OECD AND TAX POLICY Martin Jareš

Overview 1. Work of the OECD in the tax area Introduction Double taxation Transfer pricing Harmful tax practices Tax administration Consumption taxes Base erosion and profit shifting 2. Tax statistics and tax policy analysis Revenue Statistics Taxing Wages Tax Database Tax policy studies

1. WORK of the OECD in the tax area

Introduction The core work of the OECD in the tax policy area lies in setting standards The standards are not binding, the OECD does not have any legislative power to enforce them

Double taxation Countries usually tax It would lead to double taxation income sourced in their territories worldwide income of their residents It would lead to double taxation Double taxation would create disincentives to invest abroad Countries conclude bilateral double tax avoidance treaties

Double taxation (2) Model Tax Convention on Income and on Capital A model for bilateral double-taxation treaty It sets general principles and allocation of taxing rights of the two contracting countries Used by all OECD countries and some non-OECD countries as a basis for negotiation with other countries The full version has more than 2,000 pages Lately, the fight against double non-taxation has become equally important

Transfer pricing Companies can shift profits to low-tax countries using manipulated transfer prices For example, consulting services supplied by a subsidiary in a tax haven can have very high prices in order to decrease the tax base in the high-tax country shift profit to the tax haven

Transfer pricing (2) Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations. Provide guidance on the application of the arm's length principle (valuation of cross-border transactions between associated enterprises) Used by all OECD countries as a basis for their legislation The full version has almost 400 pages

Harmful tax practices In the last decades, countries have been decreasing corporate income tax rates in order to attract more investment. This is called tax competition. There are instances of tax competition which is regarded as harmful. For example, a country might introduce tax incentives only for new, foreign-owned companies. Harmful Tax Competition report in 1998 and progress reports. Model Agreement on Exchange of Information on Tax Matters

Investment incentives Investment incentives in the Czech Republic Direct subsidies Tax expenditures (tax holiday up to 10 years) Is it a harmful tax practice? Is it good for the Czech Republic?

Tax administration Sharing best practices and experiences Main areas of concern are Voluntary compliance (taxpayers pay voluntarily their taxes) Taxpayer services (e-services) Two work streams: Taxpayers with global interests (multinational companies, high net worth individuals), Small and medium enterprises. Tax Administration: Comparative Information A good source of information on tax administration

Consumption taxes Traditionally, OECD worked only in the are of direct taxation Direct taxes = taxes on income Indirect taxes = consumption taxes Importance of indirect taxation is rising Indirect taxes could cause double-taxation if countries do not follow similar principles One of the reasons for harmonisation of VAT and excises in the EU The OECD started to work also in this area International VAT/GST Guidelines

Base erosion and profit shifting Started in 2012 as a reaction to the financial and economic crisis 2008-2009 Tax avoidance has been a well-known phenomenon for decades It became politically unsustainable to tolerate it 2013-2015: 15 Actions reforming the international corporate tax system

Base erosion and profit shifting (2) Changes to double-tax treaties OECD model tax convention (Actions 2, 6, 7, 14) multilateral instrument (Action 15) transfer pricing (Actions 8-10, 13) farmful tax practices – Action 5 tax administration – Action 12 domestic legislation – Actions 2-4 Economic analysis of aggressive profit shifting Action 11 Digital economy Action 1

2. Tax Statistics AND Tax Policy Analysis

Overview Work on tax policy analyis and tax statistics is carried on by Working Party No. 2 on tax policy analysis and tax statistics Joint Meeting of Tax and Environment Experts Regular statistical products Revenue Statistics Taxing Wages Tax Database Environmental Tax Database Analysis of tax policy Tax policy studies and Working papers

Revenue Statistics The Interpretative Guide defines what is tax In the OECD classification the term “tax” is confined to payments which are compulsory unrequited paid to general government Data on tax revenues of all member states from 1965 Data on accrual basis Tax revenue is recorded at the time that the tax liability was created Breakdown by type of tax and level of government

Revenue Statistics (2) 1000 Taxes on income, profits and capital gains 1100 Taxes on income, profits and capital gains of individuals 1200 Corporate taxes on income, profits and capital gains 2000 Social security contributions 3000 Taxes on payroll and workforce 4000 Taxes on property 5000 Taxes on goods and services 5100 Taxes on production, sale, transfer, leasing and delivery of goods and rendering of services 5110 General taxes (5111 Value added taxes) 5120 Taxes on specific goods and services (5121 Excises) 5200 Taxes on use of goods, or on permission to use goods or perform activities 5210 Recurrent taxes (5211, 5212 Paid in respect of motor vehicles)

Revenue Statistics (3) Attribution of tax revenues to levels of government In general, a tax is attributed to the government unit that exercises the authority to impose the tax (either as a principal or through the delegated authority of the principal) has final discretion to set and vary the rate of the tax, and also final discretion over the use of the tax proceeds Links: http://www.oecd.org/tax/tax-policy/revenue-statistics.htm https://data.oecd.org/tax/tax-revenue.htm#indicator-chart https://stats.oecd.org/

Revenue Statistics (4) Total tax burden in the Czech Republic has been slightly above the OECD average

Revenue Statistics (5) Czech Republic has higher share of social security contributions and lower share of personal income tax and property taxes

Taxing Wages Provides comparative information of tax burden on labour income of OECD countries. Shows information on income tax paid by workers social security contributions levied on employees and their employers family benefits paid as cash transfers.

Taxing Wages (2) Average and marginal effective tax rates are calculated Not based on actual data but on a model Results are presented for different household types which differ by income level (in percentage of average wage) household composition (one- and two-earner families, different number of children) Link: http://www.oecd.org/ctp/tax-policy/taxing-wages.htm

Tax Database Comparative information on a range of tax statistics on personal income taxes social security contributions non-tax compulsory payments corporate and capital income taxes taxes on consumption

Tax Database (2) Personal taxes personal income taxes social security contributions paid by employees employers self-employed non-tax compulsory payments compulsory payments made to organizations outside the government sector or because they are not unrequited measures of tax burden average rate marginal rate tax wedge (income tax, employer and employee social security contributions and pay roll tax as a percentage of labour costs)

Tax Database (5) Corporate and capital income taxes basic (non-targeted) rates, small business tax rates, corporate income taxes relating to sub-central governments.

Tax Database (6) Taxes on consumption value added tax tax rates registration threshholds excise duties on beer, wine, alcoholic beverages, mineral oils, tobacco . Link: http://www.oecd.org/ctp/tax-policy/tax-database.htm

Tax policy studies Since 1999, 24 studies published Studies deal with specific tax policy topics, e.g. Corporate Tax Incentives for Foreign Direct Investment Taxation of SMEs Choosing a Broad Base-Low Rate Approach to Taxation Tax Policy Reform and Economic Growth Taxation and Employment The Distributional Effects of Consumption Taxes Link: http://www.oecd.org/ctp/tax-policy/tax-policy-studies.htm

Taxation working papers Since 2011, 29 papers published Link: http://www.oecd-ilibrary.org/taxation/oecd-taxation-working-papers_22235558

Distributional effects of VAT A project using actual household microdata analysing distribution of VAT across income deciles Most countries have more than one VAT rate Distributional analysis is important when assessing impacts of reduced VAT rates

Distributional effects of VAT (2) VAT is regressive, i.e. richer households pay lower VAT as a percentage of their income than poorer households because the rich save more A reduced VAT rate on necessities which represent a larger share of consumption basket of the poorer households can mitigate the regressivity

Distributional effects of VAT (3) However, the study found that the highest deciles benefit most from reduced VAT rates

Distributional effects of VAT (4) Average tax expenditure (in CZK) per household from all reduced rates: income deciles, Czech Republic

Distributional effects of VAT (5) Average tax expenditure (in CZK) per household from reduced rates on museums and ZOOs : income deciles, Czech Republic

Thank you for your attention.

VAT carousel fraud Carousel fraud is one of the most common types of large-scale VAT fraud schemes in the EU usually, the goods end up in the hands of the first company, that is why it is called “carousel” usually, many companies involved in one scheme, from several Member States Core of the scheme: company A sells goods to company B company B pays the price including VAT to B A disappears before paying VAT to the authorities B claims the VAT it paid to A as input tax

VAT carousel fraud (2) Treasury Company A Company B Company D input tax VAT 60 input VAT 80 price 400 incl. VAT 80 Company A Company B goods price 300 incl. VAT 60 price 100 incl. VAT 20 goods goods goods Company D Company C price 200 incl. VAT 40 VAT 60 input VAT 20 input VAT 40 VAT 40 Treasury