1. Globalization and fiscal justice from the perspective of emerging countries Daniel Gutmann Professor at University Paris-1 Panthéon-Sorbonne

2. Globalization Positive and negative aspects of globalization Globalization means more than internationalization – Beyond conflicts of tax norms… – Legal problem : relevance of territorial criteria for tax rules Ex : territorial taxation ; territorial concepts (place of effective management)

3. Problems of globalization Economic problems : tax competition as a result of Tax sovereignty of the States – Few limitations : WTO, EU… Freedom of movement for persons and capital – Pb where behavior is driven by tax considerations – Political problems : is tax sovereignty effective? Effective economic pressure… … leading to loss of political autonomy

4. Why care about justice? Globalization itself is driven by theoretical premises relating to « justice » in a broad sense – Freedom of States ; freedom of individuals – Freedom of commerce as a tool for a better allocation of resources around the world Globalization and the limits of political theory – A growing need for redistribution through taxes – What is left of political freedom to redistribute wealth? Capital/labour taxation – What about tax democracy?

5. How do emerging countries react to globalization? Traditional approach for many emerging countries – Need to attract foreign direct investment – Low level of taxation Latin America : CIT average rate from 41% (1985) to 29% (2003) ; marginal PIT rate from 51% to 28%. Incentives granted to non-resident investors in tax codes or investment regulations Between 1990 and 2006 total government revenues averaged only 23% of gross domestic product (GDP) in Latin America, against 42% in OECD countries

6. Legal issues connected to globalization Territoriality as a highly sensitive political issue – Exemption of foreign active income perceived as essential for emerging countries – Alternative : tax sparing and similar techniques – Voluminous literature on the intrinsic merits of territoriality

7. Globalization means pressure on emerging countries Low taxation generally means low level of public resources – Different situations : in Latin America, tax revenues during the 2000-2006 period ranged from close to 32% of GDP in Brazil, to little more than 13% in El Salvador – However, even in Brazil, 90 per cent of working people have earnings below the minimum threshold at which personal income taxes must be paid – Controversy about economic efficiency of tax incentives

8. Fiscal justice : not in this world Public spending in emerging countries is much lower than in OECD countries, and the quality of vital goods and services such as education is poor. Redistribution of income after tax is often ineffective (cf. 19 gini points in Europe OECD countries / 2 points in Latin America) The rate of tax decreases as income increases, so the poorer taxpayers are proportionally hardest hit.

9. Pressure on emerging countries tends to increase WTO  pressure on customs duties Excessive dependence on indirect taxes which accounted for almost two thirds of tax revenues in Latin America between 1990 and 2006, compared with one third in OECD countries. VAT revenue + 70% from 1985 to 2003.

10. OECD countries no longer make « exceptions » for emerging countries OECD countries face : – Huge deficits ; even worse since the financial crisis – High level of tax evasion Their reaction – Anti-evasion rules : CFC rules, thin capitalization. – Credit method as a generalized tool Territorial taxation is not the future Tax sparing belongs to the past French examples : Chile, Brazil

11. Next step for emerging countries : forget about theory Territoriality and Justice : an endless debate – Yes : reciprocity between the host state and the investor ; justice between Nations ; residence as an irrelevant connecting factor, etc. – No : tax reciprocity is a myth ; tax is not a payment for public services ; the reason why such a theory should justify tax jurisdiction is not clear.

12. Tax policy orientations for emerging countries Improve the fundamentals of the tax system – Broadening the tax base – Lowering tax rates – Controlling efficiency of tax incentives – Working on the underground sector – Fighting tax evasion generally (domestic / international) Improve tax collection (tax procedures)

13. In the future? Globalization as a chance for emerging countries? – No race to the bottom  a chance for tax to serve distributive goals Geographical harmonization – Design of tax systems – Codes of conduct – Cooperation on tax collection – Join forces against tax evasion