BASE EROSION AND PROFIT SHIFTING PROJECT. COUNTRY‑BY‑COUNTRY REPORTING – COMPILATION OF PEER REVIEW REPORTS (PHASE 1). INCLUSIVE FRAMEWORK ON BEPS: ACTION 13. The integration of national economies and markets has increased substantially in recent years, putting a strain on the international tax rules, which were designed more than a century ago. Weaknesses in the current rules create opportunities for base erosion and profit shifting (BEPS), requiring bold moves by policy makers to restore confidence in the system and ensure that profits are taxed where economic activities take place and value is created. Following the release of the report Addressing Base Erosion and Profit Shifting in February 2013, OECD and G20 countries adopted a 15-point Action Plan to address BEPS in September 2013. The Action Plan identified 15 actions along three key pillars: introducing coherence in the domestic rules that affect cross-border activities, reinforcing substance requirements in the existing international standards, and improving transparency as well as certainty. After two years of work, measures in response to the 15 actions were delivered to G20 Leaders in Antalya in November 2015. All the different outputs, including those delivered in an interim form in 2014, were consolidated into a comprehensive package. The BEPS package of measures represents the first substantial renovation of the international tax rules in almost a century. Once the new measures become applicable, it is expected that profits will be reported where the economic activities that generate them are carried out and where value is created. BEPS planning strategies that rely on outdated rules or on poorly co-ordinated domestic measures will be rendered ineffective. Implementation is now the focus of this work. The BEPS package is designed to be implemented via changes in domestic law and practices, and in tax treaties. With the negotiation for a multilateral instrument (MLI) having been finalised in 2016 to facilitate the implementation of the treaty related measures, over 75 jurisdictions are covered by the MLI. The entry into force of the MLI on 1 July 2018 paves the way for swift implementation of the treaty related measures. OECD and G20 countries also agreed to continue to work together to ensure a consistent and co-ordinated implementation of the BEPS recommendations and to make the project more inclusive. Globalisation requires that global solutions and a global dialogue be established which go beyond OECD and G20 countries. A better understanding of how the BEPS recommendations are implemented in practice could reduce misunderstandings and disputes between governments. Greater focus on implementation and tax administration should therefore be mutually beneficial to governments and business. Proposed improvements to data and analysis will help support ongoing evaluation of the quantitative impact of BEPS, as well as evaluating the impact of the countermeasures developed under the BEPS Project. As a result, the OECD established an Inclusive Framework on BEPS, bringing all interested and committed countries and jurisdictions on an equal footing in the Committee on Fiscal Affairs and all its subsidiary bodies. The Inclusive Framework, which already has more than 110 members, is monitoring and peer reviewing the implementation of the minimum standards as well as completing the work on standard setting to address BEPS issues. In addition to BEPS members, other international organisations and regional tax bodies are involved in the work of the Inclusive Framework, which also consults business and the civil society on its different work streams. This report was approved by the Inclusive Framework on BEPS on 12 April 2018 and prepared for publication by the OECD Secretariat.
The integration of national economies and markets has increased substantially in recent years, putting a strain on the international tax rules, which were designed more than a century ago. Weaknesses in the current rules create opportunities for base erosion and profit shifting (BEPS), requiring bold moves by policy makers to restore confidence in the system and ensure that profits are taxed where economic activities take place and value is created. Following the release of the report Addressing Base Erosion and Profit Shifting in February 2013, OECD and G20 countries adopted a 15-point Action Plan to address BEPS in September 2013. The Action Plan identified 15 actions along three key pillars: introducing coherence in the domestic rules that affect cross-border activities, reinforcing substance requirements in the existing international standards, and improving transparency as well as certainty. After two years of work, measures in response to the 15 actions were delivered to G20 Leaders in Antalya in November 2015. All the different outputs, including those delivered in an interim form in 2014, were consolidated into a comprehensive package. The BEPS package of measures represents the first substantial renovation of the international tax rules in almost a century. Once the new measures become applicable, it is expected that profits will be reported where the economic activities that generate them are carried out and where value is created. BEPS planning strategies that rely on outdated rules or on poorly co-ordinated domestic measures will be rendered ineffective. Implementation is now the focus of this work. The BEPS package is designed to be implemented via changes in domestic law and practices, and via treaty provisions. With the negotiation for a multilateral instrument (MLI) having been finalised in 2016 to facilitate the implementation of the treaty related measures, 67 countries signed the MLI on 7 June 2017, paving the way for swift implementation of the treaty related measures. OECD and G20 countries also agreed to continue to work together to ensure a consistent and co-ordinated implementation of the BEPS recommendations and to make the project more inclusive. Globalisation requires that global solutions and a global dialogue be established which go beyond OECD and G20 countries. A better understanding of how the BEPS recommendations are implemented in practice could reduce misunderstandings and disputes between governments.
OECD Taxation Working Papers N. 34: STATUTORY TAX RATES ON DIVIDENDS, INTEREST AND CAPITAL GAINS. THE DEBT EQUITY BIAS AT THE PERSONAL LEVEL (Michelle Harding, Melanie Marten). This paper presents statutory tax rates on several forms of capital income, including dividends, interest on bonds and bank accounts, and capital gains on shares and real property, including integration between the corporate and personal levels. It updates the rates from an earlier tax working paper (Harding, 2013) and extends the analysis to consider the debt-equity bias of the tax system when the personal level of taxation is considered. Purpose – 1. In addition to labour and business income, many individuals also receive capital income, for example, from holding funds in deposit accounts or bonds, or from the ownership of shares or real property. The tax rules applied to these forms of income differ within and across countries according to the nature, timing and source of the revenue, and the income level and characteristics of the income-earner. 2. Taxation of Dividends, Interest and Capital Gain Income (Harding, 2013) provides an analytical framework and the statutory tax treatment of three simple types of capital income earned by resident individuals in a domestic setting: dividend income from ordinary shares; interest income from cash deposits; and capital gains realised on long-term real property and shares. The paper traced the impact of different tax treatments from pre-tax corporate income, through the relevant corporate and personal tax systems, to the post-tax income received by an illustrative top-rate taxpayer. The descriptions were supplemented with diagrammatic and algebraic presentations and illustrative examples for each OECD country as at 1 July 2012. 3. This paper draws on responses to a questionnaire distributed in February 2016 (Questionnaire for Tax and Debt Bias in Corporate Financing Analysis). 1 It updates the information presented in Harding (2013) to 1 July 2016 and extends the analysis to two new types of capital income: interest income from corporate bonds, and capital gains on short-held shares. As in the previous paper, the tax rates represent the maximum possible burden on capital income under the relevant tax systems and are statutory, rather than effective, tax rates.2 Finally, the paper compares the tax treatment of the returns to debt and equity at both the corporate and individual levels to determine whether there is a tax-created bias toward debt when personal taxation is taken into account. Assumptions – 4. The paper discusses five types of capital income from personal savings. For each, the most basic form of the income type has been considered, as the tax treatment of these sets the foundation from which the tax treatment of more complex forms of the same type of income may vary. The pre-tax nominal rate of return on corporate equity is assumed to be 4%3 , which affects the tax rates shown for Belgium, Italy and Turkey (for new equity only), the Netherlands, and Norway 4 . The report considers taxes on the income from these assets but not taxes on the value of the investment (wealth taxes), which would increase the tax burden on these assets. 5. The paper makes a number of assumptions about the investor. First, it assumes that the investor is resident in the particular country; secondly, that they are not a substantive shareholder; and finally that the income is not related-party income. The investor considered is assumed to pay the top rate of any progressive rate scale applicable.5 Financial assets are assumed to be held outside tax-preferred accounts (such as pensions, retirement accounts or investment funds). As the importance of these accounts varies across countries, cross-country comparisons should be made with this in mind. The impact of inflation on the real amount of the post-tax return is described but not taken into account in the calculation of the combined rates. The impact of the holding period test on the combined rates is not considered. Capital gains on shares are assumed to derive entirely from retained profits, whereas capital gains on property are assumed to derive from property that is directly held by the investor. For federal countries, personal and corporate tax rates encompass both federal and state rates (the latter on a weighted or representative basis), as provided in the questionnaire responses. 6. The paper draws on responses to the questionnaire distributed in February 2016, supplemented by the IBFD Tax Database; consultations with member countries; reference to the previous working paper; and where necessary, country-specific data.
SPECIAL FEATURE: DIFFERENCES IN THE DISPOSABLE INCOMES OF HOUSEHOLDS WITH AND WITHOUT CHILDREN. This annual publication provides details of taxes paid on wages in all 35 member countries of the OECD. The information contained in the Report covers the personal income tax and social security contributions paid by employees, the social security contributions and payroll taxes paid by their employers and cash benefits received by families. The objective of the Report is to illustrate how personal income taxes, social security contributions and payroll taxes are calculated and to examine how these levies and cash family benefits impact on net household incomes. The results also allow quantitative cross-country comparisons of labour cost levels and of the overall tax and benefit position of single persons and families. The Report shows the amounts of taxes, social security contributions, payroll taxes and cash benefits for eight family-types, which differ by income level and household composition. It also presents the resulting average and marginal tax rates. Average tax rates show that part of gross wage earnings or total labour costs which are taken in personal income taxes (before and after cash benefits), social security contributions and payroll taxes. Marginal tax rates show the part of an increase of gross earnings or total labour costs that is paid in these levies. The focus of the Report is the presentation of new data on the tax/benefit position of employees in 2017. In addition, the new data is compared with corresponding data for the year 2016. The average worker is designated as a full-time employee (including manual and non-manual) in either industry sectors B-N inclusive with reference to the International Standard Industrial Classification of All Economic Activities, Revision 4 (ISIC Rev.4) or industry sectors C-K inclusive with reference to the International Standard Industrial Classification of All Economic Activities, Revision 3 (ISIC Rev.3). The Report is structured as follows: ● Chapter 1 contains an overview of the main results for 2017. ● Chapter 2 contains the Special Feature on “Differences in the disposable incomes of households with and without children”. ● Part I (International Comparisons) reviews the main results for 2016 and 2017 and is divided into 3 chapters (Nos. 3 to 5). Chapter 3 reviews the main results for 2017, which are summarised in comparative tables and figures included at the end of that section. Chapter 4 presents a graphical exposition of the estimated tax burden on labour income in 2017 for gross wage earnings between 50% and 250% of the average wage. Then Chapter 5 reviews the main results for 2016, which are summarised in the comparative tables at the end of the chapter and compares them with the 2017 figures. ● Part II (Chapter 6) focuses on the historical trends in the tax burden for the period 2000-17. ● Part III contains individual country tables specifying the wage levels considered and the associated tax burdens for eight separate family types, together with descriptions of each tax/benefit system. ● The Annex describes the methodology and its limitations. The Report has been prepared under the auspices of the Working Party on Tax Policy Analysis and Tax Statistics of the Committee on Fiscal Affairs. This document has been produced with the financial assistance of the European Union.
Following the 2008 financial and economic crisis, there has been renewed interest in the taxation of household savings as a means of strengthening the efficiency and fairness of countries’ tax systems. Strong calls have come from civil society to increase capital taxation to address income and wealth inequality. Meanwhile, the recent move towards the automatic exchange of financial account information between tax administrations is likely to make it harder for taxpayers to evade tax by hiding income and wealth offshore. This report provides a detailed and timely review of the taxation of household savings in OECD and five key partner countries in light of these and other developments. The report finds that, while countries do not necessarily need to tax savings more, there is significant scope to improve the way they tax savings. Most significantly, there are opportunities for countries to increase the neutrality of taxation across assets and thereby improve both the efficiency and fairness of their tax systems. The lack of neutrality in the taxation of savings is illustrated by marginal effective tax rate (METR) modelling undertaken for 40 OECD and key partner countries across a range of potential savings options. METR modelling enables the impact of a wide range of taxes and tax design features to be incorporated into a single indicator. The results highlight significant variation in METRs across assets, with tax systems creating significant incentives to alter savings portfolio allocation away from that which would be optimal in the absence of taxation. Private pension funds tend to be the most tax-favoured form of saving, with owneroccupied residential property also significantly tax-favoured. In contrast to owner-occupied residential property, rental property is often subject to relatively high METRs due to the application of progressive marginal personal income tax rates, capital gains taxes and property taxes. Bank accounts and corporate bonds also tend to be relatively heavily taxed in many countries. Analysis of asset holding microdata shows that a move towards greater neutrality in the taxation of savings can often also improve the fairness of tax systems. Drawing on microdata for 18 European countries from the Eurosystem Household Finance and Consumption Survey (HFCS), the report finds that patterns of asset holdings vary significantly across both income and wealth distributions. Matching these asset holding patterns with METRs shows that current tax systems often favour the savings of households that are financially better-off. For example, poorer households tend to hold a significantly greater proportion of their wealth than richer households in bank accounts, which are typically highly-taxed, whereas richer households tend to hold a greater proportion of their wealth in investment funds, pension funds and shares, which are all often taxed relatively lightly While acknowledging the difficulty in achieving perfect neutrality across assets, the report discusses a number of ways in which countries can look to increase neutrality, such as through inflation indexation and consistent application of taxes across assets. A number of more fundamental reforms are also discussed, including exemption of the normal return on savings, imposition of an interest charge on deferred capital gains, and adoption of expenditure-based taxation.
Many forms of energy use are associated with environmental and health damages and contribute to climate change, so the social cost of energy use frequently exceeds private cost. Taxes on energy use – carbon taxes and other specific taxes on energy use – can make energy users pay for the full costs of pollution and climate change, so reducing harmful emissions at minimal cost, while also raising revenue that can fund vital government services. These considerations may affect policy design to an extent, but this report clearly shows that energy taxes continue falling well short of their potential to improve environmental and climate outcomes. Based on OECD’s Taxing Energy Use database, a unique dataset to compare coverage and magnitude of specific taxes on energy use across 42 OECD and G20 economies, six sectors and five main fuel types, this report assesses the magnitude and coverage of taxes on energy use in 2015, and considers change between 2012 and 2015. Together, the 42 countries represent approximately 80% of global energy use and CO2 emissions associated with energy use. This uniquely detailed and comprehensive database is now available for 2012 and 2015. Permit prices in CO2 emissions trading system change the prices of energy use and carbon emissions in a way similar to the taxes included in Taxing Energy Use. These prices are not included here but in OECD’s Effective Carbon Rates. However, they do little to change the findings presented here. Taxing Energy Use data is a key input for Effective Carbon Rates, but remains unique in its in-depth account of tax rates, particularly the breakdown by fuels. The main findings are as follows: taxes are strongly heterogeneous, so are poorly described by country averages; almost all taxes are too low from an environmental point of view; taxes on coal often equal zero or nearly so; taxes in road transport are much higher than taxes in other sectors, but still are too low to cover external costs in nearly all cases; taxes tend to be higher where GDP per capita is higher but there are notable exceptions to this pattern; fuel taxes increased between 2012 and 2015 in some large countries, and first steps towards removing lower tax rates on diesel compared to gasoline are taken, but apart from that there are no signs that the polluter pays principle determines the energy tax landscape more strongly in 2015 than in 2012. The following paragraphs elaborate on these findings. Energy taxes differ strongly between countries, sectors and fuels. This is the result of a mix of policy objectives and political economy factors, and it implies that consideration of average tax rates across sectors and fuels on a country level can be very misleading. A bird’s eye view of effective tax rates per tonne of CO2 across all countries reveals that there is hardly any change in the tax rates on emissions outside the road transport sector. Taxes continue to be poorly aligned with environmental and climate costs of energy use, across all countries. In road transport, 97% of emissions are taxed.
OECD – INTERNATIONAL TAX PLANNING AND FIXED INVESTMENT ECONOMICS DEPARTMENTS WORKING PAPERS No. 1361: 1. Corporate income taxes affect business investment in several ways. By reducing the after-tax return on investment, high corporate taxes can lead firms to reject certain investment projects or reduce their scale, thus reducing the overall level of investment (OECD, 2009; Arnold et al., 2011). Corporate taxes also influence the allocation of investment across industries and countries (Fatica, 2013). All else equal, higher-tax rate countries attract less international investment than lower-tax rate countries, although corporate taxes are only one among many determinants of investment location (Skeie, 2016; Hajkova et al., 2006; Feld and Heckemeyer, 2011). 2. This paper explores whether the effect of corporate taxes on investment is influenced by international tax planning, which is also known as Base Erosion and Profit Shifting (BEPS) (OECD, 2013). The idea is that tax planning allows multinational enterprises (MNEs) to reduce their tax burden, for example by shifting profits to lower-tax rate or no-corporate-tax countries (Johansson et al., 2016a). As a result, the return on investment of an MNE entity in a high-tax rate country is only partially taxed (or not taxed at all) in this country. Reflecting this, tax-planning MNEs are expected to be less sensitive to corporate taxes in their investment decisions than non-tax-planning firms. Indeed, existing single-country studies focusing on US and German MNEs suggest that tax planning can affect the tax sensitivity of investment (Grubert, 2003; Overesch, 2009). The purpose of this paper is to assess this effect systematically across a wide range of countries. 3. This paper confirms that corporate taxes have a negative impact on investment and shows that this negative impact is smaller among tax-planning MNEs than other firms. The analysis is based on a large sample of industry and firm-level data for OECD and G20 countries. A 5 percentage point increase in the effective marginal corporate tax rate is found to be associated with a reduction in investment by about 5% in the long term on average across industries. This effect is lower in industries with a high concentration of MNE entities with profit-shifting incentives, i.e. entities facing a higher statutory corporate tax rate than the average in their MNE group. This definition of profit-shifting incentives is in line with the accompanying paper on the assessment of tax planning (Johansson et al., 2016a). For an industry with a strong presence of MNE entities with profit-shifting incentives (75th percentile of the distribution), the tax sensitivity of investment is nearly halved as compared to the median industry. Results obtained at the firm-level are consistent with these industry-level results. 4. The estimation results also suggest that strong anti-avoidance rules against tax planning (e.g. strict transfer pricing documentation requirements and interest deductibility rules, see Johansson et al., 2016b) increase the tax sensitivity of investment in industries with a strong concentration of profit-shifting MNEs. This confirms that tax planning affects the tax sensitivity of investment. Thus, tax planning opportunities may allow higher-tax rate countries to retain attractiveness as investment destinations for taxplanning MNEs, but this would come at the cost of tax distortions and losses in tax revenues. (By Stéphane Sorbe and Åsa Johansson).