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Sunset control of tax sops
December, 26th 2011

Before announcing any tax sop, the Dutch government tries to find answers to many questions. Such as, whether the problem is clear and the object stated clearly and unambiguously; why financial intervention is necessary; why a subsidy is preferred over a levy; why a tax incentive is preferred over a direct subsidy; and whether the evaluation of the provision is sufficiently safeguarded. Listing these in Ex-post evaluation of tax legislation in the Netherlands,' a recent paper in www.ssrn.coc , the author S. J. C. Hemels observes that sunset clauses might be an interesting addition to the existing framework for introducing and evaluating tax expenditures.

For starters, the Dutch definition of tax expenditure is that it is a government expenditure in the form of a loss of tax income or postponement of tax income caused by a provision in the legislation insofar as this provision is not in accordance with the primary structure of that legislation. Examples of tax expenditures include tax credit for taxpayers combining work with raising a family, and deduction of interest on loans relating to residential property.

A section on sunset legislation' traces the idea back to Thomas Jefferson who wrote a letter on this subject to James Madison on September 6, 1789. From the principle that the earth belongs to the living and not to the dead, he derived that no society can make a perpetual law. In his opinion, every generation should make its own legislation, and thus every law should expire after 19 years

Worthy read for those who aspire for a robust system of reporting about tax incentives.

Corporate tax incidence

It may be that corporate taxation does depress wages, but the complexity of real world economies makes it difficult to observe the relationship with a comprehensive approach, writes Kimberly A. Clausing of Reed College in a paper titled In Search of Corporate Tax Incidence'.

She notes that while corporate taxation may discourage some types of investment, it may not have a large enough effect on overall investment to cause a substantial reduction in wages. Reminding that truly global multinational firms are adept at using complex chains of ownership together with tax-motivated decisions regarding the holding of intangible property, the structure of finance, and the transfer pricing of intermediate goods, in order to report income where it is most lightly taxed, the author observes that if global firms separate the location of their profits from the location of their investments and employment, then workers need not bear the burden of the corporate tax.

Among the many studies cited in the essay is one by Arulampalam, Devereux, and Maffini (2010), who employ a rather novel approach to the question of corporate tax incidence.' They consider firm-level data on over 55,000 European companies in nine countries over the period 1996-2003, narrates the author. Cross-company variations in tax liabilities are related to value added per employee, and they find a large degree of wage sensitivity to corporate tax payments, implying that an increase in tax of $1 would reduce wages by 49 cents.

Suggested study for tax professionals.

Business, enterprise

Among the recent posts in the Social Science Research Network is a chapter written by Kim Brooks of the Dalhousie University, on the concept of business' and enterprise' in Canadian tax law. The essay makes a reference to many precedents, such as the Sudden Valley case, where the taxpayer was an American company that claimed it was not carrying on business in Canada. The company was trying to sell recreational land in the state of Washington, near Seattle. It leased office space in Vancouver and hired telephone operators to offer sales pitches about the land to local people. The telephone operators invited Canadians to come to Washington to look at the real estate.

Interestingly, no contracts were ever concluded in Canada, and the advertising also did not state that there was land for sale; instead, it focused on inviting Canadians to come and visit Sudden Valley. The author notes that, in this case, the Court held that the taxpayer merely extended to Canadian buyers an invitation to treat, which is something less than soliciting an order. The company was therefore held not to be carrying on business in Canada.

Of relevance to international taxation professionals, because the paper highlights some of the specific instances where courts have grappled with ambiguities in the interpretation of Canada's treaties, in the context of Canadian domestic law which does not include the concept of an enterprise.

Financial transactions tax

Let us reflect more deeply on the credibility of the proposition that capital market trading, at levels greater than one hundred times GDP, for holding periods of less than a second, with much of the trading driven by computer algorithms, is benefiting the long-term interests of the global community, urge Ross P. Buckley, and Gill North in A Financial Transactions Tax: Inefficient or Needed Systemic Reform?'

On the inclusion by the European Commission of a Euro zone financial transaction tax in its long-term budget as a first step towards a global tax, the authors are of the view that carefully calibrated legal and tax responses are required to change market behaviour. Such a tax as part of an integrated policy framework would reduce short-term momentum trading and promote longer-term investment that would better reflect underlying economic fundamentals, they add.

The paper draws attention to the fact that large financial institutions are driving most of the growing derivative, algorithmic, and high frequency trading. And that, as these players become increasingly dominant, the operations of markets are becoming more concentrated and global in nature. According to the authors, even if one accepts the arguments that the recent trading developments improve short-term efficiency and market function, these benefits must be weighed against the building systemic risks resulting from the increasingly concentrated and interconnected trading and capital flow exposures within financial markets and the global economy.

Towards conclusion, the authors underline that the introduction of a low level global FTT as part of an integrated policy framework would promote greater alignment between capital market and economic activity to the real benefit of entire economies and the people who live in them.

A paper that can remind you of the 2005 news reports on the suggestion of the then RBI Governor, Y. V. Reddy to tax FII flows, an idea that the then Finance Minister, P. Chidambaram promptly brushed aside.

 
 
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