Two recent reports – one by KPMG and one by the Business Roundtable – have reinforced a link between tax certainty and economic performance.1 Put another way, tax uncertainty hurts the economy.
In the KPMG survey of 3,300 US business leaders, 33% of respondents felt more tax certainty for both business and individuals would have the greatest impact on the economy.2 This exceeded the number of respondents who cited the European bank crisis (24%), the Chinese economy (13%) and Middle East turmoil (9%) as having the greatest economic impact.
The Business Roundtable (an association of CEOs of leading US companies) survey found that:
“In an era of unprecedented interconnectedness and capital mobility, the nation’s tax system is a key determinant of its overall competitiveness. In response to the increasingly important role that international tax systems play in many investment and plant location decisions, many countries have reformed their corporate tax policies. ... [T]he US corporate tax system is an outlier that places the nation at a competitive disadvantage in the global marketplace for investment and jobs.”3
Tax uncertainty is a problem not confined to the United States. There are meant to be two certainties in life, death and taxes, according to the old saying. Tax uncertainty could easily be a third in the US, Australia and a number of other countries.
A letter from the Joint Professional Bodies4 to Australia’s Assistant Treasurer, the Hon David Bradbury MP, set out 25 announced but unenacted tax changes dating back as far as September 2002.5 These include:
- rewriting the franking credit trading measures (including the holding period rule and related payment rule) announced in September 2002;
- changes to the share buy-back rules announced in May 2009;
- reform of the foreign source income attribution rules announced in May 2009;
- taxation treatment of earn-outs announced in May 2010; and
- improving the taxation of trust income announced in December 2010.
On the need for certainty in relation to tax laws, the letter said that:
“All taxpayers require certainty in the identification and scope of tax laws which frame both the obligations which are to be observed and the liabilities which are to be paid. This includes both prevailing tax laws as well as proposed changes, regardless of the date on which the announced changes are to take place.”
The letter said tax certainty is essential for reasons including the need to “allow taxpayers to make investment decisions and strike commercial bargains with certainty as to the tax cost resulting from the relevant transaction.” Without tax certainty, some transactions do not proceed or proceed in a suboptimal fashion. That must hurt the economy.
Treasury regularly publishes its “Forward Work Program” to provide some indication of when consultation will occur on announced tax changes. The March 2013 program includes 31 items. In relation to the above list of changes, it notes that consultation will occur on:
- modernising the taxation of trust income in early to mid 2013 (more than two years after the announcement);
- the share buy-back rules in mid to late 2013 (more than four years after the announcement); and
- reform of the foreign source income attribution regimes in late 2013 (more than four years after the announcement).
But that’s just consultation. Getting from consultation to legislation takes more time again. Moreover, it assumes the timetable doesn’t slip further due to changes announced in the 2013-14 Budget, or perhaps a change of government with a different legislative agenda.
If a tax change is important enough to make, it shouldn’t take up to 10 years to make it. A new approach is needed. The new Commissioner of Taxation, Mr Chris Jordan, wants the Australian Taxation Office to get back involved in tax design. He also wants to revamp the consultation process. Only the passage of time will tell if these initiatives make a difference. Ironically, it’s the passage of time that is the problem.