Tax Committee Research Articles

Issues of Improving the Implementation of Tax Control when Managing Tax Risks and Tax Audits

This scientific article highlights current issues in the field of reforming tax administration in the Republic of Uzbekistan, on further improving the activities of state tax authorities and the formation of a “digital economy” with high efficiency and development of the system, as well as accelerating the implementation of generally recognized international norms and standards in the field of tax control in national legislation clarifies the essence of the issues and explains the procedural rules of these processes. In particular, the determination by the State Tax Committee of the Republic of Uzbekistan of the strategy and tactics of the tax risk management system, collection and processing of information, analysis and assessment of tax risk, development and implementation of measures to manage tax risks is emphasized. The author provides a definition of the concepts, tax risk - that is, it is the possibility of non-fulfillment or incomplete fulfillment by the taxpayer (tax agent) of tax obligations, which can lead to non-payment or incomplete payment of taxes and fees to the budget system. At the same time, the level of tax risk is a state of risk, which is determined depending on the likelihood of the risk occurring and its possible consequences. From the above, the need to automate procedures for compliance with tax legislation and simplify its procedure is analyzed. The importance of introducing simplified mechanisms to extend the deadline for paying taxes or installments was emphasized. Here, every tax official, entrepreneur and taxpayer must thoroughly master the rules of the Tax Code, for which they need regular training. At the end, recommendations were developed for involving prestigious, influential foreign experts with extensive practical experience in this field in this process.

SOUTH AFRICA’S RESPONSE TO THE DIGITAL ECONOMY’S DIRECT TAX CHALLENGES – PART 1

International tax rules were developed more than a century ago. At their core is the principle that profits should be taxed where economic activities physically take place and where value is created. Advances in technology and the progression of the fourth industrial revolution have changed how businesses around the world operate and have given rise to the “digital economy”. Businesses no longer need to be “physically” present in a jurisdiction but can operate digitally or virtually anywhere in the world. New business models such as e-commerce, payment services, app stores, online advertising, cloud computing and participative network platforms have emerged. The digital economy and these new business models pose various challenges to the effectiveness of rules on the current jurisdiction to tax; businesses are able to derive significant economic benefits from a country without a “taxable nexus” to such country – for example, without the creation of a fixed place of business, permanent establishment or establishing a place of effective management. The digital economy is global in nature and, therefore, policy actions dealing with the global economy need a global approach. The Organisation for Economic Co-operation and Development (OECD) has taken a leading role in developing new direct-tax rules that will address the tax challenges posed by the digital economy and has agreed to develop a two-pillar solution that can be consented to internationally and implemented by countries. Pillar one proposes new rules on tax nexus and profit allocation for large multinational enterprises (MNEs) that meet certain revenue and profitability thresholds. The rules do not require MNEs to be physically present in a jurisdiction. Pillar two proposes mechanisms to ensure large MNEs pay a minimum level of tax (currently set at 15 per cent) regardless of where their headquarters are or the jurisdictions in which they operate. Some countries (such as the United Kingdom (UK), United States of America (USA), India, and Nigeria) have opted to take unilateral measures as they wait for a global solution. These unilateral measures are often uncoordinated and give rise to some undesirable consequences, such as double taxation. South Africa has decided to wait for global consensus and is currently not taxing the digital economy through its direct-tax rules. Although the OECD solutions are helpful proposals on taxing the digital economy and are a step in the right direction, it is submitted that they are not completely suited for South Africa as a developing African country; they do not consider some of South Africa’s unique circumstances, such as the prevalence of corruption, semi-skilled tax administration and limited resources. South Africa should not merely adopt the rules blindly but should adapt them to suit its needs as a developing country. South Africa needs to protect its tax base while embracing the digital economy; perhaps, while it waits for a global solution, it could strengthen its source rules as recommended by the Davis Tax Committee. This article is divided into two parts. Part 1 evaluates the suitability of South Africa adopting the OECD global solutions to the direct-tax challenges posed by the digital economy in a developing African country; Part 2 evaluates whether South Africa’s response to these challenges is the best option by considering the approach and consequences of select developed and developing jurisdictions (that is, USA, UK, Nigeria and India) adopting unilateral measures while waiting for an OECD global solution.

DIRECTIONS OF DEVELOPMENT OF THE SERVICE SECTOR THROUGH THE INTRODUCTION OF INFORMATION AND COMMUNICATION TECHNOLOGIES IN TAX ADMINISTRATION

In the Republic of Uzbekistan This article outlines the main directions of improving the methodology of using advanced information and communication technologies (ICT) by the State Tax Committee of the Republic of Uzbekistan in the context of global digitalization of the economy, the development of entrepreneurship, reducing the number of taxes. It also covers the application of advanced information and communication technologies based on the methodology of further improving the activities of taxpayers in the context of digitalization of the economy

PROBLEMS OF VAT IN UZBEK TAX LAW: DUE DILIGENCE AND ABUSE OF RIGHTS

The article discusses the problems of applying innovations (Articles 14-15 of the Tax Code) in the Tax Code of the Republic of Uzbekistan: the application of the concept of due diligence and abuse of the right. The State Tax Committee believes that the very fact of a transaction with "unscrupulous" taxpayers is not a manifestation of due diligence (Article 15 of the Tax Code) and will have to pay taxes for unscrupulous counterparties or prove the legality and validity of the transaction (operation). Thus, the tax authority replaces due diligence with the presumption of knowledge. In the author's opinion In fact, a taxpayer can be recognized as having acted without due diligence only if he knew or should have known (for example, due to affiliation) about violations. the presence of a transaction with an unfair counterparty does not in itself mean that the taxpayer abuses the right to receive tax benefits and fails to exercise due diligence. Quite often, the taxpayer himself becomes a victim of the counterparty's deception, and the head of the (unscrupulous) counterparty deliberately misleads the tax authorities that he knows nothing about the organization. Even if the taxpayer does not exercise due diligence, it is impossible to impose on him the obligation of another unscrupulous counterparty (as shown by foreign experience). The author proposes a number of measures for the correct application of the concept of due diligence and its limits, as well as the standards for proving the abuse of taxpayer rights.

Geoportal visualization of state cadastre objects: (a case study from Uzbekistan)

The Cadastre Agency under the State Tax Committee of the Republic of Uzbekistan (State Geodetic Inspection) is responsible for processing the state cadastre data of geodesy and cartography, which are part of the state cadastres, and visualizing the information in the geodata database. The State Cadastre of Geodesy and Cartography has a total of 115,616 objects in the Republic of Uzbekistan, of which 111,838 are included in the geodata database. Taking into account the transparency of this information and the fact that it is not widely used by young researchers in scientific research. During this research, proposals were developed to visualize the state cadastre of geodesy and cartography in the geoportal. During the research, world experience was studied and considered on the example of the Russian Federation, which was homogeneous in terms of systematization of geodetic and cartographic data. The created and recommended geoportal had sections on zone, column, row and nomenclature, and the zone section had rows 10N, 11N, 12N and 13N. Accordingly, the topographic map of the zones was provided with space and cartographic bases.

Digitalization of tax administration - a strong goal meeting modern requirements

This articleprovides the main directions of the State Tax Committee of the Republic of Uzbekistan in the development of entrepreneurship, reducing the number of types of taxes, expanding the ranks of disciplined taxpayers, improving the methodology of using advanced information and communication technologies (ICT). It also includes the use of advanced information and communication technologies based on the methodology of further improving the activities of taxpayers in the context of digitalization of the economy.

The Future of the Taxation of Software Payments: Reflections on the Proposal to Amend Article 12 of the UN Model as Discussed by the UN Tax Committee in April 2021

In this contribution to the 75th anniversary issue of the Bulletin for International Taxation, Professor Jan de Goede comments on the taxation of software payments in light of the proposal to change article 12 of the UN Model as discussed by the UN Tax Committee in April 2021.

Because Not Always B Comes after A: Critical Reflections on the New Article 12B of the UN Model on Automated Digital Services

On 20 April 2021, the UN Tax Committee approved the final version of the new article 12B to be incorporated into the 2021 version of the UN Model. In the absence of a permanent establishment or physical presence of the service provider in the source state, article 12B allows a contracting state to tax income from automated digital services (ADS) paid to a resident of the other contracting state on a gross basis at the rate negotiated bilaterally, with an option to the taxpayer to pay tax on a net profit basis. This article analyses the new article from a critical perspective and argues that, first, the new article is unnecessary, as the alleged need for the new article is only the result of the restrictive and incorrect reading of article 12A of the UN Model (2017) made by the Commentaries on the Model. Second, the new article is not only unnecessary but also counterproductive, as it jeopardizes the institutional prestige of the Committee on Fiscal Affairs, extraordinarily and unnecessarily reduces the scope of application of article 12A, exacerbates the already severe problems of conceptual delimitation between fees for technical services and ADS and, therefore, between articles 12A and 12B and, finally, introduces serious asymmetries in the treatment of these two types of services. The article closes with some advice for those states that have negotiated conventions containing article 12A or similar provisions and intend to retain their taxing rights on ADS without the need to renegotiate their conventions.

Improving transfer pricing in Ukraine using American Experience

The purpose of the present research is to determine the characteristics of transfer pricing and proposals for its improvement, identifying key factors applying transfer pricing and the development of organizational and economic measures for the implementation of the mechanism of transfer pricing in Ukrainian enterprises based on US experience. Due to significant growth of the number of multinationals since 1950, and expanding the geographical environment of their activities caused the increase in the number of studies on transfer pricing. Strengthening external instability greatly affected the formation and increased use of transfer pricing, as well as the use of market prices for the companies is risky. The research is based on the requirements of the fundamental documents of the Organization for Economic Cooperation and Development (OECD) and by the United Nations Tax Committee (UN), International Accounting Standards Board (IASB), Generally Accepted Accounting Principles (GAAP), as well as on empirical data obtained in the process of analysis of reporting of Ukrainian companies.

Because not always B comes after A: Critical Reflections on the new Article 12B of the UN Model Tax Convention on Automated Digital Services

On April 20th, 2021, the UN Tax Committee approved the final version of the new Article 12B to be incorporated into the 2021 version of the UN Model Tax Convention. In the absence of a Permanent Establishment or physical presence of the service provider in the Source State, Article 12B allows a Contracting State to tax income from automated digital services paid to a resident of the other Contracting State on a gross basis at the rate negotiated bilaterally with an option to the taxpayer to pay tax on a net profit basis. The paper analyzes the new article from a critical perspective and argues that: 1) The new article is unnecessary as the alleged need for the new article is only the result of the restrictive and incorrect reading of Article 12A of the UN Model Tax Convention 2017 made by the Commentaries to the Model. 2) The new article is not only unnecessary but also counterproductive as it jeopardizes the institutional prestige of the Committee on Fiscal Affairs, extraordinarily and unnecessarily reduces the scope of application of Article 12A, exacerbates the already severe problems of conceptual delimitation between Fees for Technical Services and Automated Digital Services and, therefore, between Articles 12A and 12B and, finally, introduces serious asymmetries in the treatment of these two types of services. The paper closes with some advice for those States that have negotiated conventions containing Article 12A or similar provisions and intend to retain their taxing rights on automated digital services without the need to renegotiate their conventions.

The impact of changes in audits and penalties on tax compliance behaviour: evidence from South Africa

Tax revenue is a major source of public revenue in South Africa, and it plays an integral role in creating the fiscal space to provide public services and infrastructural development. Tax collection is however impeded by evasion. In its 2014 interim report, the Davis Tax Committee (a tax review committee appointed by the government to inquire into the role of South Africa’s tax system) suggested that South Africa loses a substantial amount of revenue through evasion. To enhance compliance, the government has made several changes to existing tax penalty structures, and introduced new ones as well. The question arises whether these deterrence measures effectively reduce evasion. International empirical evidence on the efficacy of such policies is mixed, and mainly drawn from developed country applications. Hence, evidence from developing countries is limited.
 This study employed a laboratory experiment to examine taxpayers’ behavioural responses to changes in audit and penalty rates in South Africa. Results showed that both audits and penalties influenced salaried and non-salaried taxpayers to increase their compliance levels. However, the effect was higher on non-salaried taxpayers. We also found that audit and penalty rates had a negative joint effect on both salaried and non-salaried compliance rates. The impact was larger on salaried taxpayers. These findings suggest that, although audits and penalties are effective enforcement measures, the manner in which they are applied must be given careful consideration.

Taxation of Digitalized Economy – Proposed UN Solution

The first draft of new Article 12B – Income from Automated Digital Services was recently released by the UN Tax Committee. This article contains an analysis of the proposed article 12B.

Does the ‘pay now, argue later’ approach in the Tax Administration Act 28 of 2011 infringe on a taxpayer’s right not to be deprived of property arbitrarily?

The Davis Tax Committee declared that the ‘pay now, argue later’ approach in the Tax Administration Act 28 of 2011, which applies when a taxpayer disputes an assessed tax liability, infringes on a person’s right not to be deprived of property arbitrarily as entrenched in s 25(1) of the Constitution of the Republic of South Africa, 1996 (the property clause). In this article we set out to analyse whether this is indeed the case by first outlining the legislative provisions pertaining to the ‘pay now, argue later’ approach and the jurisprudence surrounding the right not to be deprived of property arbitrarily. Thereafter, we evaluate whether the ‘pay now, argue later’ approach complies with the requirements for a valid deprivation of property and conclude that this approach does not infringe upon the rights of taxpayers in terms of the property clause. We show that the statutory provisions surrounding the ‘pay now, argue later’ approach impose a deprivation of property, but that the deprivation is neither procedurally nor substantively arbitrary.

Rethinking the Role of Arbitration in International Tax Treaties

The dispute resolution system of Double Tax Agreements (DTAs) has been a major focus for both tax authorities and researchers around the world. For several years Article 25 of the Model Tax Convention of the Organisation for Economic Co-operation and Development on Income and on Capital (‘OECD Model Tax Convention’), and Article 25 of the United Nations Model Double Taxation Convention between Developed and Developing Countries (‘UN Model Tax Convention’) had relied on a negotiation-based Mutual Agreement Procedure (MAP) as the only mechanism for the resolution of disputes arising from a tax treaty. In order to improve the function of the MAP mechanism, the OECD, in 2008, and the UN Tax Committee, in 2011, introduced a binding ad hoc arbitration clause in Article 25(5) of their respective Model Tax Conventions. However, the OECD and UN Model Tax Conventions have reserved very limited role for arbitration in resolving tax treaty disputes. After establishing that the inclusion of the current arbitration clauses in the OECD and UN Model Tax Conventions have not assuaged the tensions created by divergent interpretation or application of rules espoused in DTAs, this article examines possible techniques for improving the dispute resolution system of DTAs. Arbitration, Dispute, Double Tax Agreement, Model Tax Convention, Mutual Agreement Procedure, OECD, Taxation

Will the Cadillac Tax Generate Revenue?

When the ACA passed in 2010, the Cadillac tax, a nondeductible 40 percent excise tax imposed on the portion of health coverage costs that exceeds $10,200 for single coverage and $27,500 for family coverage, was scheduled to take effect in 2018. It has since been delayed twice and is currently scheduled to take effect in 2022. At that point, the portion of health coverage costs that exceeds $11,200 for single coverage and $30,150 for family coverage will be subject to the tax. The Cadillac tax is controversial. It is the first time that the historically unlimited tax exclusion for employment-based health benefits has been impacted. Although it has its enthusiasts, there has been bipartisan support for repealing it. In May 2018, the Congressional Budget Office (CBO) estimated that the tax would generate $168 billion in tax revenue from 2022 to 2028. The Joint Tax Committee (JCT) and CBO assume that when employers reduce the comprehensiveness of health benefits to avoid the tax that they will in turn increase worker taxable wages such that total compensation is unchanged. Shifting the composition of compensation toward a higher proportion of taxable wages will translate into additional tax revenue. Repealing the tax would mean finding $168 billion (or the equivalent in today’s dollars) in new tax revenue. Why is understanding the wage-benefit tradeoff so important? Research on the tradeoff has focused almost exclusively on what happens to worker wages when the cost of health insurance increases. The literature on the wage-benefit tradeoff is being used in such a way that it assumes that wage responses to health insurance cuts and health insurance cost increases are symmetric. Only one study on the wage-benefit tradeoff has been found that examines what happens to worker wages when the cost of health insurance decreases, as would be the case with the Cadillac tax. It examined the impact of community rating in New York State on the wages of older workers in small firms, firms that would see premium reductions as a result of community rating, and found that older workers in small firms saw their wages increase relative to workers in large firms and workers in other states. However, it is possible that wages do not respond symmetrically to increases and decreases in the cost of employment-based health insurance. There is evidence of asymmetric effects in other aspects of health care, labor markets, and elsewhere that could inform the economic theory on wage-benefit tradeoffs. Even if workers’ taxable wages do not increase as a result of employers reducing the comprehensiveness of health benefits, the added tax revenue may still be realized. If employers kept the savings and those savings became corporate profits, they might become partially taxable as dividends and increased capital gains, thus producing higher federal tax revenue. If employers use the savings to purchase capital equipment, the seller of that equipment would see higher sales, which would result in federal tax revenue through a combination of profits, higher worker wages from sales bonuses, and worker wages possibly associated with the cost of installing the equipment. If employers used the savings to grow the business and hire additional workers, those workers would be paid wages that were taxable.

A Fund Is a Fund or Isn’t It? – Some Further Clarification on the VAT Exemption for the Management of Special Investment Funds

This article looks at the guidelines provided in Working Paper No. 396 of the VAT Committee on the scope of the exemption for the management of special investment funds Value Added Tax Committee, Working Paper No. 936, Scope of the exemption for the management of special investment funds (9 Nov. 2017), taxud.c.1(2017)6168695 – EN. (the Working Paper) and, in particular, at what constitutes a “special investment fund”.

An analysis of the applicability of the OECD Model Tax Convention to non-OECD member countries: The South African case

Most tax treaties (including South Africa's) are based on the OECD Model Tax Convention on Income and Capital and the related Commentary (the 'OECD Model'). Notwithstanding the uncertainty surrounding its legal status, the courts in many countries use the OECD Model in the interpretation of their tax treaties. The OECD launched an action plan on Base Erosion and Profit Shifting ('BEPS') in 2013, which is aimed at improving international tax cooperation between governments. In South Africa, the importance of combating BEPS is highlighted by the fact that the Davis Tax Committee has appointed a sub-committee specifically to address concerns pertaining to BEPS. South Africa's participation in the BEPS project and its tax treaty negotiations with other countries, especially OECD member states, are of the utmost importance to South Africa's National Treasury. Consequently, it is the primary objective of this article to analyse the applicability of the OECD Model to non-OECD member countries, with particular emphasis on South Africa. It will be argued that, if the treaties of non-member countries are in conformity with the OECD Model and no specific position has been taken, the non-members also accept the provisions of the Model and the Commentary as an interpretative aid.

South Africa: Technical Assistance Report-Petroleum Sector Fiscal Regime Reform-Additional Analysis for the Davis Tax Committee

South Africa: Technical Assistance Report-Petroleum Sector Fiscal Regime Reform-Additional Analysis for the Davis Tax Committee

Preventing Congressional Violations of Taxpayer Privacy

This article claims that the U.S. House Ways & Means Committee violated the law in 2014 when it voted (strictly along party lines) to release to the public the tax return information of 51 taxpayers. The committee acted under the belief that an obscure tax law provision authorized its action. But the provision required the committee to have a legitimate purpose for the disclosures and — incredibly — the committee failed to satisfy this almost trivial, common-sense restriction. Although the disclosures occurred in connection with the committee’s allegations of possible criminal misconduct by a high-ranking IRS official (Lois Lerner), most of the return information released was completely unrelated to the oversight objective and no disclosure was necessary to support the committee’s claims. In fact, there does not appear to have been any purpose whatsoever for the disclosures other than possibly providing a partisan political advantage to the committee majority. Because the Speech or Debate Clause of the Constitution insulated the committee from prosecution for the violation, the incident reveals a serious gap in taxpayer privacy protections. A future tax committee, for no legitimate reason, might release with impunity the return information of any taxpayer, including sensitive information belonging to a political enemy of those controlling the committee at the time.To prevent that outcome, this article proposes a new restriction on the access of the tax committees to tax return information. If the committees cannot obtain the information in the first instance, then they will be unable to disclose it for improper purposes. The proposal respects the legitimate need of the tax committees for the information by giving exclusive access to a Congressional staff intermediary who would be responsible for conveying necessary information to the tax committees while preventing improper disclosures. If, as claimed in this article, the intermediary’s actions would likely not be protected by the Speech or Debate Clause, then restrictions placed on the intermediary’s discretion in order to protect taxpayer privacy rights could be adequately enforced. Since today’s majority on a committee may obviously be tomorrow’s minority, it behooves every legislator to take action to prevent illegitimate disclosures in the future.

Update on the United Nations Tax Committee Developments

This article outlines the main issues discussed during the ninth annual session of the United Nations Committee of Experts on International Cooperation in Tax Matters, held in Geneva from 21 to 25 October 2013.