Today’s tax functions are grappling with a sweeping range of innovations by revenue authorities, from digitalization and analytics to new legislation. To learn more about the changes, we interviewed Grace Perez-Navarro, Deputy Director of the Centre for Tax Policy and Administration at the Organisation for Economic Co-operation and Development (OECD).
Tax Insights: What impact is digitalization having on tax authorities and taxpayers?
Grace Perez-Navarro: Technology and the digitalization of taxpayer data give tax authorities a jump start in everything from the identification of mathematical errors to the use of risk assessment tools.
There are also many benefits for taxpayers.
For example, e-filed tax returns continue to increase, which tend to be easier for taxpayers and accelerate the payment of refunds.
“In Action 5, we were not trying to bless IP boxes as an innovation tool … You could say we were putting a box around the box.“
Grace Perez-Navarro, Deputy Director of the OECD’s Centre for Tax Policy and Administration
New technologies also facilitate responsiveness from a service standpoint, providing taxpayers with better and easier-to-use formats and more information, all in real time.
Tax authorities globally, even if they are at different levels of development, are really coming together around the idea that technology can make the entire taxpayer interface with tax administrations much easier.
How do you think tax will change in a real-time monitoring environment?
The new environment should result in more real-time responses and real-time assessments and a resulting reduction in taxpayer uncertainty.
A number of countries are also trying to achieve more real-time resolution for larger taxpayers with complicated or new situations, especially as business models are changing.
If a company is uncertain about how a particular transaction should be characterized, it can be of great value to have the issue resolved in real time instead of a traditional approach, in which an issue can remain open for years.
That’s not good either for companies or tax authorities.
A number of countries have adopted various kinds of cooperative compliance programs in which taxpayers can get fast-track answers on specific issues.
Digitalization and real-time monitoring should facilitate faster resolutions under all these programs.
What is the impact of big data on tax administration?
Big data is both a challenge and an opportunity.
Tax authorities need to be able to harness technology in a way that can effectively sift through massive amounts of data in order to carry out risk assessment and focus resources on relevant issues.
On a separate level, many tax authorities are responsible not just for tax administration; they are also providers of other services or benefits through the tax system.
They need to gather information from other government agencies and integrate it all.
I also think we will increasingly see tax authorities viewing taxpayers more holistically rather than focusing on income tax in one department, VAT in another department, etc.
Without technology, it would be very hard to do that effectively.
In what ways do you think the OECD’s BEPS Action 5 — the nexus approach for intellectual property — will affect innovation?
Before addressing Action 5, it’s important to put IP [intellectual property] boxes and similarly named incentives into context.
These are income-based tax incentives that reward only successful innovators so they may be more likely to benefit large incumbent firms, which are already successful and have profits that credits can offset.
These incentives may not necessarily be the best tax tool to spur innovation, especially by small start-ups, which do not have profits to use credits against and don’t have the financing to undertake R&D activities in the first place.
Newer innovative firms need money and support from government at the beginning stage of the process to enable them to finance their R&D.
With that in mind, how might Action 5 affect innovation?
In Action 5, we were not trying to bless IP boxes as an innovation tool.
We were trying to provide a rule that would limit the tax benefit of an IP box to the profits attributable to the economic activities undertaken and the value created in a jurisdiction, in order to prevent base erosion using highly mobile items like patents and other intellectual property.
You could say we were putting a box around the box.
You mentioned earlier that income-based incentives might not be the best way for governments to spur innovation. What are other ways for governments to use their tax systems to spur innovation?
Measures such as R&D credits and accelerated depreciation support innovation through tax benefits, though on the income side.
Also, tax loss limitations can affect the value of targeted R&D incentives.
We have also seen that other elements of the tax structure can play an important role.
For example, the tax treatment of employee stock options has an impact since options can be more favorable to a start-up than paying cash salaries because it helps to ease their cash flow problems.
Labor taxes such as employer payroll taxes can significantly increase the cost of doing business, so lower labor taxes for innovative activities can make a difference.
Very different companies are innovating, so it’s important not to limit support to just one tax benefit.
What impact do overall tax rates have on innovation?
The overall tax structure makes a big difference.
For example, inventors that are innovating on an individual basis will be concerned about personal tax rates.
High tax rates hinder innovation because if you don’t see yourself as getting the benefits of your hard work, you may be less likely to engage in innovation.
Any tax, of course, distorts behavior.
So the higher a tax is, the more likely that it will alter the decisions people make about what they do.
One of the most straightforward things that countries can do is to ensure that they have a low rate and a broad base.
What is the role of tax certainty?
It’s important to raise governmental awareness of the negative impacts of tax uncertainty on a jurisdiction’s overall economic climate.
We recently launched a new project focusing on this area.
Tax uncertainty refers in part to judicial uncertainty.
For example, having tax treaties, especially, that are consistently interpreted, helps provide certainty.
Tax uncertainty can also arise from legislative policy design and the implementation of policy, so, for example, how consistently does a tax administration administer its policies?
Having effective dispute resolution mechanisms is critical to provide certainty that tax disputes will get resolved in a way that avoids double taxation.
Providing greater certainty in the tax environment should help foster investment in innovation.
Do governments have other ways to support innovation?
Government subsidies, which are expenditures rather than tax benefits, also support innovation.
Also, our science and technology department has been looking at the role that public policy can play in facilitating innovation.
They have found, for example, that innovation thrives in an environment with a skilled workforce that has the knowledge and skills to generate new ideas and technologies, bring them to the market and adapt to technological changes across society as they happen.
The tax system has a role to play in supporting the development of that skilled workforce, through education credits and other tax benefits.
It’s also important to have a sound business environment that encourages investment in technology and, again, tax is a part of that by providing support through R&D credits and other types of incentives.
Governments also need to support science and technology, including strong and efficient systems for knowledge creation and diffusion.
The right mix of policies depends on many factors; there’s no one size fits all.
Grace Perez-Navarro is the Deputy Director of the Centre for Tax Policy and Administration at the Organisation for Economic Co-operation and Development (OECD).
She plays a key role in the work on base erosion and profit shifting (BEPS), improving international tax cooperation, promoting better tax policies and engaging developing countries in OECD tax work.
Previously, Ms. Perez-Navarro was a Special Counsel at the IRS Office of the Associate Chief Counsel (International), where she was responsible for coordinating guidance provided to field offices on international tax issues, overseeing litigation of international tax issues; negotiating tax information exchange agreements (TIEAs); overseeing the drafting of regulations, rulings and other policy advice; and participating in treaty negotiations.
In 1993, she was seconded by the IRS to the OECD to launch the revision of the OECD’s Transfer Pricing Guidelines.
This article is included in Tax Insights issue 17 – Transformation and innovation (pdf)