Certainty
Certainty is a key requirement – and the lack of certainty of outcomes or operations is something for which tax systems in many jurisdictions can be criticised.
Lack of certainty can confer a discretion on tax officials to establish the correct treatment. At its extreme this can facilitate the corruption of tax officials, who could seek to exploit their perceived ability to impose excessive tax demands, a feature which governments will (and already do) seek to eliminate.
Alternatively, the scope to ‘do a deal’ with the tax authority can lead to imbalance between taxpayers. Often, only the largest business or wealthiest individual taxpayers will have access to favourable rulings, which can give rise to issues such as illegal state-aid concerns.
Elimination of the underlying uncertainties on which such deals are predicated would be beneficial for all involved, and for society more widely because where disparities arise between effective tax rates for otherwise similar taxpayers there is a distortion of what should be a level economic playing field.
While allowing for such agreements (whether prospective or otherwise) creates certainty for the individual taxpayer, their existence creates uncertainty, and potential inequity, for other taxpayers who might not have access to them.
Many tax systems call upon the taxpayer to self-assess their liability to tax, yet the wording of the legislation may make it impossible or unreasonably onerous for taxpayers to accurately establish their liability under the law. Many tax authorities do not explicitly ban certain types of tax planning, which are within the law, but nonetheless take a negative view of them. (In the US these are sometimes referred to as ‘abusive transactions’.)
Taxpayers using legitimate tax-planning techniques may find themselves having to report to the authorities or becoming the subject of onerous tax enquiries. Often these artificial ‘blocks’ are used by the tax authorities as a way of ‘fine-tuning’ the legislation when it is unclear where the boundaries of acceptable tax planning are drawn.
This can be a significant problem for businesses and individuals trying to plan their activities, for which they need certainty.
It should always be the case that different taxpayers who look at the legislation come to the same interpretation of the law. Taxpayers must have certainty over tax authorities’ interpretations, and authorities themselves should ensure that their application of the law is consistent. Authorities should establish a proper and efficient clearing mechanism for complex anti-avoidance provisions.