The international tax system is too complicated. Is it even right to call this dishevelled, mountainous conglomeration a “system”?
The combination of complex and rapidly expanding domestic law, the ever-increasing complexity of international business exacerbated by digitalisation, and the growing number of domestic tax disputes is leading to ever greater uncertainty for business. Heaped over this morass of domestic tax law comes various layers of treaties including bilateral double taxation treaties and investment treaties, regional treaties such as those within the EU and broader treaties such as the OECD’s multilateral instrument. Exactly which treaty provision applies in particular circumstances is likely to become harder to determine as various treaties enter into force at varying times for different purposes, are terminated at various times, conflict or interact in other ways with other treaties and perhaps create altogether new interactions which we have not seen before. The application of multiple tax and non-tax treaties to triangular transactions, for example, will bring a series of new challenges.
And then we need to add various kinds of “soft law” from transfer pricing guidelines to treaty commentaries. Multiple bodies are producing competing and/or overlapping versions of both “hard” and “soft” law including the OECD and the UN as well as the Platform for Collaboration on Tax and many others. Nations, of course, interpret both the “hard” and the “soft” law in varying ways, in some cases adding to the mix by providing commentaries on the commentaries!
The opacity and impenetrability of the tax landscape is clear (excuse the oxymoron). But does it matter? The answer is that it matters a great deal. The cost to business is enormous. The cost of professional fees and management time must surely amount to billions of US$ and, perhaps, the lost business opportunities are significant too. Although some people argue that “big business” can afford it, the truth is that we all pay for this in the end and since it amounts to a gigantic zero-sum game it is clearly not worthwhile!
Why is it that we find ourselves in this predicament? Could it be because international tax is so interesting and intellectually demanding that we have too many clever people with innovative ideas? Could it be because no one complains about it on the understanding that “big business” has the wherewithal to pay for it? Perhaps it is fair to say that “big business” sometimes finds the complexity quite helpful? Advisers certainly find it helpful (some of the time) and tax policy-makers probably find it helpful too, some of the time. Perhaps too many of us find it all rather fun!
What are we going to do about it? There are, of course, no simple answers. Some suggest that we throw away the entire system and replace it with a formula-based system, but experience suggests that after an extended period of unimaginable transitional chaos we would ultimately have a refreshingly different system, but sadly one which comfortably matched today’s complexity and obscurity.
The Office of Tax Simplification has had a subtle, yet profound, influence on tax policy making in the UK. Those thinking about tax right across the spectrum from policymakers, tax administrators, advisers, academics, NGOs, lobby groups and businesses place more emphasis on finding simpler ways of achieving their objectives.
Perhaps it is time for an Organisation for International Tax Simplification?
It might be objected that this will just add another decorative layer over the top of a mosaic of tectonic plates sliding over a seething maelstrom of domestic tax law. But it is hard to see how this could make the current position any worse and there may be some real upside, given that we are long past the time when we need to start taking the complexity in the system seriously. A body established to focus on simplification should be as independent as possible but with sufficient weight and authority to be heard. Perhaps a specific mandate from the G20 would provide the appropriate level of independence and administrative support could be provided by the OECD, UN, IMF or World Bank. Success would be measured not by a reduction in the number of pages of tax regulation but by a subtle but decisive shift in tone whereby tax policymakers throughout the world begin to ask: “how can we do what we need to do in a simpler way?”.
Paul Morton is the Director of the Office of Tax Simplification. Until 2017, he was Tax Director for RELX Group plc (formerly Reed Elsevier). He is a Fellow of the Chartered Institute of Taxation, a member of the Council of the Institute for Fiscal Studies and the Tax Law Review Committee, an adviser to the International Chamber of Commerce Taxation Commission, a member of the Executive Committee of the International Fiscal Association and a past President of the Confederation Fiscale Europeenne.
Publications of the Office of Tax Simplification can be found at www.gov.uk/government/organisations/office-of-tax-simplification.
This is a CBT guest blog. The views expressed are the author’s own. They do not represent the views of the Office of Tax Simplification, nor the Centre for Business Taxation (which has no corporate views).