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Tax Certainty in a Complex World

Posted on April 10, 2017 by Stuart Gibson

After more than three years, the OECD has nearly finished its project to end base erosion and profit shifting. As countries around the world implement the recommendations of the BEPS project and the remaining working groups tackle the project's unfinished business, the OECD, the G-20, and the European Union are pivoting to the next big project: tax certainty.

Tax certainty clearly merits everyone's attention. After all, in the complex world of international taxation, who wouldn't want some assurance that taxpayers and tax administrators could agree on how the rules would apply in a given situation? Whether by advance pricing agreements, mutual agreement procedures with more predictable outcomes, or clearer rules in the first place, improved tax certainty would remove inefficiencies from the current system and enable businesses to allocate capital and labor, confident that tax uncertainties would play a limited role in the decision-making process.

The G-20 finance ministers recently approved a joint report on tax certainty from the OECD and the IMF. The report noted the importance of the issue in today's rapidly changing tax environment. In fact, more than 60 percent of respondents to a business survey released with the report said that uncertainty in the corporate income tax and VAT system is very or extremely important to investment and location decisions.

Last week the Maltese presidency of the EU Council released its own report on tax certainty. Identifying causes beyond the OECD-IMF report, the Maltese presidency blamed increased transparency measures and international efforts to address tax avoidance, specifically mentioning the BEPS project, as primary contributors to tax uncertainty. Malta seems to be marching to the beat of a different drummer.

Luxembourg has taken steps over the past few years to reverse its reputation as a haven for multinational tax avoidance. They include releasing past rulings and agreeing to release newly issued rulings. In December Luxembourg improved tax certainty by issuing detailed transfer pricing rules for finance companies. Oliver R. Hoor discusses those rules and their application (p. 153).

If a robust advance ruling regime could help remedy tax uncertainty -- as both the OECD and the Maltese presidency have said -- then a system that can overturn those rulings years after the fact reduces the efficacy of such a regime. When it comes to how rulings can advance tax certainty, what European tax authorities give with advance tax rulings, the European Commission's Bureau of Competition takes away with its retroactive state aid rulings.

EU Competition Commissioner Margrethe Vestager recently visited the United States to discuss trade policy with her U.S. counterparts. Her post-meeting press conference, however, devolved into a discussion of prospects for U.S. international tax reform, and the commission's response to Apple's challenge of its state aid ruling. While Vestager scrupulously avoided making substantive comments on both subjects, her mere presence suggested that any efforts to reform the U.S. tax code must take into account the impact of reform on trade with the EU (p. 122).

The U.S. tax reform debate is driven in large measure by which entrenched interests would stand to gain and which would lose under any reform proposal. But what if policymakers could design a tax system from the ground up, unencumbered by those interests, or by history at all? That is not as far-fetched as it sounds, as such an opportunity is likely to arise by the end of the decade. Carrie Brandon Elliot discusses the options available to policymakers in a new to-be-created nation in the South Pacific called a seastead (p. 104).

Stuart Gibson is editor of Tax Notes International.