On September 2016 the G20 summit stated: “We emphasize the effectiveness of tax policy tools in supply-side structural reform for promoting (…) the benefits of tax certainty to promote investment and trade and ask the OECD and IMF to continue working on (…) tax certainty”. There are several reasons to consider that uncertainty in tax matters has become more elevated than the system could shoulder. As the OCDE and IMF have recognized, the period of economic history from financial crisis on, has been a very active one in tax policy matters. Many countries have tackled the challenge of stimulating growth while consolidating their public finances, and Spain is a perfect example of this effect.
There is a trade-off we should recognize between public accounts consolidation and tax uncertainty, because taxation continuous change inevitably drives to uncertainties and, consequently, potential costs for taxpayers. But there are also more specific factors that have contributed to tax uncertainty risen.
On one hand, the increased internationalization of business activities with markets that are more integrated and corporate activities involving many jurisdictions, contributes to highlight the existing differences in tax legislation and inconsistency in their application across countries can be a source of uncertainty. Furthermore, globalization contributes to the emergence and spread of new business models, many of them arising out of intangible assets of digital economy, what makes harder to assign the creation of value to a specific jurisdiction and tax businesses.
On the other hand, international fragmented and unilateral policy decisions, particular rulings and court decisions, have contributed to uncertainty, in fact. The BEPS Project of the OCDE, to prevent tax avoidance and its transition regime until it is fully adopted is a field of uncertainty, as it happens with the implementation of any new legislation or regulation involving a transition period. Even if one of the central purposes of BEPS is to avoid the uncertainty arising from fragmented or unilateral action by achieving greater cooperation and coordination in international tax matters.
This article is structured in three parts. First of all, we will construe a wide concept of tax certainty, according to its positive and negative definition. Secondly, we are going to look for tax certainty sources; and, thirdly, we shall identify trends and foresights. Of course, it is based on the IMF/OCDE
I) Tax certainty as a concept
As previously referred, tax certainty is broader than a concept itself, it integrates a large variety of vectors or tools to enhance tax certainty. There is not a fixed concept of tax certainty, instead of construing it, tax specialists have focused on what is tax uncertainty. As a result, all initiatives are uncertainty-fighting oriented.
Firstly, tax certainty requires lower complexity and higher clairness of legislation through improved tax policy and law design. The development of a consistent principles-based tax law design and monitoring framework is a great advancement, but is not enough, and should be coupled with other measures to reduce complexity, including avoiding inappropriate retroactivity, ensuring appropriate mechanisms for consultation on proposed or announced legislation and enhanced guidance, as OCDE said. Assuming this model, it would be easier to increase predictability and consistency of tax administrations rulings and technical interpretations. Even though, clear rules are not enough, fairness in their application is a key point; that is where effective dispute resolution mechanisms have a critically important role to play in establishing certainty. Dispute resolution mechanisms should be fair and independent, accessible to taxpayers and effective in resolving disputes in a timely manner, in compliance with OCDE standards.
Secondly, tackling tax uncertainty in the international context can be particularly important. The OCDE/IMF report outlines a number of approaches to enhance tax certainty in the international context: Dispute prevention and early issue resolution programs, such as cooperative compliance programs and advance pricing agreements (APAs), as well as simultaneous and joint audits, where appropriate. One of the most relevant initiatives to foster international tax certainty is the update of tax treaties through the use of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS. This instrument will allow for the amendment of treaties to be made rapidly and consistently, thereby enhancing certainty. This may make cooperation and coordination easier, as a result of being related to the same basis among the parties of the Convention.
Tax certainty can also be construed as absence of tax urcertainty. In other words, we may identify tax uncertainty key indicators in order to fight against them.
Constant changes in tax policies are on the origin of tax uncertainty. Even though tax policies changes can lead to uncertainty, it is not change per se that creates uncertainty. Changes may, of course, be fully anticipated instead of overcome without any possibility to foresee them. Tax changes could temporarily affect business decisions, that is assumed by the OCDE/IMF (2017) when they refer: “Some uncertainty in tax matters is an inevitable consequence of the wider uncertainties with which governments must cope in addressing their economic and social objectives. Tax policy and administration play important roles in promoting economic growth, addressing redistributive issues and negative externalities in the economy. Consequently, it is important for governments to have sufficient scope to manage the tax system to respond to new challenges such as an economic slowdown, a larger budget deficit or increased inequality.”
We must take into account that frequent changes disturb economic agents, who require time to adapt to the tax environment; specially when changes happen with high frequence. In such a context, open government policy with proactive consultation systems, announcing changes in advance and offering enough information would reduce uncertainty. As OCDE/IMF recognize: “Clearly the more frequent the changes, the more difficult it will be for the tax authority to give enough advanced notification and for business to assimilate all the modifications introduced in the tax system. Further, the process for implementing the relevant changes is also critical to managing the level of uncertainty produced by the change”.
Timely communication of changes could be particularly critical for some taxes, is to say that uncertainty leads to substantial loses and economic negative impact; timely communication is a good technique to address uncertainty, indeed. But there are some tax policy reasons for the swift implementation of some tax changes with minimal pre-announcement, because transition between tax periods allows taxpayers to avoid. The same is related to temporary provisions.
Retroactivity is frequently mentioned as very harmful as it relates to uncertainty, it is critical to distinguish between retroactivity and tax stabilization (reneging on previous taxpayer-specific promises). The issue then, is whether changes which were applied to previous tax years could generate uncertainty in the sense of letting taxpayers in general to distrust the future actions of a government.
In addition, an unclear, poorly drafted, ineffective tax law making, monitoring processes, and Ineffective and unpredictable implementation, clearly has decisive influence on tax uncertainty.
II) Sources of tax certainty
Reducing tax system complexity and improving the clarity of tax law needs the development of a consistent principles-based law, requires to design and monitor all the measures which were adopted; including to ensure appropriate mechanisms for consultation on proposed or announced legislation. The latter is a proactive taxpayer engagement mechanism; it increases predictability and consistency by tax administrations. This engagement has to be bilateral, through the issuance of rulings and technical interpretations in time, that shall improve understanding of the legislation , its requirements, and of the practices of the administration, reducing the compliance cost for taxpayers.
Even though rules are not clear at every time or different interpretation form taxpayers or tax administration are possible, the need of effective dispute resolution mechanisms has a critically important role to play in establishing certainty. This kind of mechanisms should be fair and independent, accessible to taxpayers and effective in resolving disputes in a timely manner, as OCDE/IMF stated.
But, tackling tax uncertainty does not depend only on national level measures. The international context may be particularly important. It can be implemented through: early dispute prevention and early issue resolution programs, such as cooperative compliance programs and advance pricing agreements, as well as simultaneous and joint audits, where appropriate, as OCDE says . Accordingly with this objective, the fully implementation of the minimum standard by updating tax treaties through the use of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS. This instrument helps rising tax certainty by allowing the amendment of treaties rapidly and consistently, thereby enhancing certainty by cooperation and coordination on the development of international standards.
This OCDE/IMF report highlights that tax certainty is an important priority for governments and businesses in G20 and OECD countries and outlines a set of concrete and practical tools to enhance tax certainty. In this context, tax certainty represents an important opportunity to provide a more predictable environment for business, cross-border trade and investment and secure a more stable and predictable revenue system for governments.
One of the main issues for the future years is to engage developing countries on tax certainty trends, according to the Agenda 2030 for Sustainable Development that establishes the challenges of balancing the need for sustainable revenues against creating an attractive business environment. As OCDE remembers, “the enhancement of tax certainty measures on developing countries needs to be assessed in terms of their weaker enforcement capabilities and lower implementation capacity. While noting that many issues relating to tax certainty are already embedded in existing capacity building programs, as a specific practical measure, the report proposes a consultative workshop on tax certainty for African countries to be held in the region in 2017 to take forward the discussion on the particular challenges that developing countries face”.
Tools under tax policy design and legislation are another challenge for future. Investments requiere long term policies, reduced frequency of changes in the tax legislation and, as a consequence of that a reduction of bureaucracy to comply with tax legislation. To help business to face tax uncertainty, changes in statutory tax system are needed and should be announced in advance. Although changes are announced previously, tax law needs to be reduced in terms of length and complexity; that would help to align domestic tax legislation with international taxation standards.
To sum up, in any case, there is a growing international consensus on the need to adopt general principles for tax certainty, and it has to be broader than interdiction of retroactivity or no taxation without representation. That is extremely important. A fair, clear and certain taxation system is the counterpart of tax base broadening, the reduction of optimization mechanisms in international taxation or the strict rules against avoidance, base erosion or profit shifting. The need of certainty is a long path we need to make in the following years, and the first step is to formally recognize the right to tax certainty both in international and national jurisdictions. In the following years, this is going to be the battle-horse for lawyers and tax advisors, as a counterpart of high intensity tax systems we are having nowadays.
Manuel Díaz Pérez
Editor en Derecho & Perspectiva
EUROPEAN COMISSION Tax Uncertainty: Economic Evidence and Policy Responses (2017) https://ec.europa.eu/taxation_customs/sites/taxation/files/taxation_paper_67.pdf
OCDE/IMF Tax Certainty. Report for the G20 Finance Ministers , March (2017) http://www.oecd.org/tax/tax-policy/tax-certainty-report-oecd-imf-report-g20-finance-ministers-march-2017.pdf