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.