Major tax changes wreck business confidence – undermine business and investor certainty

The report highlights that there is risk of uncertainty discouraging investment. The effects of uncertainty on investment are ambiguous in theory. But the empirical evidence, while sparse, is more clear-cut—and does suggest adverse effects on investment and trade. The results of the business and the tax administration surveys presented in this report are instructive, with respondents to both reporting that tax uncertainty is a major concern: • Uncertainty in the corporate income tax and the VAT systems is reported by business as having an important influence on investment and location decisions. Over 60 percent of respondents to the OECD business survey indicate that uncertainty in the corporate income tax and the VAT is very or extremely important to investment and location decisions. • Tax certainty is a high priority for tax administrations, with over 80% of respondents to the tax administration survey identifying it as a very high or extremely high priority of their tax administration. While the sources of uncertainty are many and varied, the key findings from the surveys are: • According to businesses, issues related to tax administration were ranked as among the major drivers of uncertainty in tax systems, with the top two, and three out of the top 10, sources of tax uncertainty deriving from issues related to tax administration. In this regard, the main sources included bureaucracy to comply with the tax legislation, although this may also reflect concern over compliance costs, and inconsistent treatment. • Concerns over the inconsistent approaches of different tax authorities towards the application of international tax standards ranked high in the business survey. • Issues associated with dispute resolution mechanisms, including timescales, were also identified as an important driver of uncertainty. In particular, respondents to the business survey highlighted concerns about lengthy decision making of the courts—which may be an aspect of the wider judicial system, and not wholly under the tax authorities’ control. • Tax administrations identified taxpayer behaviour as an important source of uncertainty, in particular as a result of aggressive tax planning and a lack of cooperation. They also highlighted complexity in legislation, lengthy court procedures, unclear drafting and frequency of legislative changes. • A key area of agreement in both surveys was that legislative and tax policy design issues are a major source of tax uncertainty, mainly through complex and poorly drafted tax legislation and the frequency of legislative changes. The narrative analysis suggests there is considerable variation across advanced countries in both the frequency of corporate tax changes and the lag before implementation. Most corporate income tax changes, however, are announced at least ninety days in advance of implementation. There is no obvious trend towards less pre-announcement of corporate income tax changes.