Week 4 – Supranationals Influence on Tax Policy and Tax Reform

Learning Objectives

Understanding supranational organizations and their influence on tax policy.
Discussing the role of the OECD in shaping domestic tax policy.
Defining tax reform and the reasons behind it.

Influencers of Tax Policy

Tax systems are significantly influenced by international developments, demonstrating that policies and events in one nation can have substantial indirect effects on the welfare of citizens in other countries (Oats & Sadler, 2011).

“Policies and events originating in one nation often have large indirect effects on the welfare of citizens in other nations.”

Tax Policymaking Process

The tax policymaking process involves critical steps where political authorities engage in formal or informal processes to make binding decisions regarding tax policy.

**Policy-Making Definition**: Defined as an episode of political authorities acting to create policies (Gould & Baker, 2002).
**Translation of Ideas**: The process transforms policy ideas into implemented policies that yield positive effects (Birkland, 2011).

Heuristic Model of Tax Policymaking

**Design Stage**: Outlines policy goals, priorities, and methods to achieve goals.
**Legislative Stage**: Involves drafting legislation, debating, amending, voting, and signing laws.
**Implementation Stage**: Carried out primarily by tax authorities to enforce tax legislation.

Actors in the UK Tax Environment

Multinational Enterprises/Corporations (MNEs/MNCs)

Cross-border decentralization has facilitated the emergence of multinational enterprises, defined as groups with associated companies operating in multiple countries (OECD, 2010).

MNEs leverage tax discrepancies across jurisdictions to minimize overall tax payments, often eroding the tax base.
Strategies include:

**Tax Havens**: Utilizing countries with low or no tax rates.
**Transfer Pricing**: Adjusting the prices of goods and services across borders to influence tax liabilities.
**Hybrid Instruments**: Instruments that have different tax treatments in different jurisdictions.

The Media's Role

The media plays a crucial role in fostering tax debates and driving legislative changes.

It often serves as a platform for public discourse on tax policy.
Jones (2009) emphasized the influence of non-academic voices in shaping tax law and policy, noting the cultural implications of tax law decisions.

Supranational Influences on Tax Policy

Understanding Supranational Organizations

Supranational organizations are entities that operate above national interests, influencing or controlling decision-making at the national level.

Types of Supranational Bodies

Some are singular entities, while others comprise unions of member states.
Commonly, these bodies possess voting mechanisms allowing members to agree on or veto proposed plans.

Influence on Tax Policy Making

Supranational organizations often act as "talking shops" employing soft law and informal methods.
Examples include:

**OECD**
**United Nations**: Engages in treaties affecting tax policies.

Countries frequently adopt practices from one another, essentially benchmarking their tax policies against international standards.

Supranational Actors in the International Tax Environment

Core Roles and Responsibilities

These organizations regulate and formulate laws while retaining enforcement powers.
They manage and control agendas, ensuring compliance through potential penalties (e.g., EU, NAFTA, ASEAN, WTO).

The Role of the OECD

Established in 1961 with roots tracing back to World War II, the OECD focuses on fostering international cooperation and promoting policies for economic and social well-being worldwide.

The OECD is acknowledged as an expert institution, influencing domestic policy through credibility and transnational networks (Christians, 2010).
Countries emulate best practices from the OECD, leading to reforms in:

**Double Taxation Agreements**
**Transfer Pricing Guidelines**
**E-Commerce Policy**

Notably, the OECD's Base Erosion and Profit Shifting (BEPS) project aims to combat tax avoidance strategies that exploit gaps in systems.

Tax Reform

Definition and Necessity

Tax reform involves the debate over principles to reach consensus for changes within the tax system.

It is essential to address the evolving societal needs and economic conditions influenced by supranational entities (OECD, IMF, World Bank).

Levels of Tax Reform

**Constitutional Level**: Major changes to the framework governing tax collection and distribution.
**Intermediate Level**: Enhancements focused on efficiency and fairness; impacts are medium-term.
**Normal/Policy Development Level**: Targeted reforms addressing specific issues, implementing changes rapidly with short to medium-term effects.

Tax Reform in Practice

**The Mirrlees Review**: Initiated by the Institute for Fiscal Studies in 2006, aiming to assess the ideal tax system for the 21st century.
Following the Meade Report (1978), this review involved extensive consultations. To read the report, visit Mirrlees Report.

Tax Reform in Developing Countries

Tax reform poses unique challenges, especially in developing nations.

Considerations include:

High fiscal deficits: E.g., Jamaica's public debt at 142% in 2003-2004.
Weak tax structures correlate with poor economic performance.
No universally perfect approaches exist for tax reform.

Comprehensive strategies must include detailed law studies to ensure revenue neutrality.

Conclusion

In summary, understanding the complex influences of supranational organizations like the OECD on domestic tax policy, as well as the essential nature of tax reform, is crucial. The interplay of international and national factors significantly shapes the frameworks within which taxes are collected and utilized in societies globally.

Supranational Influence on Tax Policy and Reform

Supranational Influence on Tax Policy and Reform