Yet governments have to function, and in order to finance the services voted for by their citizens, must be able to collect the right amount of tax in this new global environment. The question is, how? Can a fair system of taxation of capital persist side by side with liberalised financial markets and in a world increasingly characterised by skilled professionals who are highly mobile?
But there are several other questions too, some of which we deal with in this Spotlight. How can fair tax competition flourish between sovereign nations, but unfair competition be eliminated? What is the most appropriate way to tax global enterprises? Does the “new economy” imply new taxes or a need to redesign old ones? How can tax policymakers contribute to creating a “greener” future for generations to come? And what is the role of tax administrations in this new world: are they just the collectors of tax or the facilitators of a wide range of government services?
Governments can respond to the challenge of globalisation in one of three ways. They can retreat behind national frontiers and try to move back towards an “isolationist” approach to global tax issues. The second option is to press for a harmonisation of the international tax system: a sort of global tax code administrated by a global tax authority. And third, they can respond by intensifying their co-operation, which includes putting in place transparent systems and sharing information across borders.
The first option is clearly not feasible in today’s global environment. No country can isolate itself enough to be able to ignore the international constraints and consequences of its tax reform, nor would it be desirable. The second option, while appearing to be a rational response to increased internationalisation of tax issues, is neither desirable, feasible nor, for now, politically acceptable. It would imply governments giving up one of their basic sovereign rights: the right to tax in a way that best suits the political realities, economic needs and social and cultural values within each country. There is no reason why Sweden, Spain, Singapore and Senegal should harmonise their tax systems. This is not to say that smaller economic groupings should not move towards a greater coherence in the design of their tax systems to reflect commonly agreed objectives. But as far as nation states are concerned, there is no consensus on what such a harmonised tax system would or should look like, nor indeed is such a consensus likely to emerge in the foreseeable future.
Intensifying co-operation, the third option, is the only appropriate response to the pressures of globalisation. National governments maintain their power to design their tax systems, but accept that these decisions will be influenced by international considerations. It also means that they must carefully consider how their decisions will affect the ability of other countries to enforce their own tax laws. If, for example, residents of a country are trying to escape tax in that country by using a tax haven, then that country needs information from the haven to help it enforce its tax laws. Co-operation would include reaching agreements on what may or may not be acceptable in the tax area – just as governments have used the World Trade Organisation for trade agreements. A premium will be put on facilitating information flows between tax administrations and exchanging experience on best practices. Mechanisms will be required to resolve disputes when they arise.
More generally, tax policymakers will have to accept the constraints imposed on domestic policy formulation that flow from globalisation. For instance, taxing pollution activities in one jurisdiction may just drive the polluters into another with weaker controls. So collective action is required and the international dimension of tax policy will grow in importance for all countries.
Tax administrators will have to modernise, too. New communication technologies open up new possibilities for improving services to taxpayers. Electronic assessment, collection and refunds of tax are now feasible options, and several countries in the OECD have developed these and other e-services. Some non-OECD countries are leading the way: Chile for instance has been developing online tax services since 1994! The aim is a common one: to deliver better service as the key to improving voluntary compliance.
But the broader challenge facing tax administrations is how to maintain public confidence. Tax systems not only have to be administered in a fair and effective way, but must also be perceived as being fair and effective. In some countries, this may require reviewing the organisational structures of administrations that may have served well for many years but now, with the focus on customer relationship management, may need updating. The whole question of how taxes are collected will need to be addressed. Tax administrations also need to reconcile their desire to have better access to information with legitimate privacy and confidentiality concerns.
Perhaps, as we move into the new millennium, governments will need to reach out and develop a social compact with citizens. They would undertake to provide the service requested by citizens in an efficient and cost-effective manner and to minimise the complexity and compliance costs of tax systems. In turn, citizens would seek to meet their tax obligations. Civil society would put peer pressure on those who wish to avoid their obligations. Illegal tax behaviour would be seen for the crime that it is. Aggressive tax planning by tax advisers would be considered sociably unacceptable. This would help governments to break out of the vicious circle of each new tax loophole, leading to more complex tax legislation that in turn generates further loopholes. Clearly, the trend prevalent in Europe over the past two to three years of reducing tax rates will help to encourage more compliant taxpayer behaviour.
These are some of the key issues that the OECD is addressing by means of its recently created Centre for Tax Policy and Administration (see box). The OECD recognises that a group of 30 countries cannot respond effectively to these challenges while ignoring the rest of the world. Other countries must be brought into this process and strategic partnerships developed with regional tax organisations.
The OECD has accepted the challenges of the new global environment and its partnership programme now extends to more than 70 countries beyond the OECD area. Together, we can set the new international tax standards that we all so urgently require in the 21st century.
• Improving Access to Bank Information for Tax Purposes, OECD, 2000.
• Towards Global Tax Co-operation, OECD, 2000.
• Project on Harmful Tax Practices: 2001 Progress Report, OECD, 2001.
©OECD Observer No 230, January 2002