Organisation for Economic Co-operation and Development
Taxation, Social Cohesion
and Sustainable Development
Overview of key determinants and
assistance in tax compliance strategies
W. Steven Clark
OECD Centre for Tax Policy and Administration
LAC Tax Policy Forum
16-17 September 2010, Panama City
Centre for Tax Policy and Administration
Overview of speaking points
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Taxation and development – consider ways in which
taxation influences the development path of countries:
• Economic activity (level and allocation of investment)
• Financing of key public expenditures (economic, social)
• Accountability of government
• Voluntary compliance of taxpayers
• Market participation (above-ground economy)
Efforts to improve voluntary compliance of individuals
Approaches to curb aggressive corporate tax planning (tax
compliance by banks)
Taxation and development (key linkages):
- level of economic activity, investment
 Taxation (policy, administration, compliance) plays a fundamental
role in shaping economic and social development –
consider various influences (1-5):
1. Tax policy (selection of taxes, tax mix, tax rates and base),
tax administration, and tax compliance can positively or
negatively influence economic activity (income/GDP).
 Some tax systems are less distorting (more efficient) to the
level and allocation of capital:
• Stability, transparency, predictability
• Tax mix (consumption tax, residential property tax vs. income tax)
• Tax design (low rate, broad base, limited use of incentives)
• Factors influencing tax compliance
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Taxation and development:
-- tax revenues to fund public expenditures
2. Taxation establishes amount of tax revenue to be raised
to fund public expenditure on key programmes important
to attracting investment and social policy:
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Infrastructure, education, health care, property rights
Unemployment, social welfare, housing
 Note: tax incentives for investment given on discretionary
basis, other incentives found to be inefficient and favouring
high net worth individuals -- can be detrimental to
economic development by:
• Misallocating resources
• Eroding tax revenues
• Discouraging voluntary tax compliance
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Taxation and development:
-- accountability of government
3. Taxation influences the level of accountability of
government over use of public funds (efficient/equitable?)
-- accountability influences:
• Taxpayer compliance
• Business participation in the market (above-ground) economy.
 Some tax systems exhibit high degree of accountability:
• Broad taxpayer base (e.g. consumption tax) – diverse vested
interests, broad-based social contract, pressure on government to
act in interest of citizens collectively
 Some tax systems exhibit low degree of accountability:
• Narrow taxpayer base (e.g. heavy reliance on resource taxation) –
can inhibit transparency, invite corruption, misuse of public funds
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Taxation and development:
-- fairness/efficiency encouraging compliance
4. Features of tax system (tax mix, design, administration)
influence degree of willingness of individuals and
business to voluntarily comply with a tax system
 Relevant tax-related factors influencing tax compliance:
• Fairness in taxation (sharing of tax burden)
• Tax compliance costs (policy and administration; provisions
recognizing high costs for small firms; use of ICT)
• Government accountability
 Fairness in taxation – where tax system reduces income
inequality, contributes to perception of fairness in sharing
of tax burden, strengthen voluntary compliance
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Taxation and development:
-- fairness/efficiency encouraging
participation in above-ground economy
5. Features of tax system (tax mix, design, administration)
influence business incentives to operate in above-ground
market economy or shadow-economy
 Relevant tax-related factors:
• Fairness in taxation (sharing of tax burden)
• Tax compliance costs
• Government accountability
 Increased business opportunities (e.g. foreign markets),
business growth where tax system encourages
participation in above-ground economy
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Focus of recent OECD work
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Recent OECD work elaborates ways in which tax can help
underpin social cohesion and thereby foster economic
development:
• Broad-based taxation to increase government accountability
• Design of tax systems to achieve fairer sharing of the tax burden
(tax mix, tax rates, base provisions)
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Progressive PIT rate schedules, basic allowances, provision benefiting
primarily low-income households (e.g. in-work tax credits)
Limited use of personal tax reliefs/incentives benefiting primarily highincome households (e.g. savings incentives)
Taxation of corporate profits (domestic and foreign)
• Measures to ensure tax compliance, steps to contain aggressive tax
planning by high net worth individuals and corporations
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Encouraging voluntary compliance
of high net worth individuals
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In recent years, greater transparency and exchange of
information to counter offshore tax evasion.
Request by G20 leaders – Global Forum on Transparency
and Exchange of Information – reorganized to provide
robust peer review on effective implementation of
standards (start March 2010)
Increased steps being taken by governments to facilitate
voluntary disclosures by taxpayers with undisclosed
income and/or assets.
Offshore Voluntary Disclosure (OECD, 2010) sets out a
framework for successful offshore voluntary compliance
programmes for governments to consider.
Curbing aggressive
tax planning by corporations
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Offshore risks include use of no/nominal tax jurisdictions by
closely-held businesses and multinationals to avoid
reporting of taxable income:
• Offshore financing structures
• Offshore holding companies for intellectual assets.
Key challenge of government – addressing aggressive tax
planning by banks, both on their own account and for their
clients:
• Direct revenue losses from leaving unchecked aggressive planning
• Indirect revenue loss where perceptions of unfair sharing of the tax
burden discourage voluntary compliance of other taxpayers
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Organisation for Economic Co-operation and Development
Thank you
Centre for Tax Policy and Administration