Written evidence submitted by ACCA
ABOUT ACCA
ACCA is the global body for professional accountants.
We aim to offer business-relevant, first-choice qualifications
to people around the world who seek a rewarding career in accountancy,
finance and management.
ACCA has 140,000 members and 404,000 students in
170 countries, and works to help them to develop successful careers
in accounting and business, with the skills required by employers.
We work through a network of over 80 offices and centres and more
than 8,000 Approved Employers worldwide, who provide high standards
of employee learning and development. Through our public interest
remit, we promote appropriate regulation of accounting and conduct
relevant research to ensure accountancy continues to grow in reputation
and influence.
The expertise of our senior members and in-house
technical experts allows ACCA to provide informed opinion on a
range of financial, regulatory, public sector and business areas,
including: taxation (business and personal); small business; pensions;
education; and corporate governance and corporate social responsibility.
EXECUTIVE SUMMARY
1. ACCA has identified 12 principles which can
be discerned in, and should underlie, good taxation policy.
2. Tax
as a percentage of GDP: Government should
rationalise and set a target of taxation as a percentage of GDP
as part of its economic management, and then be held to account
via objective measurement and variance analysis.
3. Tax
simplification and stability: ACCA believes
that tax legislation and operations should be as simple and straightforward
to understand and to comply with as possible.
4. Openness,
transparency and accountability: Tax policies
should be transparent and non-discriminatory unless part of a
declared discriminatory policy.
5. Certainty:
It should always be possible for different
taxpayers who look at legislation to come to the same interpretation
of the law.
6. Competition: ACCA supports the principle
that nations are free to determine their tax affairs within the
context of a global competitive environment.
7. Avoidance/evasion:
There is a clear division between tax avoidance (or planning,
or mitigation), which is legal, and tax evasion, which is not.
8. Efficiency:
Tax systems should be efficient for governments in terms of their
ability to secure the revenue due and to prevent tax leakage and
the development of a black economy. It should, however, also be
efficient for taxpayers in terms of their ability to comply with
its requirements.
9. Sunset
Clauses: Tax systems should have a review
principle whereby tax legislation is periodically overhauled and
consolidated to bring it up to date and make it easier to follow.
10. Clear
link from tax to spend (hypothecation): Although
we are not convinced that "hypothecation" of particular
taxes to specific areas of spending is practical, we do believe
that there should be greater clarity in the public finances showing
expenditure projections and how these are to be financed.
11. Avoidance
of double taxation: An essential principle
of tax law must be that income should be subject to tax only once.
12. Human
Rights: The huge inequality in resources
and power between governments and individual taxpayers places
a responsibility on states not to impose their will in the field
of taxation in an arbitrary or vexatious way.
13. Tax
shifting—Green Taxes: ACCA believes
one of the most important examples of legitimate discriminatory
tax policy is to change behaviour that can damage the environment.
INTRODUCTION
14. In
April 2009, ACCA published its Policy Paper "Tax principles:
From Adam Smith to Barack Obama". In keeping with ACCA's
role as the global body for professional accountants, the paper
looks at tax systems worldwide rather than simply the UK to derive
the principles to which all tax systems should aspire.
15. When
examining tax principles, it is worth starting with a review of
the famous four canons of taxation put down by Adam Smith, who
is generally considered (certainly in the English-speaking world)
to be the father of modern political economy. In The Wealth
of Nations (1776) he argued that, "the evident justice
and utility of these maxims have recommended them more or less
to the attention of all nations".
16. The
subjects of every state ought to contribute towards the support
of the government, as nearly as possible, in proportion to their
respective abilities; that is, in proportion to the revenue which
they respectively enjoy under the protection of the state. (EQUITY)
17. The
tax which each individual is bound to pay ought to be certain,
and not arbitrary. The time of payment, the manner of payment,
the quantity to be paid, ought all to be clear and plain to the
contributor, and to every other person. (CERTAINTY)
18. Every
tax ought to be levied at the time, or in the manner, in which
it is most likely to be convenient for the contributor to pay
it. (CONVENIENCE)
19. Every
tax ought to be contrived as both to take out and to keep out
of the pockets of the people as little as possible over and above
what it brings into the public treasury of the state. (EFFICIENCY)
20. Translated
to the modern era, the first maxim is in some ways the most contentious,
as it appears to argue for progressive taxation, where tax is
levied according to the ability to pay. On fairness grounds it
is hard to argue against this and most modern tax systems follow
this principle, but whereas the huge inequalities of wealth in
Smith's day made such a position necessary, it is arguable that
it is now a political position rather than a statement of fact.
21. The
other maxims are less contentious. Canon II forms our 5th tenet.
A society's tax system must be known and understood by all its
adult members; otherwise, they cannot play their part to the full.
Maxim III is hard to argue against though is not always adhered
to in practice. Maxim IV forms our 7th tenet—though it could
be argued this is the area where Smith's theory is furthest from
modern reality, given the costs of the state's taxation apparatus
and the subsequent cost of advisers to represent taxpayers.
22. So
it can be seen that, given the complexity of modern economies
and societies, it is a challenge to apply the tenets of even the
greatest thinkers to contemporary tax systems. Unlike Smith, ACCA
does not offer the following points as universal truths, but believes
that if followed by governments these 12 policies would represent
the basis of effective tax systems around the world.
What are the key principles which should underlie
tax policy?
ACCA's tenets are:
23. Tax
as a percentage of GDP: Government should
rationalise and set a target of taxation as a percentage of GDP
as part of its economic management, and then be held to account
via objective measurement and variance analysis.
24. ACCA
accepts that the current unprecedented economic turmoil may require
special measures from governments. Notwithstanding current conditions,
we believe that levels of taxation should be clearly stated as
a percentage of Gross Domestic Product, as far as possible. ACCA
does not seek to enter the political debate about the appropriate
level of tax and public spending.
25. Nonetheless,
substantial tax increases represent a significant burden on businesses
and individuals and should be subject to an impact assessment
before being introduced. These impact assessments should be used
to challenge the need for new regulations and to establish an
accurate and updated estimate of costs. Once new measures are
put in place there should be a means of measuring and evaluating
their impact in terms of their proclaimed public policy objectives.
26. Tax
simplification and stability: ACCA believes
that tax legislation and operations should be as simple and straightforward
to understand and to comply with as possible. It is also essential
that the volume of legislation is kept to a minimum. Much of the
increase in tax law and administration in recent years is due to the number of new anti-avoidance
measures. Small businesses in particular have no time to engage
in esoteric tax planning and are simply trying to cope with the
volume of laws. Changes in tax law—particularly those that
reverse previous tax breaks or incentives that have formed the
basis of business planning—should be kept to an absolute
minimum.
27. Openness,
transparency and accountability: Tax policies
should be transparent and non-discriminatory unless part of a
declared discriminatory policy, such as one intended to encourage
new enterprise. ACCA's view is that this use of tax by elected
governments is legitimate but such taxes should then meet the
other principles such as being transparent, simple and effective.
Governments should be wary of increasing the complexity of the
tax system by too much tinkering to "reward" certain
groups of taxpayers.
28. Too
often, consultation processes on tax policy are flawed exercises
where government policy has already been decided, and are carried
out largely for appearances' sake. On major issues of tax policy,
there should be clear consultation where the different options
are specified at the start, and properly considered with an audit
trail including unambiguous minutes and written responses.
29. There
should also be openness on the application of tax policy. So-called
"stealth taxes", such as the quiet reduction of tax
exemptions, and the phenomenon of "fiscal drag", whereby
personal tax thresholds are not increased in line with rising
prices and incomes, thus bringing more individuals into higher-rate
tax bands, cannot be justified. Tax rises should be made openly
and subject to debate.
30. Certainty:
The tax systems in many jurisdictions can be criticised for the
lack of certainty in outcomes or operations. It should always
be possible for different taxpayers who look at legislation to
come to the same interpretation of the law. And it should not
be possible for authorities to overturn long-established practice,
which businesses are accustomed to, and then seek to challenge
them on an obscure point of law.
Taxpayers must have certainty over Revenue
authorities' interpretations. Authorities should establish a proper
and efficient clearing mechanism for complex anti-avoidance provisions
31. Tax
Competitiveness: The globalisation of
business means that each country should ensure its tax rates are
competitive and its regime user-friendly. Tax is a key factor
in ensuring the overall attractiveness of a location to mobile
capital (businesses and individuals). It is important to look
at the underlying tax base of a country and not just focus on
the rate.
32. The
danger with competition, however, can lie in very low tax rates,
where offshore tax havens or flat tax systems can lead to "beggar
thy neighbour" approaches, in which inward investment can
be lured from one country to another and which may undermine agreed
international financial regulation initiatives. They can also
have regressive rather than progressive tax outcomes and so entrench
wealth inequality.
33. ACCA
supports the principle that nations are free to determine their
tax affairs within the context of a global competitive environment,
but governments must be wary of causing retaliatory action and
trade wars by drastic business tax cuts.
34. Avoidance/evasion:
There is a clear division between tax avoidance (or planning,
or mitigation), which is legal, and tax evasion, which is not.
It is not unethical to minimise one's taxes. While most businesses
try only to comply with the law, there have nonetheless been many
cases of convoluted tax planning schemes that are designed not
for any proper business purpose but to exploit loopholes in the
law and avoid its spirit. ACCA does not support this artificial
activity, which could be considered the equivalent of the creation
of some of the extremely complex financial products, designed
to get round banking regulations, which have had such a disastrous
effect on banks.
Such actions, which may generate short-term
financial advantage at the cost of long-term value, cannot be
supported.
35. Efficiency:
Tax systems should be efficient for governments in terms of their
ability to secure the revenue due and to prevent tax leakage and
the development of a black economy. It should, however, also be
efficient for taxpayers in terms of their ability to comply with
its requirements. It should not be forgotten that small businesses
represent the bulk of economic activity in most countries and
regulation can have a disproportionate effect on small firms,
as the smaller the business the heavier the compliance cost.
36. Sunset
Clauses: Tax systems should have a review
principle whereby tax legislation is periodically overhauled and
consolidated to bring it up to date and make it easier to follow.
Outdated laws should be removed.
37. There
needs to be a positive prompt for justifying the existence of
legislation. All anti-avoidance legislation should have sunset
clauses attached to it. This will ensure that it is regularly
reviewed and the need for it to remain in place is actively considered.
Governments and tax authorities should devise clear metrics to
gauge whether the tax system is being appropriately and sufficiently
reviewed.
38. Clear
link from tax to spend (hypothecation):
There is a lack of credibility with tax systems when taxpayers
do not know why they are being taxed and where the revenue is
being spent. It is of benefit to society, individuals and businesses
if there is a clear link between tax take and its application.
Issues such as "green taxes" have fallen victim to cynicism
as the public has not been convinced that the revenue raised has
been spent on activities to help the environment.
39. Although
we are not convinced that such "hypothecation" of particular
taxes to specific areas of spending is practical, we do believe
that there should be greater clarity in the public finances showing
expenditure projections and how these are to be financed.
40. Avoidance
of double taxation: An essential principle
of tax law must be that income should be subject to tax only once.
This applies both to direct tax, where an individual or business
should suffer tax once, and consumption taxes such as VAT, where
input tax recovery should be available at each stage of the transaction
chain and only the end user, in the form of a private individual,
ultimately pays the tax.
41. Human
rights: Taxpayers have rights as well
as responsibilities. They are obliged to pay their tax due, in
full and on time, as this is the only way governments can generate
the funding to provide the public services everyone depends on,
and in this sense tax is part of the social contract of any civilised
society.
42. Nonetheless,
the huge inequality in resources and power between governments
and individual taxpayers places a responsibility on states not
to impose their will in the field of taxation in an arbitrary
or vexatious way.
43. Tax
shifting—Green Taxes: We have said
that elected governments have the right to use taxation in certain
circumstances in pursuance of agreed social policies. ACCA believes
one of the most important examples is to change behaviour that
can damage the environment. Accountants should play an active
part in efforts to reduce global carbon dioxide emissions, and
the concept of "tax shifting" by increasing carbon taxes
on the use of fossil fuels but reducing them for payroll, income
or corporate taxes should be promoted.
How can tax policy best support growth?
44. Growth
is best supported by simplicity and removing the drain
on productive time imposed by unnecessary bureaucracy and complexity.
45. Using
(reductions in) tax to subsidise particular business sectors or
activities is of debatable efficiency. Differential taxation introduces
complexity to the system, which acts as a drag on all taxpayers.
For example, proponents of SME stimulation through tax incentives
often base their arguments on market failure, principally underinvestment
in SMEs by external investors, caused by a failure to fully value
the contribution of SMEs, and increased costs of raising finance,
caused by information asymmetry.
46. However
in order to effectively deal with the market inefficiencies they
must first be valued. Policy makers must then establish the level
of tax incentive required to offset that inefficiency. The disconnect
between problem and solution leads to further inefficiencies and
potential market distortions.
47. Incentives
for investors can be aimed directly at them, by giving relief
on the tax they pay on their investment, or indirectly by reducing
the tax burden on the SMEs and thereby hopefully increasing the
return on investment to the investor.
48. The
former type of measure will generally be more effectively targeted
than the second type which will tend to influence all SMEs, whether
they are looking for further investment or not. Moreover, where
the incentives for SME's are too great they will cause other distortions
such as the issues of "disguised employees" presenting
themselves as micro businesses in order to access tax incentives
made available to SMEs.
49. Measures
are notoriously difficult to target, an example being the 0% corporate
tax rate for companies with small profits. The aim was apparently
to induce a supply side boom driven by reinvestment of profits
not paid in tax. Among the actual results were complex anti-avoidance
measures and a rash of incorporations by small businesses which
had operated perfectly well as sole traders and partnerships but
now saw a financial advantage in changing legal form, with no
particular change in business strategy.
50. If
the factor restricting SME growth is lack of transparent information,
tax policy is unlikely to be the most effective remedy. Subsidised
training for small businesses in how to keep records and present
financial information will be more effective, and will have a
positive impact on efficiency even in businesses with no wish
to expand.
To what extent should the tax system be structured
to support other specific policy goals?
51. Tax
systems in general are cumbersome instruments of policy implementation,
so while use of tax as a policy instrument can be legitimate,
it should be exercised with care and restraint. Once enshrined
in law and relied upon by influential groups a distortion to the
system can be remarkably enduring. Specific policy goals however
can change far more rapidly. Use of the tax system by policy makers
as a regular instrument of policy implementation results in constant
change, complexity confusion and cost.
52. Tax
as a policy instrument (rather than revenue raiser) broadly falls
into redistributive and regulatory functions. Redistribution is
usually best served through income taxes, although some academics
argue that a properly formed consumption tax can have redistributive
effects. Regulation of consumption meanwhile is most effective
when applied as a consumption tax on the particular good.
53. As
a general rule, tax is best used for externalities not otherwise
reflected in the taxpayer's decision making, and which cannot
be addressed by other means—for example, green taxes, to
reflect the environmental cost of given behaviours which might
otherwise be ignored and where regulation would be ineffective.
The tax can be closely linked to the desired behavioural outcome
by seeking to monetise the impact of ie carbon consumption and
increase the cost of consumption accordingly.
54. Other
policy measures, seeking to encourage particular types of activity
rather than consumption of a particular good or service are, for
the reasons outlined above, more difficult to form. Adjustments
to consumption tax on a particular good or service essential to
the desired activity are unlikely to be sufficiently specific
to be effective, particularly where it is just one sector of the
economy that is the target of the proposed stimulus but the goods
are widely consumed. The most effective method will generally
be the income taxes paid by the businesses or individuals concerned.
If the population can be identified and defined an adjustment
can be made to the income taxes of that population in isolation.
An example is R&D tax credits, where the labour and consumable
goods subjected to tax relief could be consumed in any number
of ways. The tax incentive is given based on the behaviour of
the specific consumer, rather than the goods and services consumed.
How much account should be taken of the ease and
efficiency with which a particular tax can be imposed and collected?
55. The
extent to which costs of administration are relevant depends on
how focussed the particular tax is on being "profitable".
Revenue raising is all about the money; costs need to be kept
to a minimum. International experience indicates that consumption
taxes and withheld employment taxes are the most efficient instruments.
56. Redistribution
is (mostly) about the money, although not from the government's
perspective. Wastage on administrative costs reduces the amount
of money which can be transferred from rich to poor, directly
reducing the efficiency of the tax.
57. Regulatory
taxes are not necessarily about the money at all, eg carbon taxes.
The important goal is reduction of carbon consumption; if the
tax is expensive to administer, those costs can be built into
the levy. For many years, the example of capital gains tax was
quoted as an instance of a policy instrument, where the costs
of collection outweighed the revenue raised. The alternative cost
to the economy in lost income tax were the gains tax removed was
however considered to be even greater.
Are there aspects of the current tax system which
are particularly distorting?
58. Any
level of differential taxation introduces distortion. Some cases
(redistribution for example) are deliberate. Often however the
differential treatment of otherwise equivalent behaviours (ie
the differing tax cost of Debt finance v Equity finance, or the
proliferation of zero rated goods for VAT) exists for primarily
historic reasons, often with little objective economic justification.
The question of whether any specific distortion is justified on
policy grounds can is one for policy makers themselves.
January 2011
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