Tax: competition or co-ordination?

G20 leaders have recently proposed improved international regulatory co-operation to restore faith in global regulation. But financial regulation may not be the only area requiring international co-operation – opportunities exist for co-operation in tax matters as well.
 
For example, taxation as an element of environmental policy is one tool that relies heavily upon international co-operation. Green taxes can play a key role in persuading companies and individuals to modify their behaviour, but green taxes simply cannot function as they are supposed to without co-ordinated action. Any discrepancy in green tax levels between states will see polluting companies moving around to avoid those taxes, rendering them less effective.
 
International co-operation is necessary to combat tax evasion too. 2009 has seen a raft of traditional 'tax havens', including Liechtenstein and Switzerland, sign international agreements that will ensure compliance with OECD standards on tax transparency and information sharing.
 
Traditional tax havens should continue to co-operate with other states to help stamp out tax evasion. In return, larger nations should respect jurisdictions and refrain from adopting vociferous pursuits of tax havens, where the only purpose is to distract from domestic causes for budget deficits.
 
Total co-operation in all tax matters would be unwise, however.
 
For example, flat-tax regimes in Central and Eastern Europe should be treated with respect. Flat-tax policies in those states have so far proved appropriate for the current stage of their economic development and 'harmonisation' with higher tax rates elsewhere in Europe should be avoided; tax competition can be healthy.
 
Besides, governments can become hung-up on headline tax figures as reasons for business relocation. This is important but in reality it is often the complexity or simplicity of underlying tax regimes that repel or attract investment; a 2008 ACCA survey saw Britain score poorly on tax issues such as complexity, transparency, and, above all, sheer volume of tax legislation.
 
One potential cause of confusion in tax systems is the way tax policy is currently drafted in many countries; the politicisation of policy-formulation is rife, a major problem for tax policy. Policy designed in this way is usually riven with short-termism and is often overly complex. Additionally, the specialist nature of tax law means democratic bodies are often unable to provide sufficient scrutiny of new legislation.
 
Governments should focus on simplifying underlying tax issues to provide a secure environment for business that would attract investment. Re-adjusting the focus in this way could help bring much needed clarity and objectivity to tax policy.

Comments

[Karl Ranworth]

Brilliantly short piece - I'm really interested in this kind of subject matter so enjoyed it.

[Frank]

I totally agree with your last paragraph. Well written post.
Frank

[Richard]

In my opinion, as governments need to offset growing budget deficits in the face of lower tax revenues, tax authorities will increase their focus on multinationals and their transfer pricing arrangements; I believe this will have a bigger impact on business location than 'green taxes'.

I will also be interested to see the impact of the introduction of the the Senior Accounting Officer legislation in the UK.