THE CASE FOR TAX HARMONISATION

THE CASE FOR TAX HARMONISATION

There are several arguments and factors to be taken into account in

considering the case for tax harmonisation. Here they will be examined under

the headings of economic efficiency, tax competition and administrative

considerations.

 Economic efficiency

The main economic arguments for tax harmonisation revolve around

economic efficiency - that the production and distribution of goods and

services should not be unduly distorted by tax considerations. If economic

activity is impeded by all sorts of obstructions, including different tax

arrangements in different areas, it is less likely to flourish. Moreover, if taxes

are particularly high in one area, trade, labour and capital might migrate to

lower tax areas for tax purposes rather than for sound economic reasons.

Furthermore, a country which discriminates against imports may find itself

subject to retaliatory action from other countries. The outcome might be

costly for all concerned, including the country which originally imposed

restrictions or tariffs on imports

There are also wider economic pressures for greater tax harmonization. The

development of the "global economy’’ is making it more difficult (or costly)

for individual countries to pursue policies which are considerably out of line

with practice elsewhere and a global view is often needed. It is also clear

that a technological revolution is under way and the pace of change is also

increasing. This has some important implications for taxation, in particular in

the development of the internet and the world wide web. Electronic

commerce - the ability to undertake transactions involving the exchange of

goods and services electronically - is a rapidly growing phenomenon.

Tax competition

Tax competition may be defined as the "competition between different tax

jurisdictions to encourage businesses and individuals to locate in their

areas". At one extreme complete "tax holidays" may be granted whereby

companies or individuals with particular skills are granted exemption or

favourable tax treatment for a period following their move to a new country.

There are two views of tax competition - one that it has beneficial effects, the

other that the overall result is damaging.

The first argument is that tax competition has a beneficial effect in

encouraging governments to keep tax rates down.

The other argument is that the alignment of tax systems may be impeded by

tax competition.This is because countries will have an incentive to adjust

their tax systems to gain an advantage over their rivals and there will be a

misallocation of resources as production may "gravitate towards countries

with relatively high production costs but low taxes.

 Administrative considerations

There are many arguments and pressures for a greater degree of tax

harmonization for administrative reasons. One of the most widespread

developments in this area has been the growth of double taxation agreements

Some of the tax implications of technological change have already become

obvious, e.g with the introduction of the facility to transmit tax returns

electronically to the revenue authorities, but this is only the start.