Discussion Paper
No. 2018-16 | February 14, 2018
Santiago Díaz de Sarralde, Christian von Haldenwang, Tobias Hentze and Nara Monkam
Tax certainty: proposals for the short term and the long term
(Published in Global Solutions Paper)

Abstract

Tax certainty aims at the stabilization of expectations of both, taxpayers and governments. Improving tax payer service, easing cooperation channels and clarifying legal framework are strategies already in place to increase tax certainty, even though to different extent depending on the countries level of development. For the short run, concrete measures can be recommended through which international cooperation can contribute to strengthening tax certainty. These measures concern the establishment of enhanced engagement programs, the development of model legislation as a tool for the implementation of international rules and standards, the alignment of bilateral treaties and domestic legislation to international good practices, using the country-by-country-report as an indicator for the adequacy of tax payments and setting up investment incentives. In the long run, a radical change in the international tax scheme is suggested since, amongst others, the current rules do not match with the emerging digital economy. A unitary taxation system might be therefore the appropriate response even if the implementation on an international level is complex.

JEL Classification:

H25, H26, O19

Cite As

Santiago Díaz de Sarralde, Christian von Haldenwang, Tobias Hentze, and Nara Monkam (2018). Tax certainty: proposals for the short term and the long term. Economics Discussion Papers, No 2018-16, Kiel Institute for the World Economy. http://www.economics-ejournal.org/economics/discussionpapers/2018-16


Comments and Questions



Anonymous - Referee report
February 26, 2018 - 09:45
see attached file
[ Download attached file ]

Tobias Hentze - Comments on referee report
March 12, 2018 - 09:59
Comments on the referee report on “Tax Certainty: Proposals for the short term and the long term” The referee report is highly appreciated. I acknowledge that there is a consensus regarding the recommendations and proposals of the Global Solution Paper. This is a valuable feedback as the proposals are the main item of the paper due to its character as a policy paper. The idea of relating the policy proposals to the recent tax reform in the United States is promising for future work. The referee states that more evidence based research and results would be desirable. I fully agree with this. Further empirical research should be focused on the actual behavior of MNE as well as tax administrations. However, the focus of the paper at hand is rather policy orientated. At the same time, the referee report recognizes that the paper refers to an evidence based study regarding tax payments by MNE (Hentze, 2015). The referee report doubts that the empirical results of the cited study are valid. The main finding of the study is that German corporate tax revenue benefits from the existence of MNE. The referee report argues that the results are rather obvious as larger companies (which export more and invest more abroad) make higher profits. It has to be strengthened that the profit variable controls for the success and thus the size of a company. Therefore, the stated “weaknesses” of the study are not based on appropriate arguments. However, as the referee report correctly states only German companies are considered and data restrictions are an issue.

Anonymous - Referee´s response
March 14, 2018 - 13:09
I agree that a policy paper is a different category. However, e.g. just stating that MNEs are important tax payers in developing countries and providing no evidence given that there is this 6 % figure by UNCTAD that also includes social contributions and not just corporate taxes is not very convincing. Regarding the paper of Hentze (2015). The study does control for a profit measure (value added minus wages) that includes also profits of private households and non-incorporated firms that are not liable for corporate tax but for income tax. Typically, larger enterprises that are more often liable for corporate tax are more often active in the international sphere and they pay more corporate tax. This is the story of the study. However, these firms pay more corporate taxes because non-incorporated firms simply do not pay corporate taxes at all but income tax. Whether one or the other type of firm is paying more taxes given their profits is not clear and the study is silent about this since non-incorporate firms are totally disregarded. To keep is short: the right hand side profit measure do not represent the profits that are the base for the left hand side taxes. Or to do it more lengthy: The right hand side profit measure is the base for all taxes on profits. This includes also the income tax and the withholding tax on capital revenues. The profit measure “value added minus wages” is a bad proxy for the profits of corporations because it is highly likely that the profits of non-corporations that are included vary systematically among federal states. Possible example: the share of non-incorporated profits is higher in Saxony-Anhalt than in Hamburg. However, exports relative to overall profits are likely to be higher in Hamburg than in Saxony-Anhalt. “Value added minus wages” does totally disregard this and one may “wonder” why corporate taxes are so low given the “profit variable” in a country with low exports. However, maybe this has nothing to do with the role of MNEs but with relatively higher income tax in countries with fewer exports and fewer corporations.

Tobias Hentze - Comment on referee reply
March 22, 2018 - 14:20
Thanks for your reply. Your assumption regarding non-incorporated firms is not correct. The tax variable considered in the study at hand is the local business tax which is paid by both corporates and non-incorporated firms.

Anonymous - Referee´s response
March 23, 2018 - 12:17
The income tax paid by non-incorporated firms is missing, anyway. Further, several persons who do not receive wages, pay income tax, and do not pay trade tax do exist (members of the professions). Their incomes are included in your control variable, but they are not controlled for. If their relative weight varies between “Länder” your control variable “profits” does not measure what you claim it to measure.