So why do you blog?

One year and 164 posts have passed since I started this blog (i.e. my personal online journal) and some persons started to ask me why I blog.

In fact, I decided to make a blog on a topic such as International and European Tax during my experience as a teaching assistant in the International Tax Centre in Leiden. I could have started (and probably with more success) a blog on literature, cinema or other areas of my interest. Instead the theme I chosen was a closed topic, probably only of interest to the ones engaged in any way (as a student, researcher or working) on this area.

This choice has a particular reason. I have been involved in tax for more that 5 years and more recently since my work has gained a bit more “academic” emphasis, I realised that a blog could occupy some empty space (left by the traditional sources) and provide some sort of message to persons involved in international tax.

A blog is no more than a “personal online journal” displayed in reverse chronological order, with the most recent entry on top. A recent Economist special report on New Media gives some insight into the “art of blogging” According to the Economist, Blogs are social by nature and their essence rests on the “the unedited voice of a single or group of persons. Blogging is therefore also about style and individuality. Blogs are designed to induce conversation and at the same time linking to the outside world (i.e. other blogs, websites, etc..). The essence of a blog entry is that “it is not content until is linked.”

So why TALK TAX?

I have the feeling that the Internet revolution is coming late to the tax world, where the old media still plays an important role. TaxProf Blog (Member of the Law Professor Blogs Network), a US blog is an example of how a thematic blog can make a difference. TaxProf Blog is directed to a US audience and its entries rage all aspects of taxation. Therefore, for a non-US reader, the blog is not at first sight the most useful tool. Nevertheless, I like the concept (which also inspired me) and its success proves that there is space for this type of initiatives.

More recently I saw a European blog called TAXVISTA which is a creation of a group of young tax professionals (apparently form different countries). Accordingly, they had in common a “disappointment with the available online tax resources” and decided to launch a website. Through that website they would be able to contact with colleagues from other countries; deepen their tax knowledge in a faster paced environment; and establish their tax expertise online.

The idea is nice, the intentions are correct but the implementation (in my humble opinion) still leaves some room for improvement. The use of more than one language (in the articles section), not always linking to the outside and the lack of clear editorial line may run against it in the long run. Nevertheless, I appreciate the initiative and since a part of the website is only for members, I may be mistaken about the reach of this initiative.

So if TALK TAX is not like TaxProf Blog or TAXVISTA what it is?

TALK TAX is simply a personal initiative designed to stir the debate around international tax issues. Public discussions around technical issues should not be a monopoly of scholars, conferences or specialised journals. There is a mid-way where a blog on international tax can prove to be useful. First, by immediately linking a reader to the sources. Secondly, by inviting others to comment and creating a platform for interactivity. Thirdly, by adopting a more friendly approach and freeing the legal language of some of its “old trappings”. Lastly, by creating a space for open personal development, where ideas and experiences are shared with who want to know about them.

Taking into account the fact that International tax is a particular field, where experience and up-to date knowledge may create leverage, I expect that this type of initiatives to grow in the near future. Blogs can be made within faculties, within an international organization (such as IFA) or on a personal level. The end result will always be that the end-users will always benefit from the increased knowledge-sharing and discussion of ideas will be easier.

For the time being, I will continue to blog. I blog for an idea, which is sharing of knowledge (even if I know that my modest knowledge in this area may be of use to a small community of people). What matters is that you do it for yourself, for what you believe.

In conclusion, I believe the success of my initiative will only be measured when similar initiatives are launched and never by the number of visits, clicks or praises. I don’t blog for achievement and I refuse to advertise my blog. I simply blog for whomever is out there!

India: telecommunications, PE issues and attribution of profits

Following the increased attention by tax practitioners and scholars on Indian Case-Law, I decided to analyse a recent Indian decision of 2005 dealing with permanent establishment issues and attribution of profits.

The Indian Income Tax Appellate Tribunal (ITAT) delivered last year a judgement in a high profile case featuring three of the most recognized brands of telecommunications, namely Motorola, Ericsson and Nokia (2005-TIOL-103-ITAT-DEL-SB). These cases, which deal with the taxability of income arising from the supply of equipment and software to Indian telecom operators, raise several permanent establishment (PE) issues that deserve to be analysed in more detail.

According to the facts of the cases, the companies in question entered into contracts with Indian telecom operators in India. Primarily the contracts involved the sale of hardware and software. In a second instance, there were installation contacts between the Indian telecom operators and the branch/subsidiaries of the respective non-resident companies. In addition there was marketing and business promotion agreements in place between the Indian subsidiaries/branches and the non-resident companies.

The dispute aroused because Indian tax authorities assessed the non-resident companies on the income derived from the sale of hardware and software. The tax authorities stated that the separation into three phases, namely supply, installation and marketing agreements, was intended to avoid tax. In their view, the agreements were in effect works contract and not a mere sale of goods and since the non-resident companies had a business connection in India, the income from the sale of hardware and software to Indian telecom operators was taxable in India (domestic law issue). In addition, the tax authorities contended that the non-resident companies also had a PE in India and the income from the supply of hardware and software was attributable to such PE (Treaty Issue I). Finally, the tax authorities contended that the consideration for supply of software amounted to a royalty, which would therefore be taxable in India, irrespective of whether the three non-resident companies had a PE in India or not (Treaty Issue II).

The court’s discussion of existence of a “business connection” is simply a domestic analysis and therefore we skip this issue. As regards the remaining questions, I will focus on the PE issue and leave the qualification of part of the payments made by the network operators as royalties to another opportunity.

Ericsson PE

In the Ericsson case, the contention was that since the employees of the non-resident came frequently to India and since the Indian company provided facilities to these employees, the Indian office constituted a fixed place of business for the non-resident company.

After mentioning the OECD commentary, namely to the criteria that form the PE definition, the Court noted that the tax authorities failed to establish that Eriksson India had made certain space available to its parent company at its disposal.

In other words, the Court considered that there was nothing to indicate that whenever any employee of the parent company visited India, he could straightway walk into the office of the subsidiary and occupy a space or a table!

The Physical PE argument was denied because the Court considered that it could not be said that the parent company had at its disposal, as a matter of right, certain space, which could be characterized as a fixed place of business. In order to reach its conclusion, the Court cited French case law, where a travel agency in Paris had made an office available to the German company from time to time, and the manager of the German company had a flat in Paris. In that French case, the Court held that the travel agency did not have a PE in France.

The tax authorities also attempted to argue that under the overall agreement, since the non-resident company had the overall responsibility for the commissioning of the project, the installation site constituted a PE for the non-resident in India. On this point, the court swiftly ruled out the existence of a Construction PE under Art. 5(3).

As regards to the existence of an Agency PE, the court noted the independent status of the subsidiaries, notwithstanding the fact they belong to the same group. The Court held that such subsidiaries of the non-resident company would not give rise to an Agency PE of the non-resident company since such subsidiaries do not habitually exercise, in India, an authority to conclude contracts on behalf of the non-resident company.

The Court mentioned that, event if they promote its products in India, the subsidiaries cannot bind the non-resident company in any manner. Therefore, the non-resident company decides the final terms of the sale contracts.

In order to determine if there was any type of authority to conclude the contracts on behalf of the non-resident, the Court cited Vogel which himself referred that such question (authority to bind) must be decided not only with reference to private law but must also take into consideration the actual behaviour of the contracting parties. In this case, the Court stated that there was no finding that the non-resident companies were instrumental or even participated in the negotiations with the Indian operators. As such, it could not be held that the non-resident company had an Agency PE an India. In conclusion, the Court held that no income accrued to Ericsson in India as it had no PE in India.

Motorola PE

The case of Motorola was slightly different from the case of Ericsson, where the Court held that the Indian company cannot be considered as the fixed place PE of Ericsson in India, since the Swedish company, had no right to enter the office of the Indian company for the purpose of carrying out the activities of the Swedish company.

In case of Motorola, US employees were apparently using the premises of the Indian subsidiary, working for both companies. The Court noted that the Indian subsidiary was reimbursed on a cost plus 5%, which covered bonuses given by the Indian subsidiary to the US employees. The Court held this reimbursement of expenses lead to the perception that there was a projection of the Motorola in India in the form of the place of business of its Indian subsidiary and thus there was a fixed place PE of the Motorola in India, within the meaning of Art. 5(1) of the tax treaty.

Nevertheless, the business activities of such PE (such as market survey, industry analysis, economy evaluation, product information, etc) were considered activities of preparatory or auxiliary character, which therefore excluded the existence of a PE under Art. 5(1). As such, the Court held that no PE of Motorola was constituted in India.

Nokia PE

The issue in the Nokia case was also whether its liaison office and or its subsidiary give rise to a PE of Nokia Finland in India, and if there was such a PE, what would be the income attributable to it.

The Court started by referring that the liaison office cannot constitute a PE of Nokia in India, As regards Nokia Indian subsidiary, the Court, differently from the previous cases, considered the existence of a PE of Nokia in India.

The Court argued that the Indian subsidiary is the virtual projection of Nokia in India. In that respect it noted that services rendered by Nokia Indian subsidiary to its parent company under the “marketing agreement” were compensated on the basis of cost plus 5%. The court referred that because of the close connection between the parent company and its subsidiary, it was possible to look upon Nokia Indian subsidiary as a "virtual projection" of Nokia in India. Several facts/factors contributed to the existence of a PE in Nokia’s case

Differently than Motorola, where the PE was deemed not to exist because of the preparatory or auxiliary character of Motorola activities in India, the activities of Nokia were considered to be in nature something more than preparatory or auxiliary. Unfortunately, the Court was not very detailed on this aspect of the decision

The next question related to the attribution of the income. Under Indian domestic law, all income accruing or arising, whether directly or indirectly, through or from any business connection in India shall be deemed to accrue or arise in India. Now the question is “how much” India could tax under the respective tax treaty.

The Court started by referring that Art. 7 (1) states that profits of an enterprise of Finland shall be taxable only in Finland, unless the enterprise carries on business in India through a PE situate therein. In the enterprise carries on business in India through a PE, the profits of the enterprise may be taxes by India, but only so much of the profits as are attributable to the PE.

As regards the attribution of profits to the PE of Nokia, the Court enumerated the activities which Nokia carried on in India through its PE, namely network planning, negotiations in connection with the sale of equipment, and signing of the supply and installation contracts.

The Court, in order to reach the amount attributable to the PE, referred to principles included in previous judgments. Under the first mentioned judgment, the income attributable to manufacturing activity should be more then the income attributable to the activity of sale. Under another judgment 10% of the income can be attributed to the signing of the contracts in India.

The Court reasoned, taking into account such principles, that in addition to the 10% of income to be attributed in respect of the signing of contracts, a higher income should be attributable to compensate with the two additional activities carried out by the PE (negotiations and network planning).

The Court applied a two-step method to compute the income attributable to the PE. First it determined the global net profit ratio of the contract for supply of both, equipment and software. Secondly, it determined that 20% of the respective net profit would be the adequate attributable amount in order to cover the three activities of the PE.

Leadership

During Easter holiday, I decided to blog on something unrelated to tax that I recently read (and of course liked). It is about Leadership and it is in a shape of eleven commitments that form according to the author the foundations of an extraordinary life and of leadership. Michael C. Jensen, Professor of Harvard Business School, internationally noted expert in finance and founder of the SSRN, the Social Science Research Network addressed the students of University of Toronto in 2005 with this enlightening view on Leadership and how principles of living may be the right asset to bring you the best of fortune in your journey of life.

Just a last note mentioning that this paper (with 1600 downloads) is the best selling paper in the SSRN in the last 60 days. So much downloads can mean two things; or the author is authoritive in the field or there are large demand of guidance on the subject of leadership. I have a feeling that is both!

Happy Easter!

Benchmarking Tax Systems – what is your neighbour doing?

As a professional that is "deeply" involved on comparative taxation, I was awaiting the results of a study of the Australian Tax Authorities on how Australia's tax system compares with other developed economies. Simply the fact that a jurisdiction focuses its efforts in benchmarking(*) its own tax system, against similar economies, demonstrates the importance of using benchmarking studies, based on a comparative tax analysis, as a tool to develop and align tax systems.

In fact, Benchmarking tax regimes can provide interesting results, which may permit to evaluate the competitiveness of a particular tax regime and provide ideas for tax reform. European jurisdictions have been long using this type of approach, but unfortunately such studies are rarely released to the public.

The Australian study, just publicly released, provides an extensive comparative analysis of various tax regimes throughout the world, although not including policy recommendations or judgments.

Besides a statistical analysis, the study of 449 pages (International comparison of Australia’s taxes) covers the tax treatment of, amongst others, employment income, capital income, pension income, corporate tax and foreign source income. For the purposes of the report, OECD-10 (Canada, Ireland, Japan, the Netherlands, New Zealand, Spain, Switzerland, the UK and US) were selected as comparators.

A study with the comprehensiveness of this one has its own risks. Since it attempts to cover as much as possible, it sometimes misses some important elements necessary to benchmark a tax regime or a particular issue. Allow me to provide an example. Table 10.6 of the study (Chapter 10: International taxation arrangements) outlines the attribution and other international tax integrity rules in place in the so-called OECD-10. These are controlled foreign company (CFC) and foreign investment fund (FIF) rules CFC and FIF, Thin cap rules and transfer pricing rules. It is natural that a table such as the one mentioned above simply states the existence or not of the rules and their (very) basic elements.

It is here that a more detailed analysis is necessary to analyse any degree of competitiveness of the regime. Especially with an increasingly mobile capital, MNE look thoroughly to the scope of application of those rules in order to assess the competitiveness of a tax regime to work as a suitable investment platform. The impact of the existence or non-existence of CFC or thin cap rules cannot be measured without analysing the scope the rules and other measures to achieve similar results.

Based on my professional experience, I consider that benchmarking studies can in fact bring enormous benefits when preparing tax reforms or assessing investment opportunities. In my view the potential gains of such studies may be enhanced when such studies focus on precise topics and use comparators based on a “similarity or divergence” arguments, instead of using as closed group of pre-selected jurisdictions.

A last note to mention that I am a great fan of the Australian tax authorities. I try to follow as much as follows the developments in Australia, namely when it involves international tax issues. The website of the tax authorities provides a wide set of resources to keep up with not only the interesting case-law and ATO interpretive decisions but also their public rulings dealing with international tax issues (such as interpretation of treaties, transfer pricing, allocation of profits, etc).

(*) According to my favourite encyclopaedia, a benchmark is a point of reference for a measurement. The term originates from the chiseled horizontal marks that surveyors made into which an angle-iron could be placed to bracket (bench) a levelling rod, thus ensuring that the levelling rod can be repositioned in exactly the same place in the future. In the framework of taxation, a benchmarking is a coherent and comprehensive set of indicators or elements of the tax regime that can help to describe a position of a country’s tax system from an international perspective.

Arbitration and Tax Treaty Disputes: Time is approaching

Somewhere in Spain and in the middle of tons of work, the duty to the readers surfaced at last!

The business community and the International Chamber of Commerce, have long been promoting the inclusion of an arbitration provision in tax treaties. Countries, on the other hand, are sceptical to surrender their taxing power to an outside authority. For developing countries, the scepticism may be said to be aggravated by the fact that such countries may be put at a disadvantage in an arbitration proceeding, namely due to resources and expertise related issues.

As maybe some of you are aware, on 1 February 2006, the OECD released a public discussion draft, which includes new proposals for improving mechanisms for the resolution of tax treaty disputes, including finally the long-expected arbitration clause.

For those of you who need to be situated in the debate, this 2006 discussion draft represents in general the follow-up work of the project to improve the effectiveness of the Mutual Agreement Procedure launched back in 2003. A 2004 progress report entitled Improving the Process for Resolving International Tax Disputes included 31 proposals aimed at improving the way that tax treaty disputes are resolved through the Mutual Agreement Procedure and the new 2006 discussion draft includes various draft changes to the OECD Model Tax Convention.

In fact, when countries starting signing tax treaties, they soon realized that problems were not always solved through the allocation of taxing rights. In fact as time went by, those countries realized it was necessary to find solutions for cases of double taxation not covered by the treaty, difficulties in the interpretation or cases resulting from changes in domestic law. As such, there was a neet of a mechanism that would secure an agreement and solve disputes on the interpretation of treaties. The Mutual Agreement Procedure (Article 25 of the OECD Model) was the mechanism adopted in 1963 by the OECD. In short, Art. 25 allows designated representatives (so-called competent authorities) from the governments of the contracting states to interact with the intent to resolve international tax disputes.

But what is a Mutual Agreement Procedure (MAP)?

According to the (also recently released) draft Manual on Effective Mutual Agreement Procedures , the MAP article (Article 25 of the OECD Model) usually sets out three general areas where two Countries shall endeavour to resolve their differences. The first area applies to situations where a taxpayer believes that the actions of one or both of the contracting states has resulted or will result for him in “taxation not in accordance with the provisions of the Convention” (Article 25 (1) and (2)). In addition, the two other areas involve questions of “interpretation or application of the Convention” and the elimination of double taxation in cases not otherwise provided for in a convention (Article 25 (3) first and second sentence respectively).

In short, if a taxpayer considers that the actions of one or both countries’ result or will result in taxation not in accordance with a tax convention (first area), that same taxpayer may request competent authority assistance under the said MAP article (taxpayer-initiated MAP). The cases covered by paragraph 3, rather than offering a treaty obligation are more aimed at facilitating discussion between competent authorities. In fact, the OECD recognizes that there is little experience with cases arising under paragraph 3 of Article 25. Nevertheless, the 2004 report suggested that the appropriate scope (and effectiveness) for paragraph 3 of Article 25 should be examined.

In the 2006 draft, The OECD proposed a system for the mandatory arbitration of tax disputes between two treaty countries when the tax authorities of those countries have been unable to resolve those disputes within a two-year period. The text of the new paragraph 5 reads as follows:

“5. Where, under paragraph 1, a person has presented a case to the competent authority of a Contracting State and the competent authorities are unable to reach an agreement to resolve that case pursuant to paragraph 2 within two years from the presentation of the case to the competent authority of the other Contracting State, any unresolved issues arising from the case shall be submitted to arbitration if the person so requests. These unresolved issues shall not, however, be submitted to arbitration if any person directly affected by the case is still entitled, under the domestic law of either State, to have courts or administrative tribunals of that State decide the same issues or if a decision on the same issues has already been rendered by such a court or administrative tribunal. The arbitration decision shall be binding on both Contracting States and shall be implemented notwithstanding any time limits in the domestic laws of these States. The competent authorities of the Contracting States shall by mutual agreement settle the mode of application of this paragraph.”

If one looks back to the 2004 Progress Report, two of the most important proposals dealt, in fact, with the use of supplementary dispute resolution mechanisms, in particular the use of an advisory opinion, a joint commission or arbitration to resolve issues that prevent competent authorities from reaching a mutual agreement.

It is here that the problems may start! The problems can be said to be both on the technical aspect of the arbitration rule itself, but also on the policy objectives that it intends to achieve. Is it really necessary?

As we said before MNE and the International Chamber of Commerce (ICC), have long been promoting the inclusion of an arbitration provision in tax treaties. The UN recently commented (5-9 December 2005) on the government side concerns, even suggesting that an attempt could also be made to design an arbitration mechanism adapted to the relations between developed and developing countries.

In that respect, I would like to note that J. Mcintyre (Wayne State University - School of Law) recently posted a paper making a critical analysis of the OECD Proposal. His work “Comments on the OECD Proposal for Secret and Mandatory Arbitration of International Tax Disputes” is a very good platform to understand both the policy issues behind the OECD proposal and consider alternative policy options.

For the ones interested on these issues, I should note that the ICC is hosting on 3 May 2006 a high-level conference on the “Resolution of International Tax Disputes through Arbitration”. According to the programme, the discussions will focus mainly on (i) Recent OECD developments; (ii) EU arbitration convention and the EU Code of Conduct; (iii) ICC model clause; (iv) Design, procedural and enforcement issues of arbitration clauses.

A list of 10 must read BOOKS AND ARTICLES on the subject:
I - Arbitration under tax treaties : improving legal protection in international tax law, Züger, M., Amsterdam: IBFD Publications (2001 )

II - Arbitration in international tax matters, Paris: ICC - International Chamber of Commerce, (1998)

III- Resolution of tax treaty conflicts by arbitration, IFA congress seminar series; Vol. 18e, (1994)

IV- The resolution of transfer pricing disputes through arbitration, Markham, M., Intertax, Vol. 33 (2005), no. 2 ; p. 68-74

V-The EC Arbitration Convention - an overview of the current position, Rousselle, O., European taxation, Vol. 45 (2005), no. 1 ; p. 14-18

VI- Arbitration clauses in international tax treaties could benefit developing states, Morgan, J., Tax notes international, Vol. 31 (2003), no. 7 ; p. 681-691

VII - Tax disputes and international commercial arbitration, Melchionna, L, Diritto e pratica tributaria internazionale, Vol. III (2003), no. 3; p. 769-796

VIII- Income tax treaty arbitration, Park, W. W., Tax Management international journal, Vol. 31 (2002), no. 5 ; p. 219-253

IX- Issues in the implementation of the arbitration of disputes arising under income tax treaties, Tillinghast, D, Bulletin for International Fiscal Documentation,vol. 56, 3 (2002) p. 97

X- International coordination of tax treaty interpretation and application, Van Raad, Intertax, vol. 29, 6-7, (2001)

Freakonomics deals with tax

In a recent WSJ article, Filling in the Tax Gap, the authors of the book Freakonomics: A Rogue Economist Explores the Hidden Side of Everything (Stephen J. Dubner & Steven D. Levitt) discuss what makes people comply with the tax law and what measures can deter tax cheating. I read the book (which I personally recommend) and I found this article a nice continuation of the type of approach used in this “unconventional” book.

In addition, the authors provide bonus material on the Freakonomics website, for the ones that want to explore the “dark-side” of the argumentations used in their articles.

The flattening of tax systems in the OECD Countries

The OECD published on 29 March 2006 a Policy Brief entitled “Reforming Personal Income Tax”. As the name says, this brief looks at the recent trends in personal income taxation in OECD countries and (very briefly) evaluates several types of personal income tax reforms.

The OECD addresses the issues of introducing a “flat personal tax” and its possible consequences. One can even derive (although the OECD wording is rather mild) a "implicit" recommendation that “flat tax” reforms should not be pursued in OECD Member countries due to possible effects such as the weakening of income redistribution and potential “side effects” on the benefit systems in place in several of the OECD Member Countries.

The OECD looked at recent reforms in selected countries and concluded that the key result of these reforms has been the reduction of the tax rates, compensated by the broadening of the tax base. These reforms also resulted in a move away from comprehensive personal income tax systems, through the introduction of alternative tax systems, such as the (Scandinavian) dual income tax system or the introduction of a flat tax system.

To more easily understand the differences between the various systems, a comprehensive income tax system taxes wage and capital income (less deductions) according to the same progressive rate schedule, while under a Dual income tax system personal capital income is taxed at low (and proportional) rates and labour income is taxed at high and progressive rates. The flat tax system, on the other hand, is based on a flat tax rate on all net income (i.e. capital, labour and other income less deductions).

With regards to recent flat tax reforms, the OECD mentioned the introduction of a flat tax in Russia (January 2001) and Slovak Republic (January 2004). In both cases, the reforms were said to broaden the personal income tax base (by eliminating tax allowances and credits) and introduce a flat personal income tax rate of 13% and 19% respectively. Interestingly, the OECD pointed out that it is unclear if the revenue increase (in Russia) should be attributed to the flat tax reform or to the administrative reforms and stronger tax enforcement that followed the reform. The OECD (for the safe side) even referred to a study by IMF that concluded that "there is, in short, no strong evidence that (Russian) tax reform itself caused the PIT revenue boom".

With regards to dual income tax reforms, the OECD referred to the case of Norway, whereby self-employed income is split into a labour income component and a capital income component. Accordingly, Norway taxes all personal income at a flat personal income tax rate of 28% (same rate as for corporate income). In addition to the flat rate, a progressive surtax is levied on gross income from wages and pensions above a certain threshold. As a new development, the OECD pointed out to the fact that Norway recently introduced (January 2006) a higher shareholder income tax on realized income of shares above a “normal” rate of return (i.e. above a risk-free return on investment).

This new regime, remembered-me about one Dutch novelty, introduced back in 2001. In short, investment income (such as dividends, interest, royalties and rental payments) received by Dutch resident individuals (other than substantial shareholders) is not taxed at the ordinary progressive rates but instead, the average annual value of property and assets are deemed to produce a net yield of 4% per year, which is taxed at the flat rate of 30% (the so-called “box 3” income). This means a tax of 1.2% on the average net annual value of the capital assets.

In fact, if one looks across the OECD countries you immediately note that the current taxation of personal capital income varies substantially: (i) with some countries taxing all personal capital income at a flat rate; (ii) other countries taxing all or most capital income according to a progressive schedule at more or less the same rates as labour income; (iii) other countries having a “semi-dual” income taxation, whereby all or some personal capital income is taxed at lower rates than wage income (e.g. Italy); and (iv) others having some sort of “deemed income” provisions.

What is interesting is that the OECD appears to focus on the dual income tax systems in comparison with the flat tax option. In fact, although both systems have their problems, the OECD “implies” that the problems of the flat tax are more of a structural nature (lack of progressivity) as compared with the dual income tax. It is usually said, that vertical equity(i.e. the unequal tax treatment of unequals) is an important element in a personal income tax system in order to achieve the so-called "distributive justice"! The flat tax would simply compromise that vertical equity.

It will be interesting to see the evolution, in the next years to come, of the personal income tax systems, namely whether the dual income tax systems adopted in the early 1990’s in Norway, Sweden, Finland and Denmark will eventually widespread throughout OECD Countries. The Dutch "Box-3" system is also an option, but its implications on an international level are still to explore (at least to me!).