IMF report looks at US economic prospects and tax reform

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On 26 July 2017 the IMF issued a staff report following the conclusion of consultations with the US under Article IV of the IMF’s articles of agreement.

The report suggests that in the medium term reforms should include a more efficient tax system; a more effective regulatory system; an increase in infrastructure spending; and reform of the welfare system. The reforms could raise productivity, labor supply and investment. This would require changes in fiscal spending and revenue priorities and a steady fiscal consolidation course.

The IMF Directors consider that the tax reform should lead to a higher tax-to-GDP ratio but the burden of the fiscal adjustment should not be borne by low and middle income households. The US personal and business tax system should be simpler and less distortionary with lower rates and fewer exemptions. Labor force participation should be increased and support given to low and middle income households. The tax reform should be revenue enhancing over the medium term.

To maintain a flexible workforce the measures should aim to improve educational opportunities, offer childcare support for low and middle income families, expand the earned income tax credit, increase the federal minimum wage and provide better social assistance programs for the poor. Measures to reform the social security system could include raising the income ceiling for social security contributions; indexing benefits to inflation; increasing the retirement age; and introducing more progressivity into the benefit structure.

The IMF notes that there is broad agreement on the objectives of tax reform that include simplifying the system; reducing tax preferences; lowering marginal rates; encouraging labor force participation, business investment and innovation; reducing the polarization of incomes; and supporting low and middle income households.

The US corporate income tax could be reformed by moving to a rent tax such as a cashflow tax or an allowance for corporate capital tax with a lower marginal tax rate. The aim would be to encourage business investment and reduce the incentive to use debt finance.  Many of the current corporate tax preferences could be removed. This reform would affect domestic activity and investment but also have international consequences such as effect on international investment location and on incentives for profit shifting,

A transition to a territorial system of taxation has been suggested by the administration but would need to be combined with a minimum tax for profits from low tax jurisdictions to reduce the scope for profit shifting. The administration’s proposal for a one-time tax on the stock of unrepatriated profits of multinationals could be incorporated into the tax reform. The profits could be taxed at rates that are a little lower than the current tax rate. This would be efficient as the profits are past profits but on the other hand deferring the tax has already brought benefits for the taxpayers keeping profits offshore.

Income tax relief for low and middle income groups could help reduce income polarization and increase labor force participation. Most specific tax deductions could be removed and instead the standard tax deduction could be increased. Tax deductions that are not abolished, for example mortgage interest relief, could be capped. Eligibility for the earned income tax credit (EITC) could be expanded and the credit could be increased. This could be combined with an increase in the federal minimum wage so that an increase in the EITC does not lead to a decrease in pre-tax wages for lower income workers.

If the effective tax rate on pass-through entities is lower than the effective tax rate on distributed corporate profits or lower than the top marginal personal income tax rate there is an incentive for some firms to become pass-through entities and for higher income employees to become independent contractors for tax reasons. Any tax rate reduction for pass-through entities must be combined with anti-avoidance provisions to limit the recharacterization of income but this would add an administrative burden.

To ensure that the tax reform results in more revenue the US could rely more on other revenue sources such as a federal consumption tax, a broad based carbon tax or a higher federal gas tax. A move from direct to indirect taxes would have a positive effect on long-term economic growth. The IMF notes however that the proposal to introduce either a carbon tax or a consumption tax is not politically feasible at the moment.

 

WTO: Amendment to Trade Policy Review mechanism

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On 26 July 2017 the General Council of the World Trade Organization (WTO) approved the first ever amendment to the Trade Policy Review Mechanism. The mechanism provides for periodic reviews of the trade policies and practices of WTO member states and the monitoring of the global trading environment.

Owing to the increase over the years in the number of member states of the WTO an adjustment to the cycle of Trade Policy Reviews (TPRs) has been agreed to ensure the continued effectiveness of the mechanism. Currently WTO members are the subject of a TPR once every two, four or six years depending on the size of the economy. Following the amendment the frequency of reviews will change to once every three, five or seven years, with the largest economies reviewed the most frequently. The change will be phased in, commencing from 2019.

In addition to this change WTO members also agreed to revise the timeline relating to the question and answer process for TPRs. Members choosing to provide early written answers to questions from other WTO members will be given one more week for preparing their answers. The WTO Secretariat intends to develop an information technology system that will allow the question and answer process to be managed more efficiently. A regular practice is also to be introduced for members to provide brief reports on changes to their policies during trade monitoring meetings.

Canada: FTA with Ukraine enters into effect on August 1, 2017

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The Free Trade Agreement between Canada and Ukraine will enter into force on 1st August 2017. As per previous discussion, from August 1, 2017, the agreement will cut 98% of the tariffs for Ukrainian exports to Canada and 72% of the tariffs from Canada to Ukraine. This agreement had been signed on July 11, 2016. The law on ratification was signed on April 3, 2017 by the President of Ukraine.

U.S. and Slovakia sign an agreement on the exchange of CbC reports

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According to an IRS announcement on its website, the competent authorities of the U.S. and Slovakia have concluded an arrangement on the exchange of Country-by-Country Reports. The competent authority arrangement (CAA) for exchange of country-by-country reports is on the basis of a double tax convention (DTC). The agreement was signed on 21 June 2017.

Under the arrangement, the first fiscal year for which the U.S. and Slovakia intend to exchange CbC reports is the fiscal years of MNE Groups commencing on or after January 1, 2016. The CbC report is intended to be exchanged as soon as possible and no later than 18 months after the last day of the fiscal year of the MNE Group to which the CbC report relates. CbC reports with respect to fiscal years of MNE Groups commencing on or after January 1, 2017 are intended to be exchanged as soon as possible and no later than 15 months after the last day of the fiscal year of the MNE Group to which the CbC report relates.

The Competent Authorities intend to exchange the CbC Reports automatically through a common schema in Extensible Markup Language (XML).

U.S. and Norway sign agreement on the exchange of CbC reports

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According to an IRS announcement on its website, the competent authorities of the U.S. and Norway have concluded an arrangement on the exchange of Country-by-Country Reports. The competent authority arrangement (CAA) for exchange of country-by-country reports is on the basis of a double tax convention (DTC). The agreement was signed on 26 April 2017.

Under the arrangement, the first fiscal year for which the U.S. and Norway intend to exchange CbC reports is the fiscal year of MNE Groups commencing on or after January 1, 2016. The CbC reports are intended to be exchanged as soon as possible and no later than 18 months after the last day of the fiscal year of the MNE Group to which the CbC report relates. CbC reports with respect to fiscal years of MNE Groups commencing on or after January 1, 2017 are intended to be exchanged as soon as possible and no later than 15 months after the last day of the fiscal year of the MNE Group to which the CbC report relates.

The Competent Authorities intend to exchange the CbC Reports automatically through a common schema in Extensible Markup Language (XML).

U.S. and Netherlands sign an agreement on the exchange of CbC reports

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According to an IRS announcement on its website, the competent authorities of U.S. and Netherlands have concluded an arrangement on the exchange of Country-by-Country Reports. The competent authority arrangement (CAA) for exchange of country-by-country reports is on the basis of a double tax convention (DTC). The agreement was signed on 11 April 2017.

Under the arrangement, the first fiscal year for which the U.S. and Netherlands intend to exchange CbC reports is the fiscal years of MNE Groups commencing on or after January 1, 2016. The CbC report is intended to be exchanged as soon as possible and no later than 18 months after the last day of the fiscal year of the MNE Group to which the CbC report relates. CbC reports with respect to fiscal years of MNE Groups commencing on or after January 1, 2017 are intended to be exchanged as soon as possible and no later than 15 months after the last day of the fiscal year of the MNE Group to which the CbC report relates.

The Competent Authorities intend to exchange the CbC Reports automatically through a common schema in Extensible Markup Language (XML).

U.S. and Latvia sign agreement on the exchange of CbC reports

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According to an IRS announcement on its website, the competent authorities of U.S. and Latvia have concluded an arrangement on the exchange of Country-by-Country Reports. The competent authority arrangement (CAA) for exchange of country-by-country reports is on the basis of a double tax convention (DTC). The agreement was signed on 21 June 2017.

Under the arrangement, the first fiscal year for which the U.S. and Latvia intend to exchange CbC reports is the fiscal years of MNE Groups commencing on or after January 1, 2016. The CbC report is intended to be exchanged as soon as possible and no later than 18 months after the last day of the fiscal year of the MNE Group to which the CbC report relates. CbC reports with respect to fiscal years of MNE Groups commencing on or after January 1, 2017 are intended to be exchanged as soon as possible and no later than 15 months after the last day of the fiscal year of the MNE Group to which the CbC report relates.

The Competent Authorities intend to exchange the CbC Reports automatically through a common schema in Extensible Markup Language (XML).