Risk is often characterized as the different likelihoods within a known distribution (eg. knowing the rules of the game), while uncertainty is the existence of possible multiple distributions (eg. not knowing which game will be played).
Tax certainty new focus of G20
The G20 leaders meeting earlier this month highlighted a new fourth “pillar” of its tax work. To the ongoing work on tax transparency, reducing base erosion and profits shifting (BEPS), and building tax capacity of developing countries, the G20 leaders added tax policies to promote inclusive growth and tax certainty. See link to communiqué.
Tax policy will now be one of the structural reforms for the G20’s Growth Agenda. As noted earlier, the tax and growth work will focus on more than just efficiency, with the goal of inclusive growth with distributional equity. The prior conclusion that corporation tax is the most harmful to economic growth will be revisited with a broader focus. Some analysts had used the earlier finding to argue that any corporate tax reduction, including from BEPS, was desirable for growth. Other considerations, as noted in the BEPS Action 11 report, suggest a more careful assessment.
An important new focus of the G20 will be on tax certainty. With major changes occurring in the international tax environment, including the BEPS Project, businesses are adapting to new tax rules and administrative practices. BEPS Action 14 will help improve tax dispute resolution after disputes have arisen, but it would be better to increase the certainty of tax rules and administrative practices before disputes occur.
The G20 asked the OECD and IMF to continue working on the issue of tax certainty, given the potential benefits from increased investment and trade. The G20 Finance Ministers held a special half-day High-Level Symposium on inclusive growth and tax certainty in July 2016. Finance Minister Lou Jiwei of the People’s Republic of China stated: “We should improve the transparency, predictability and standardization in the process of tax policy-making and implementation.” (see link) US Treasury Secretary Jack Lew said "Countries create uncertainty when you change your tax laws on a regular basis, or when you enact laws that are unclear both to the taxpayer and the tax authorities." (see link)
Michael Devereux of the Oxford University Centre for Business Taxation conducted a survey of 88 tax officials earlier this year for the European Tax Policy Forum to measure corporation tax uncertainty across countries. He reports that the most commonly encountered problem is complexity in the tax code, followed by unpredictable or inconsistent treatment by tax authorities. Uncertainty (about the effective tax rate on profit) was ranked as more important than the anticipated effective tax rate on profit. “This suggests that uncertainty surrounding the effective tax rate can outweigh even a lower anticipated effective tax rate.”
The G20’s focus on tax certainty and the future work of the OECD and IMF is an opportunity for the business community to help policymakers and policy analysts better understand specific sources of tax uncertainty, tax uncertainty’s effects on business operations, and possible solutions to increasing tax certainty for both businesses and governments.
It is time to move from generalities and hypotheses about tax uncertainty to specific policy actions to improve both tax policy and tax administration. Business and academics need to contribute to greater understanding of better government policies for increased tax certainty.
Tom Neubig