Tax is still complicated, and things are only getting worse…
A few years ago, when BEPS was little more than the twinkle in Pascal St Amans’ eye, I wrote a slightly tongue in cheek blog comparing tax law to astrophysics.
One of the points that come up was that certain aspects of the application of physical rules are able to remain (thankfully) theoretical. Randall Munro does a great job of taking a few of those concepts and explaining them clearly.
But while a pitch travelling at 90% of the speed of light doesn’t really have to fit in with the Major League Baseball rules, there’s still nothing to stop a multibillion pound multinational enterprise operating through the same legal form as a window cleaner – and they frequently do. And what’s worse, in the same way that physicists have to deal with emerging models driven by the discovery of new particles at one end for the size spectrum, and new types of interstellar body at the other, so tax authorities have to grapple with the challenges of the digitalising economy as it rebuilds consumers’ expectations on the one hand and manufacturing and service delivery on the other – not to mention the emergence of hybrid legal models such as DAOs and blockchain-based self-executing contracts.
Now in fairness, the physicists are still discovering new particles, and making sense of even our own solar system can be challenging enough as the boundaries of knowledge shift. But the one key difference is that scientists are interpreting the evidence that reveals an externally created set of principles; tax law on the other hand is very much something that we do to ourselves; any need to reappraise the situation is as likely driven by a fundamental change to the rules as it is to novelty in the external environment.
One of the other key points in my blog Brian Cox has got it easy was the distinction between rocket science (the theory) and rocket engineering (the practical application of those rules). And that is an aspect which very much remains at the forefront of the tax debate. Just like the theory and practical divide of space flight, there’s a gulf between the political vision for taxation and the cold hard reality of tax forms, revenue assessments and, inevitably, dispute resolution that businesses face when civil servants attempt to translate those ideals into cash collection.
That’s shown up starkly in recent months as governments scrambled to reverse the natural flow of tax administrations and use their mechanisms to pump Covid-19 support funds into their economies. In the UK, the owners of micro companies found themselves unable to claim on the support mechanisms for either sole traders or employees. Designing filters to target aid appropriately would have been expensive and resource intensive, while the longstanding tensions created by the hugely flexible nature of the limited company form swung towards condemnation of tax motivated incorporations, sapping the political will to stand up for the myriads of blameless entrepreneurs caught in the crossfire.
At the international level, research has consistently shown that people would rather be taxed in accordance with the law than on the basis of someone’s concept of fairness. But when it comes to taxation of the digitalising economy, which has dominated international business tax discussions led by Pascal St Amans and his team over the past couple of years, the narrative has very much been around fairness, while trying to create a law to reflect that has been far more problematic.
Some commentators have even suggested that the OECD’s efforts are doomed to failure, and that we should instead focus on reaching a political agreement at the UN. But what we need is both the political buy-in and the practical ability to administer if any new regime for taxation of international online value creation is going to work. It’s not just about tax fairness, but the more three-dimensional concept of tax morale, which takes into account the ease of paying taxes as well as the desire to do so.
Building a coherent system that fosters good tax morale is not easy. But without a coherent framework to guide the design of tax policy, tax administration and tax payment systems it’s pretty much inevitably doomed to failure. Policy and decision makers at every level should be clear about the Foundations for a good tax system, while those who hold them to account should be ready to challenge them on how they’ve addressed each of the principles and balanced the compromises necessary in the real, complicated world that they have to work in.