LUIGI MATTONE: Thank you.
Thank you, Eric for your introduction and for
recalling so many times the bank rater effect.
I will not speak about this today.
This is an experimental work and has been done
together with Johannes Buckenmaier and Eugon
Dimant.
They are - they were PhD students when we ran this
experiment, and now they are working at the
University of Cologne and at the University of
Pennsylvania.
It's an experimental research, so it's an
experiment.
I can skip this because you know better than me
these kind of things, and I go directly to the
psychological issues that we tried to explore with
this experiment that I will present you today.
I am an economist and, from the economic point of
view, to evade the taxes accordingly with the
standard theoretical framework that we are
using, analyzing tax behavior, is just a matter
of expected utility maximization.
This was exactly what Allingham and Sandmo did
in their model in 1972 and till now let's say the
standard theoretical benchmark for economists
is still the same.
But we also know that this frame is not enough to
understand the real drivers of taxpayers'
behavior, so a huge amount of the studies that have
been done across time to investigate the
psychological mechanisms that influence their
behavior and, among the others, there is one which
is quite fashionable nowadays, at least among
the behavioral economists and economic
psychologists, which is the so-called whistle
blowing mechanism.
The whistle blowing mechanism is a way that
allows the taxpayer to denounce someone else who
is, in some way, involved in tax evasion.
Here there is a sentence by the legal dictionary
about one of the possible faces that whistle blowing
can take, and it's the case where the state
encourages whistle blowing by giving something back
to the whistleblower.
For a person accused of a crime to decide to give
the prosecutor evidence about the crime, including
facts about other participants in the crime
in return for lenient treatment-a plea bargain
and/or a recommendation of a light sentence- So, it's a
situation where the state encourages whistle
blowing.
And we have two main kinds of whistle blowing.
One is taxpayer versus taxpayer, is the situation
when a taxpayer denounces another taxpayer who is
evading, so I know that someone else is evading
and I denounce him or her.
Which other motivations?
Well, psychologically speaking, we can have
moral, ethical, and psychological motivations.
For example, we can be moved by social norms or
by personal ethical values; envy, which is
very, very human - a very human sentiment; and, also
the pleasure to punish.
These have been studied using fMRI machine.
I cannot go into this in detail, but it is a very
interesting issue.
And, of course, there is also the situation where,
as I told you, the tax authority encourages
whistle blowing.
Then, there is another situation of whistle
blowing which is the taxpayer versus tax
officer.
Tax officer, in this case, is a corrupt tax officer,
so it is the case when the taxpayer decides to
denounce a tax officer who is a corrupted one, and
about this second kind of whistle blowing, there is
less evidence from the scientific point of view,
has done almost nothing to explore this issue, and
here, the psychological mechanisms are not so
sharp as in the first case.
At least the first case has already been studied a
bit, but the second one is not explored until now, at
least as far as I know.
What we did in our experiment was to see what
happens when we introduce an institutional change
into the frame of the experiment.
By the way, the experimental design is
perceived by the participants like an
institution.
The rules of the game that we impose to our
participants are perceived psychologically like
institutions.
Loss, overuse, and therefore, a change in
experimental design is equivalent to a change in
the institutional setting.
So what we did was to provide legal immunity to
bribe giver for blowing the whistle as a
measure to the deter tax evasion, and the idea is,
well, I can skip this because we don't have
enough time.
Yes.
Okay.
So we investigated the so-called principal
witness regulation, which is a law that allows
implementation of the mechanism of enforcing
whistle blowing by the authority, and the scheme
in our game is very simple, as you will see.
We have two main kinds of agents in our experiment.
One agent is the taxpayer, the other agent is the
public officer.
So imagine a situation where a tax officer has to
apply the law to get the money from the taxpayer.
This is the situation, the frame.
And the taxpayer can only evade if the public
officer accepts a bribe, accepts to be corrupted by
the taxpayer.
Is it clear the scheme?
Very simple.
We ran different treatments to test if
introducing a law that encourages the taxpayer's
[unintelligible] evading to denounce the tax officer, to
encourage this, has an impact on the taxpayer's
behavior and on the public officer's behavior.
Okay, so this is the general scheme.
Quite simple.
We ran many treatments, more precisely we ran four
treatments.
The first one is the standard treatment and it
works in the way I told you.
There is a participant to the experiment that plays
the role of the taxpayer.
He receives money, real money.
We pay our participants with real money.
And he plays 20 rounds.
He has to decide to pay or to evade the taxes
expected across these 20 rounds, and to do this, he
has to convince another participant, another
participant to the experiment, who plays the
role of the tax officer, or the public officer, to
be corrupted.
So he sends a bribe to the tax officer.
If he or she accepts, he can evade the taxes and
the other one gets the bribe, okay?
Good.
So this is the standard treatment.
Then we have a second treatment, which is a
treatment where they play the game exactly the way I
told you, for the first 10 rounds but in the 10th
round we introduce a change.
We tell the taxpayers that if they denounce the
public officer, if they are found to be evaders,
of course, and they denounce the tax officer,
the public officer, they can receive a discount on
the fine that they have to pay.
Okay.
And the tax officer is punished instead of them.
So the first 10 rounds is without this, the second
10 rounds is with this new regulation.
Then, we have a third treatment where there is
always these rules at work, so from the
beginning there are these laws at work, and finally,
the other one, the fourth one, where we inverted the
time, we start with the law, with the law that I
told you, and then we take it off for the second set
of 10 rounds.
Why did we do this?
Because we want to see if the institutional story,
let's say, history, the institutional history,
does matter in influencing behavior, the taxpayer's
behavior.
So this is the game, this is the extended game.
I don't know if I need to get into this in detail
because I already told you how it works.
[Laughter]
So if you want I can do it.
It's because we always need a theoretical
prediction when we run an experiment, so this is the
standard, the game's theoretical prediction,
which I can summarize.
I can summarize here - no, it does not accept to do
it.
Okay.
So.
The game theory predictions are the
following.
Given the parameters that we include-oh, by the way,
I'll show you the parameters, at least,
very, very quickly.
What they had to declare in each round was 80 EQ,
which is Experimental Currency Unit.
It's always the same break.
It's a way to give more money, virtual money, to
the participants.
Then, at the end of the experiment, this money is
transformed - this virtual money is transformed into
real money.
Okay.
So 80.
Then they there is the bribe that they can offer
which is a maximum of 30; the probability to be
audited is 20%, which is very high but I could tell
you about this and I don't have enough time; anyway,
it's 20%.
The tax rate is 50% it has been parametrized on the
Italian standards because Italy, as you probably
know, has a very high fiscal pressure, so 50% is
something that Italians find fair.
[Laughter]
You can trust me or not, but it is.
Well, anyway, the fine rate is 25% of the amount
evaded, and finally, the commission that-oh, I
forgot to tell you that the public officer gets
money from the tax collected, so he has an
advantage in collecting taxes, which is 15% of the
tax collected.
Okay, so this is enough.
I can go on.
Given these parameters that the theoretical game
predictions that I showed you using the picture that
I showed you, is that the unique sub-game perfect
equilibrium of the bribery game, which is the game
that you saw, in this situation the taxpayer
should declare zero taxes and offer a bribe of
exactly 6, okay, so this is the optimal rational
choice for the taxpayer, which, in equilibrium, is
always accepted by the tax officer.
So we have a normative theoretical prediction
about this game.
Similarly, in the EG, EG means Extended Game, is
the game where the law is at work, taxpayers declare
zero taxes, but the bribe offered in the unique
sub-game, Perfect Equilibrium Outcome, is
ten, so increased.
This is very intuitive.
If I am the tax officer and I know that the other
one, the taxpayer, can denounce me, I raise my
bribe.
I want more to be corrupted, because I'm
running the risk to be punished, so the
prediction is perfectly intuitive and it works in
an intuitive way.
If all the participants are rational, and
particularly if the public officers are rational,
they should reject any bribe lower than 10, if
they are rational.
So, I'll skip this because it takes too much time.
It is interesting to be honest with you,
[Laughter]
but I'll skip it because I have only 15 minutes.
So thank you.
[Laughter]
I'll see you later at the coffee break
to tell you the end of the story.
Okay, I'll skip this because it's too long,
it's the experimental procedure's description,
and I'll go to the results.
I skip also this.
Then I skip this.
[Laughter]
And this is a table, I understood from
Christophe, that you don't like tables, so I'll skip
the table as well
[Laughter]
and I'll go directly to the qualitative result of the
results.
So, first result.
The levels of tax compliance are
significantly higher with the rules, the law that we
introduced in the experiment, the principal
witness view.
The effect is mainly driven by female
participants.
By the way, I will spend a bit of time on this
because it's the most interesting result of the
experiment.
Alright, two minutes more.
It's about the gender effect, something
unexpected.
By the way, the unexpected results of the interesting
experimental economics, I like it a lot when I find
something that I was not expecting from my boring
theory, and I get very excited when I find this.
On the other side, the behavior of males are
almost unaffected by the law.
So to have this law on board or not have it does
not matter for males.
But it is very important, this change, regarding
females.
The bribe acceptance threshold is, as the
theoretical prediction says, significantly higher
with regulation and this was, as I told you, very
intuitive because as I told you, if I run the
risk of being denounced I want more to be corrupted.
And here I have the graphs that Christophe likes, and
I'll show you-I don't remember if they worked
exactly, but I will try to tell you the story.
So the first set of graphs, the first two, are
the percentage of taxes paid by the participants
in my experiment in Treatment 1, in which
there was no principal witness regulation, so
there was no law working, while the second graph is
Treatment 2, with principal witness
regulation.
As you can see, immediately, it's very
clear, there is a shift of the tax declaration up, so
the introduction of this law increases the tax
compliance in a significant way.
Trends in average incomes declared without PWR,
which is the graph on the top left, the solid line,
and with PWR graph, top right, solid line is where
the average tax is paid without the PWR and with
PWR across treatments.
This is a description of the graphs.
So everything goes up-the income declared and the
amount of taxes paid with the principal witness
regulation.
Then let's see what happens with regards to
the bribe acceptance.
In Treatment 1, which there was no principal
witness regulation, bribes were quite high in terms
of acceptance, of percentage of acceptance,
but they remained quite high also in the Treatment 2.
So this is not so expected in the sense that we
thought that bribes should be rejected more when the
principal witness regulation is at work, but
it is not the case.
So the percentage of acceptance does not
change.
The public officers are not particularly sensitive
in terms of acceptance of the bribes to the
introduction of the law.
What changes is the behavior of taxpayers but
not of the public officers.
And here is the result I told you about females and
males.
The first graph shows the percentage of tax declared
regarding females in the Treatment where there is
not the law and in the treatment where the law is
at work.
When the law is at work, women pay much more taxes,
declare much more taxes, than in the case where the
law is not working.
Regarding males, this does not matter.
They are completely neutral regarding the
introduction of this law.
And so it's females that justify this shift upwards
of the declaration.
It's only females that are driving the phenomenon.
But this is not a counterintuitive
phenomenon.
I will explain in a while.
I'll skip this, and I'll go directly to the
treatment where we - so, remember, Treatment 1 and
2 we have the principal witness regulation, or we
don't have it for the whole experiment.
In Treatment 3 and 4, we introduce it at the middle
of the experiment, so we have an institutional
change, a switch in the institutional setting.
So this is what happens when we introduce an
institutional change regarding the percentage
of taxes given.
As you can see there are strong differences
regarding the case when you introduce the
principal witness regulation at around 10.
Why?
Because, as you can see, there is a change in the
slope of the percentage of taxes declared.
Yes, I'll skip this.
This is faster and I'll go to this one.
Oh, this is the most interesting result.
Do you remember that I told you that females pay
more taxes when the principal witness
regulation is at work from the beginning of the
experiment compared with the case where there is
not, do you remember this?
Now, what happens if this law is introduced during
the experiment and not from the very beginning?
Something absolutely unexpected happens.
Once the law is introduced, and it's this
graph, this one.
These are males and these are females.
No principal witness regulation, then an
introduction of the principal witness
regulation, so it's the same group of people
experiencing these two situations during the same
experiment.
The males were complying with the law, meaning
paying taxes.
Once the principal witness regulation is introduced
they start to evade.
Yes, massively.
Males are not affected.
Once more, they don't care.
It's something they don't care about.
This is something really new because we know, from
the literature, and Erica can confirm, I think, that
females are more honest than males in this kind of
experiment.
Females almost always are tax compliant, while males
like to evade the taxes, at least from our
evidence.
But this is something new.
Why?
If I introduce the principal witness
regulation, why do females start to evade?
Why?
I can answer my question.
[Laughter]
And then I'll close.
I don't know.
[Laughs]
[Applause]
MODERATOR: Indeed, Luigi always has interesting
results, especially those which he does not show.
[Laughter]
Well, you heard now, two experiments, and it's not
always easy to understand these experimental
approaches, especially if you're coming from another
discipline than psychology of behavioral economics,
and you might think differently about this
game, theoretical approaches, and lab
experiments, where we usually have students as
participants and the whole setting is quite
unofficial, but believe me, the experimental
approach is really important to test
hypotheses sharply and to develop our theory.
Of course, it's not the end of the whole story.
We need to go out in the world, in the field and
see what we are doing and finding what's really
valid.
Well, now Rupert Sausgruber, who is a
professor of economics at this university, here at
the Vienna Economics University, will talk
about experimental approaches but not about
single experiments, research in economics, and
summarize this research.
He will talk about penalties and general
anti-avoidance rules and what we have learned so
far from the behavioral economics approach.
RUPERT SAUSGRUBER: Than you.
When I prepared this talk, I was actually reading what was
written on this slide, and it said: "the panel will
explore current research on the use of penalties
and general anti-avoidance rules from the perspective
of economic theory," so I saw them going back to our
approaches and I'm giving you an overview of what
economics says about these issues.
The starting point is that the state needs money to
run business, basically to provide worthy government
expenditures, and once you introduce taxes to do
that, you have basically three ways to increase
taxes.
The first is you increase enforcement, you raise the
tax rates, or your broaden the tax base.
And optimal tax policy would account for the cost
of increased enforcement, so it's basically an
option that you have, but it's a costly option.
So what are the costs?
You have administrative costs, the costs that are
actually showing up at the budgets of the tax
administration; you have compliance costs, the cost
that doesn't show up in the budget but are, of
course, part of the cost of taxpayers; there's
excess burden, basically taxpayers reacting to
being taxed so they move business abroad, they
consume less, they produce less, things like that;
and, there's taxpayer uncertainty.
So this is basically a reduction of utility
because you have a threat of being fined and
audited, which is a reduction in utility
terms, so people have a preference to pay it to
get rid of this uncertainty.
All this tells you is that the optimal tax gap is not
zero, so I'm trying to tell you that there is a
tradeoff when you increase enforcement; there's a
tradeoff in terms of cost.
There are good reasons to crack down on
non-compliance.
First of all, non-compliance leads to an
unfair distribution of the tax burden, which is
obvious for individual taxpayers.
It's not so obvious if you talk about corporate tax
evasion because corporations are run by
individuals and it's not clear why you treat
corporate entities, in terms of fairness, so it's
an elusive concept here.
It's especially elusive, so there's this quote by
the Mirrlees Review: "It's not meaningful to think
about the effects of taxes on companies separately
from the effects of those taxes on the individuals
associated with companies."
It's just a difficult issue.
The second issue is that non-compliance is costly
to the society.
Basically when you narrow the tax gap, if you manage
to narrow the tax gap, you actually free up money
that you can use to invest in worthy government
projects, or you can cut existing tax rates so you
get rid of excess burden.
But there's also another issue, which is probably
not so prevalent.
Basically, if all these people and all these
companies spend a lot of money to find ways to get
rid of their tax burden, we would call this like
rent seeking.
It's a huge expenditure taken by companies, taken
by individuals, and it's essentially wasteful
expenditure in the sense that you could use all
these resources alternatively, you could
use those alternatives in a more productive way.
Of course, you see tax administrators and tax
people are employed by all these issues but, in a
sense, it's wasteful because you could use an
alternative in a much better way.
So how can you increase tax compliance?
The economic approach, as Luigi already pointed out,
is the standard Allingham & Sandmo model.
It's basically an extension of this Becker
Economic Model of Crime, and the two most important
variables in this model are the probability of
audit, "p", and fine in case of detection.
And even though it's a very simple model, it has
already some interesting implications.
One interesting implication is what has
been referred to as "hang them with probability
zero," and the main intuition is that
increasing the probability of an audit is quite
costly because the tax administration needs to
hire auditors and it's very costly to do it,
whereas increasing fines is relatively cheap, so
this implies that the optimal deterrent strategy
would be one that the probability is rather low
and the fine is really, really high.
There are, of course, reasons why you can't
increase "F" extensively and these are mostly legal
issues, fairness issues.
You cannot increase punishment over
proportionately to the perceived seriousness of
the crime.
Tax evasion is typically perceived as a rather
modest crime in any country, not only in
Italy.
It's a crime, but it's a modest one and typically
the punishment with regard to that is not so
excessive.
There is the probability of the detection typically
is determined by the revenue services, the
fines are set by the judiciaries.
So I'm coming now to evidence.
What does the literature tell you about evidence?
And, even though it's a very simple model, there
is extensive evidence that supports them all, so
whenever you increase the audit probabilities you
find higher compliance, you find that people who
have been audited are more likely to comply, when you
increase information about the audit rates you have
more compliance, and if you look at the details of
the studies we have been presenting, now you also
will realize that whenever the probability of an
audit has been increased you see more compliance.
I think it's a real established fact that
higher enforcement probability leads to more
compliance.
The evidence is not so clear regarding penalty
size.
One reason is that it's not easy in the field to
vary the size of penalties.
So when I'm saying here compelling empirical
evidence what I mean is do we have causal empirical
evidence, and it's very difficult to implement a
change in penalty size in the field such that we can
causally argue that the penalty size increases
compliance rates.
There is some evidence from lab experiments which
kind of points to the direction that an increase
in penalties is less effective than an increase
in audit rates.
There is some evidence on shaming.
Basically, if you announce people who have - publicly
announce people who have avoided taxes, then this
has a big effect.
There is evidence that penalty rates point in the
same direction as audit rates, but it's less
compelling.
The literature has proposed several
extensions to the simple model which are basically
to account for non-standard preferences
like tax morale and honesty, some extensions
regarding what determines the probability of
detection, and also an extension on how to
account for tax avoidance.
Tax morale.
So the issue is basically that this early literature
argued that this probability of detection
in reality is really low and the way they did
this basically, is they looked at, I mean,
the base was all the taxpayers in the
country and they counted the number of audits the
tax authorities conducted, and they concluded that
the probability of an audit is really small.
Nevertheless, we see a lot of tax compliance and they
concluded there must be something explaining this,
which is tax morale.
But, in essence, if we play around in the field
with tax morale, we find very, very little evidence
of that.
I'm trying to explain what I mean by that, so there's
loads of empirical studies working with morale
appeals, basically sending people letters, well, be
an honest taxpayer, it's your moral duty to pay
taxes, and things like that, and there's
virtually no evidence that these appeals work.
So I've cited several studies here and, with
very few exceptions, these studies find only weak
effect.
I also have an issue with corporate tax morale.
Corporations are typically run by executive
committees and these committee decisions are
kind of different than individual decisions.
I'm a big believer in honesty.
I think people are generally honest, but if
it comes to committees, I'm very skeptical.
One reason is simple aggregation.
We know that many people are not honest and when
you have a committee decision, typically the
median preference is the one who is decisive, and
so if you have a majority of dishonest people, the
group decision will be dishonest as well.
There's also a coordination issue.
Sometimes in this corporate decision making,
being dishonest as a group pays off more, so everyone
has to be dishonest, so the stakes are higher.
And finally, there's behavior in competitive
environments.
So competition basically forces you to be dishonest
because if you are not dishonest yourself someone
else is going to be and then you're out of the
market.
So there's a very strong competitive force that
drives you down to unethical behavior.
Three minutes?
Okay.
Legitimacy.
I believe in legitimacy.
I think there's also research supporting
legitimacy.
Basically it's different from honesty but it says
that taxpayers have a preference for being
treated in a fair way.
What's determining the probability of detection?
As I said earlier, literature saw that tax
morale is really important but this recent literature
basically tells us, in the study by Kleven from
Denmark, it was a field study randomly auditing a
huge amount of taxpayers and the main variable of
interest was whether the income is third party
reported or self reported.
And the main result is: the tax gap is really low
in Denmark, but it is low because most income is
third party reported.
There's absolutely no way that you can cheat on your
tax unless you are self employed, and to people
who are self employed, they cheat extensively,
even in Denmark.
So the conclusion is that Danes are unable to cheat,
they're not unwilling to cheat, so it's another
piece of evidence that tax morale is not the driving
force, it's really the information of the tax
authorities they have and to pin down tax
enforcement.
Avoidance basically, the way economists model
avoidance is an extension of the Allingham & Sandmo
model, basically they argued that any act of
avoidance is costly, the cost of finding avoidance
opportunities, and of course, then the
probability of detection, the fines become less
effective because people can substitute and enter
avoidance so, from this perspective, a general
anti-avoidance rule would, of course, increase
enforcement.
We do have a lack of evidence on very important
questions.
The first one is, if we increase measures to deter
evasion, to what extent will taxpayers respond by
increasing avoidance behavior?
Actually we don't know that.
It's likely that this happens, but it's
difficult to quantify it.
Again, if policy introduces a GAAR, how
will taxpayers respond?
Will they increase evasion again, or will they engage
more in reasonable tax planning?
It's very difficult to get empirical information on
these kinds of questions.
If we increase or introduce GAARs, what is
actually quite likely to happen, I think, is that
we observe a strong reaction towards what we
call legal avoidance, basically relocation of
real activities or general equilibrium effects, so
basically people will lay off domestic work because
they will try to produce abroad, so these are true
costs if you introduce those GAARs, but they
will, of course, be effective, so there will
be less tax evasion.
I'm summarizing.
Non-compliance is a problem, also from an
economic perspective, but zero tax gap is not
optimal.
From my perspective, there is little evidence that
promoting tax morale would work.
I do, however, think that procedural fairness is
important to sustain legitimacy.
The standard model, the standard economic model,
works quite well and it's easily extendable towards
GAARs, so enforcement, in terms of GAARs, reduces
tax evasion and also increased transparency
works because increased transparency means that
the probability of detection is increased so
you have the standard deterrence model coming to
life.
However, enforcement is likely to increase
avoidance and GAARs is likely to increase
reasonable tax planning and there are some side
effects of GAARs in legal enforcement.
There might be indirect effects via strength in
reputational pressure, which is, again, basically
like increasing the probability of detection
and it may also enforce social norms.
Thank you very much.
[Applause]
MODERATOR: Thank you, Rupert, for your insights.
I don't believe them.
[Laughter] You need more psychology at this
university, I think.
Now we come to Christophe Waerzeggers, he's a
lawyer, and he is in the field.
So we will learn a lot from your experience as a
senior counsel in the financial and fiscal law
unit of the International Monetary Fund in
Washington and Christophe, you have in your CV also
mentions many lectures and seminars which you took at
different universities all around the world.
You were a tax consultant in the World Bank, so we
expect to learn a lot about the experiences in
the field when you talk about tax compliance, tax
law drafting, and the anti-avoidance rules.
CHRISTOPHE WAERZEGGERS: Thank you very much for
this very kind introduction.
Of course, I also have to thank Nina to inviting me
to this conference, who actually managed to find a
few lawyers that are working at the Fund, so
the Fund is not an entire institution made of
economists.
A lot has already been said, but I wanted to
start briefly by saying a few things of what the
Fund does because it also shows what we don't do.
So the IMF is an organization which has
actually a relatively specific mandate which is
focused on what we call global financial
stability, and so we are given specific powers
under the Articles of Agreement of the IMF,
which is the charter that set up the Fund in 1945,
which set out the things that we can do to achieve
that global financial stability.
And tax is relevant for all those three functions,
so I've summarized them here.
I'll go quickly because I want to come to the GAAR
in a minute.
But those three things that you can find in the
Articles of Agreement are: TA, or Technical
Assistance Advice.
It's probably the most obvious area where tax is
important in our work where we provide
assistance to member countries.
The previous slide said we had 189 member countries.
Nauru, if you know where that is, is the most
recent member of the IMF.
We do roughly 200 HQ admissions on tax per year
as far as the work of the legal department where I
am from is concerned.
We provide legal drafting assistance to member
countries.
Looking back over the years, I've tried to work
out roughly between 200 and 300 tax laws on the
statute books anywhere in the world we've
contributed to in some shape or form.
Probably the most high profile thing that the
Fund does is the lending activity.
These are the programs you will hear about in the
media and perhaps some of your countries have been
experiencing them.
Tax obviously is often a core element of those
programs so the financing arrangement that the Fund
enters into is technically a swap arrangement where
we swap local currency against typically the U.S.
dollar, but any of the currencies in the SDR
basket.
But what's relevant here is that typically we don't
perceive this as a contract with a country
but an engagement of the country to carry out
economic reforms, to get back on a fiscally
sustainable path and obviously tax is an
important part of that exercise.
And so, in the context of lending arrangements, we
typically have what we call structural
benchmarks.
This is the famous conditionality that you
might have heard of in the media where countries
agree to tax reforms specifically and,
actually, looking back over the past couple of
years in the post global financial crisis period,
when we scrutinized our own programs we've seen
that actually the number of conditionalities put in
the tax area have actually increased, so it is
becoming also more important in that part of
our work.
Surveillance is a third area of work.
This is the famous Article IV discussions we have
every year, typically every year, with our
member countries, so when you become a member of the
Fund you commit to surveillance and so
typically every year you get a visit from, not me
but my colleagues in the area departments to have
sort of a health check of the country.
And tax, certainly in the past couple of years, has
played a more important role in some of those
discussions where tax is a structural socially
important issue and you can work out which
countries for which that is the case.
I was also going to talk about some new tax
initiatives, the global tax agenda, but I will
skip this to proceed and allow time for discussion
at the end.
I will also skip this because Rupert already
covered this.
These are some graphs from a recent board paper we
did on tax compliance and tax administration
challenges.
This is showing that tax gaps, several tax gaps,
it's not just PAT, also CIT in a selected number
of countries where before the crisis, compliance
gaps were generally declining.
In the post crisis, immediately after the
crisis, there was actually a big increase in tax gaps
and so, to some extent, non-compliance was sort of
an automatic stabilizer, as economists would say.
Obviously not a very efficient one, but just to
show that non-compliance has become more of an
issue in the post crisis period.
Of course, what's relevant, is unpacking
non-compliance, unpacking tax gaps and a lot has
been said about that already and I won't repeat
that here.
What I want to focus on, perhaps more, is what is
the relevance of legal frameworks, because that's
where the lawyers come in and yesterday there was
some discussion on the complexity of legislation,
complexity of the taxes, and generally I presume
that's also complexity of legislation.
How does that impact compliance?
And so, there's not a lot of evidence on that other
than from our own experience of working with
countries and, of course, from my own personal
experience, I can tell you this is actually very
important.
It's also become part of a recent stream of work that
we've worked on with our colleagues from the OECD
where we produced a report for the G20 that will be
presented actually in a couple of days' time at
the Baden-Baden Summit for Finance Ministers on tax
certainty.
And so, in the context of that exercise, the OECD
ran a couple surveys, a business survey and a tax
administration survey, and one of the questions that
was asked in that survey was specifically on the
complexity of legal frameworks.
Unfortunately, because the report-this is an issue of
timing here-the report has not been presented
formally.
I cannot talk too much about it so I would say
stay tuned, it will be presented at the end of
this week and probably be released for comments
later this month.
But you will find in there, in that report,
some new evidence on the relevancy of complexity of
legal frameworks, both from the perspective of
business and tax administration, and also
some discussion on what are the approaches towards
improving or reducing complexity.
There was some discussion yesterday about maybe the
pitfalls of plain drafting, which I think we
agree with.
I think we've come out on more of what we call
principle base drafting, and I think that is also
relevant for the discussion on GAARs, so
that's why I wanted to mention it now, and I'll
come back to it in a minute.
There's also some discussion on
anti-avoidance rules, again, we'll have to wait
until the report comes out.
I'm really sorry about that.
I can tell you about this publication, which we
released last year, which is a note, sort of our own
sort of little toolkit, a toolkit is the new
buzzword in international tax, so this is a
relatively short publication that you can
find on our website.
It's a new series that we launched in the legal
department called Tax Law Technical Notes on a
topical issue, and this one is specifically on
GAARs.
So the way we approach this note is in a very
practical way.
It has some general observations on designing
and implementing a GAAR and then has sort of a
sample set of provisions, not tailored to any
jurisdiction in particular, but sort of a
generic legal provision with a sort of explanatory
note on how it is supposed to apply and then with a
numbered example how it can take effect.
The primary focus of this note was, I would say,
domestic GAAR provisions.
But I think I should say a few words, also, of how it
has gained more importance also in the international
tax agenda.
Yesterday there was obvious reference to the
OECD BEPS project, so as you probably all know, in
the context of Action 6, Combating Treaty Abuse,
which will culminate in the signature of the MLI,
the convention to amend as many bilateral tax
treaties as possible of those countries that sign
on to the MLI and we'll have to wait and see how
many those are.
But one of the commitments, when you do
sign on to the MLI, is to introduce either a
principal purpose test, which is effectively a
treat-based GAAR, or a limitation on the benefits
clause.
Now, again, we're a bit early in the game.
There was a speed dating exercise a couple of weeks
ago at the OECD where countries that are
planning to sign on to the GAAR had sort of
one-on-ones with treaty partners to see where
their positions are because countries can
reserve and opt under the MLI, and this is one of
the options-principal purpose, that's their LOB,
now the countries that have made public
statements to the effect of what they will do, it
seems like most countries will opt for the Principal
Purpose Test, not the LOB, which is sort of ironic
because my understanding was that the LOB was put
in there for the purposes of the United States,
which typically uses LOBs, but of course, the United
States is not going to sign the MLI in the first
place.
So it's sort of ironic.
But anyway, so that's sort of at the international
level.
At the domestic law level, I think there's also some
interesting developments here.
Many countries have these sort of domestic law GAARs
that are primarily focused on general tax avoidance
issues, but more recently, a number of countries have
started using these types of provisions to
specifically target international tax
avoidance and so I'm obviously referring here
to the diverted profit tax in the UK, which is
formally not a GAAR, it's a standalone tax, but it
obviously smells like an anti-avoidance rule, and
other countries have taken suit in that respect, and
Australia is one that has already put out
legislation to that effect and Ali will know the
situation very well, but I think very recently New
Zealand has announced that it will actually move in
the same direction.
And so the Australian/New Zealand approach is
slightly different in that unlike the UK approach is
sort of the standalone tax, the Australian/New
Zealand approach is sort of to bring it under the
anti-avoidance rule as sort of part of the
corporate income tax infrastructure.
And the reason why I think that's sort of an
interesting development is that technically what the
GAAR is supposed to do is not patch up underlying
policy problems, it's basically to reestablish
the intent of the legislature, so it's a
substance over form provision.
But, in these sort of internationally targeted
rules, it's almost as if you're using this kind of
rule to actually cure an underlying problem of
deficiencies in the international tax system,
which are not fundamentally solved by
the BEPS project.
So that's, I think, an interesting development.
I'll come back to those two examples, as well,
because they're relevant also for the penalty
aspect.
So I was also going to say what a GAAR is.
I think most people know, so as I said, it's a
substance over form provision.
What is critical, I think, here is that, and that's
relevant for the next slide, which is it is
potentially quite a powerful tool in the hands
of the tax administration because it's meant to give
the tax administration the power to overrule, or sort
of to discard transactions entered into by the
taxpayer, that are, other than for the GAAR itself,
legally in sort of in line with the letter of the law
but not the spirit.
And so you're asking the tax administration to also
second guess, in a way, the intent of the
legislature which may not always be very clear,
certainly in the context of complex tax
legislation, and this is where I want to come back
to the point of principle based drafting where, if
you adopt that kind of drafting approach where
you have a principal provision that sets out
the overall policy intent, that will make it easier,
in light of the application of a GAAR, to
find the policy intent of a more complex provision
introducing that policy.
So, of course, it's not meant to reestablish what
is fair or just, it's still a legal provision,
it's not some kind of moral obligation, but
nevertheless, it is quite, potentially quite a
powerful tool.
That's why the note also makes clear that
institutional capacity is very important in this
context and most of the discussion, and I think
also most of the experiments here, are run
in sort of OECD style sort of countries or more
developed countries, but in developing countries
this is obviously often a very big constraint.
That's not to say that most of the countries we
work with, when they are developing countries,
they're also very interested in GAARs and
they also want to know about them and want to use
them, but obviously, when providing taxpayer
protection there's sometimes more of a
constraint in those kinds of countries.
This is just a general point made here that
procedural safeguards are important and different
countries go about that differently so, for
instance, there's the GAAR Panel in the UK, I won't
go into the details of that, but that's a form of
safeguard.
The main point being that you need effective dispute
resolution systems to back up the use of these
provisions, and that's where - and this is
something from our own data - we know that many
countries struggle with having effective dispute
resolution mechanisms.
It's already been mentioned yesterday, as
well, so this is very hard to see, and it the numbers
don't matter, but the basic point is this.
So this is from TADAT, it stands for Tax
Administration Diagnostic Assessment Tool, that's
why we use the acronym; it's meant to be an
assessment tool that allows us to diagnose the
performance of tax administrations across a
number of performance outcome areas, POA's, in a
way that make the results comparable across
jurisdictions.
And so we've done a number of these TADAT
assessments.
I think we've done almost 40 now, mostly in
developing countries, low-income and
middle-income countries and what we find, in
respect to the performance indicator in terms of
dispute settlement procedures, is that
countries score relatively well in that left axis in
terms of having, on the statute books, an
effective dispute resolution mechanism, so
they have a graduated independent system,
institutional setting, set up but, in terms of the
time it takes for reaching a point of decision and
for learning from the decisions in terms of
administrative processes, many countries score very
poorly.
Partly there's an issue of data not being available.
Countries don't track what is happening.
But those that do track often have very lengthy,
very inefficient in practice dispute
settlement procedures.
So in a context as this, of course, it becomes a
bit more critical, the issue of taxpayer
protection in the face of a provision that is
potentially quite heavy handed.
And so I'll finish on this point, which is - I
promised I was going to come back to, in relation
to fines or penalties.
So, in our note we do not actually talk about fines
and penalties in relation to a GAAR specifically, so
I think, to some extent, it's related to the point
on effective dispute settlement procedures.
You know, if you have a fine on top of the GAAR,
obviously, especially when there is an advanced
payment requirement, the pecuniary impact of that
might be quite hard and so if the fine is a
proportion of the tax payable it actually almost
doubles the impact of the discretionary power of the
tax administration.
So if there's no effective remedy, I think we would
be quite reluctant to say, okay, when this is your
first go at having a GAAR, it might be a bit tricky
to also impose a fine of 100%.
Now if your objective is clearly deterrence, which
is basically what the DEP, the UK DEP and the
Australian MAL, Multinational
Anti-avoidance Law are intended to do, I think
the MAL is 100% fine, Ali?
So there, there the objective is actually
basically that you will never have to use it and
that companies will no longer structure their
businesses in the way that you find unacceptable,
which is a point that Rupert also made where the
objective is clearly changing behavior than
obviously, a heavy fine might actually make sense.
I don't know if Philip is here.
Philip, the DPT was obviously also meant to
change behavior.
I don't know how much the DPT has raised in terms of
revenue-
PHILIP: Nothing.
CHRISTOPHE WAERZEGGERS: -probably nothing.
Exactly.
So you see it's actually very effective in that
way.
So, in that context, fines-
AUDIENCE MEMBER: [Inaudible]
CHRISTOPHE WAERZEGGERS: Absolutely.
So, absolutely.
So I'll stop there.
I had a list of sort of conclusions for discussion
which maybe we can come back to in the discussion.
Thank you.
[Applause]
MODERATOR: We have only a few minutes before the
coffee break, therefore, I would like to ask you for
a couple of questions, and very short answers.
AUDIENCE MEMBER: Hi.
I've got a question for Christophe.
This kind of analysis of GAARs, do you see from a
perspective of judges what kind of role could the
judges play in a domestic role, because, as a
taxpayer defender, I love the idea of introducing
GAAR.
We don't have it in Mexico and I think that it can
improved a lot of the aspects of the
relationship, but at the end of the day, the GAAR
are going to be applied by a tax administration and
talking about an acceptable behavior of the
taxpayer, it's dangerous for the taxpayer and the
defenders of taxpayers.
At the end of the day, the tax conflict is going to
end in a tax court.
How can you link the relationship of the
effectiveness of a GAAR and the role of a domestic
judge?
MODERATOR: Can we collect two more questions and
then have the panel answer?
AUDIENCE MEMBER: Hi.
I just wanted to make one remark on the GAAR and
then a question for Rupert.
I think we need to be very careful.
If you're too taxpayer rights friendly with GAAR,
it will lose its effectiveness and, you
know, it's very much evidence-based.
For example, with the UK recently introduced
GAAR with two reasonableness tests,
I really do wonder how much success HMRC will
have in courts taking cases to court because,
you know, the reason why the Australian GAAR and
also the MAO are so strengthened is because
of, you know, the evidentiary burden on both
sides, you know, to prove GAAR, but that's just a
comment which I'm sure Christophe will pick up
on.
But I wanted to ask Rupert, because you said,
kind of like this moral obligation doesn't really
work because I've actually recommended some of this
stuff in my report and what I've taken it from,
you know, in the early '80s, for example, when I
moved from the UK to Australia, you know, the
drinking culture was there and everybody drunk drived,
but there was such a-not everybody, I'm
exaggerating for effect-but there was such
an education program undertaken that not only
it's a crime but it's socially irresponsible and
you very rarely see it happen.
The other thing was, also another one, about, I
forget the ad, but basically keep the country
clean.
It was such an effective ad done that, you know,
the cleanliness of Australian cities, I
think, is wonderful as a result, and all of these
have been as a result of education campaigns and,
you know, this moral obligation.
And I was wondering whether you had done any
research about embedding this moral obligation at a
very early stage at schools and also when new
migrants come to a country, and I just
wondered whether you had done any studies on
embedding that moral obligation much earlier in
the piece.
AUDIENCE MEMBER: My name is Leo Nafer.
I was struck by a remark on the sheet where it says
there is a tension between preserving the rule of law
and protecting the integrity of the tax
system.
It's my experience, more or less, that the rule of
law is not playing any role in many of these
rules of the institutions.
So what is, in your opinion, the position of
the rule of law in the integrity of the tax
system.
MODERATOR: Okay.
Thank you.
Christophe, will you answer?
CHRISTOPHE WAERZEGGERS: Maybe I'll start with the
first question on the role of the judiciary.
I think it's a very good question and an important
issue.
I think I'll try to answer it from a legal design
perspective because that's sort of my comfort zone.
So in the sample provision that we set out in our
publication, we basically have two limbs.
There has to be a scheme that a taxpayer enters
into and then that scheme has to be entered into for
a dominant purpose for a tax benefit.
So it must basically be tax driven.
So the sole or main objective or principle
objective, you can use different words that have
slightly different meaning, but that's sort
of an objective standard.
Now, other countries, I think Canada is in that
situation, have a requirement that it has to
be an abusive arrangement, and that obviously raises
an additional bar of a burden of proof where,
indeed, you get into the situation where judges
will have to rule on sort of almost a subjective
objective standard.
So to the extent that through the drafting of
the rule you can keep an objective test, it will
help probably also in the application, both in
taxpayers, tax administration, and judges
ultimately.
At the same time, I can also say that we sometimes
engage with the judiciaries, and we also
do workshops for judges.
But, obviously, that's not our primary goal but I
think it is important that judges are also play a
role in our part of tax reform efforts so that
they understand what is the objective of this
provision, how it is supposed to apply, because
many countries don't have specialized courts, don't
have specialized judges, and so when they're
confronted with very complex tax cases, let
alone these highly technical GAAR provisions,
you know, you run into that problem.
And then, the point on rule of law, I almost
deliberately did not mention that issue.
I think it's sort of a misconception, really.
It's more - I put it more as a typical objection
that taxpayers try to argue that, well, I've met
the formal requirements of the law and so if you now
are going to disregard my transaction based on some
implied intent, that is basically violating my
legitimate expectations that I was allowed to put
trust in the letter of the law.
But I guess, in the context of purpose of
interpretation of tax statutes, the law is not
just the letter, very formalistic interpretation
because most countries have moved away from that
anyway.
So I don't think there is a real tension there, it's
just an objection that you sometimes hear.
I didn't want to create confusion, that's why I
basically didn't mention it, but I probably
shouldn't have put up the slide in the first place.
MODERATOR: Rupert, would you like to say something
to Ali?
RUPERT SAUSGRUBER: Yes.
I think my point was basically that the
empirical literature on tax compliance does not
find great support for moral appeals to work, so
I looked up, especially this literature, where
they used these moral appeals and the evidence
is very thin.
I have to be straight on that.
It doesn't mean that social norms are not
important, in fact, most of our life is organized
by informal social norms and they work very well.
It's just in the context of tax compliance we have
competitive pressures, so it's very costly to comply
basically, and if you don't comply, then, of
course, you face this risk of detection.
But if everyone else does, if your competitors do,
then it's a strong incentive not to comply
yourself.
So it's kind of an equilibrium behavior.
There is, of course, this tendency, for drunk
driving, if you have phenomena that you want to
avoid and you back them up with legal provisions as
well as with moral appeals, in combination
the whole policy might work.
I'm a bit skeptical that moral appeals alone will
do the job.
That's it.
MODERATOR: I'm sure there are many more questions,
but the coffee break has already started and I'm
sure the panelists will be ready to talk to you
individually about all the issues.
I would like to close by just saying that I think
that we are, so far, looking on a very static
situation when we're talking about morale, et
cetera, et cetera, and all the deterrence measures.
Perhaps we have to look more at the dynamics of
the development of things over time and we'll
discover that probably there are many phenomena
which influence compliance and we have to have a more
complex view on the whole issue.
I would like to thank you all, especially the
panelists.
Thanks.
[Applause]
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