At a seminar organised by Christian Aid and Tolley, ten leading tax professionals give their recommendations on how to design the tax system for a fictional developing country.
It’s often said that if you wanted to simplify the UK tax system, you wouldn’t start from here. Well, the Treasury select committee of Qumar had a luxury not afforded to John Whiting and his Office of Tax Simplification – they were able to build their tax system from scratch.
You might not have heard of Qumar, despite its population of over 177 million. That’s because Qumar is a fictional country created for the purposes of a workshop organised by Christian Aid and Tolley.
In attendance were ten leading tax professionals drawn from a range of backgrounds: Paul Morton; Lee Corrick; Douglas Rankin; Andrew Gotch; John Cullinane; David Heaton; Steve Wade; Chris Needham and Aili Nurk.
These professionals, whose role it was to play the imposing Treasury select committee, were tasked with formulating the principles of a personal tax system, a business tax system and an indirect tax system. With less than two hours to complete this task, the exercise did not result in the complete Tolley Yellow & Orange handbooks, presumably to the relief of the fictional Qumari tax professionals.
But it did raise a number of issues that could be of practical use – not just for the benefit of developing states, which was the primary aim of the event, but even for our very own tax system.
Qumar
The state of Qumar – based on either an episode of the West Wing or Yes Minister, depending on your age – covers more than 796,000 square kilometres and has a GDP of $482.913 billion, or $2,851 per capita. It is mainly agricultural based and it is ranked 145th in the Human Development Index.
It has achieved impressive growth levels, averaging 4.8% annual growth in the 2000s. However, it had to be bailed out by the International Monetary Fund in 2008 and poverty levels have been increasing since then, reversing the trend of a few years previous.
The World Bank suggests that the increases in poverty levels are, in part, because of inequalities in the tax base. The tax gap stands at 79% now, and the tax take is around 10% of GDP. The task of the new committee was to increase this to 16%.
The various subcommittees had to decide on the structure of the revenue service, the scope of the taxes, punishments for non-payment, how it is to be collected, incentives to attract the right businesses and a host of other issues. They also had to face many hurdles, such as a lack of a taxpaying culture, a political class determined to maintain the status quo, poor education and a predominantly cash-based economy. So how did our groups do?
Indirect tax
It was perhaps telling that, of the three subcommittees, the recommendations from the indirect tax group were the most orderly, perhaps reflecting the nature of the tax itself.
The first task of the Qumari subcommittee was to decide on the name of the tax, choosing the name Goods and Services Tax (GST) over Value Added Tax (‘VAT’) as it was felt that GST was a better description than VAT.
For the purposes of simplicity for both inspectors and the public, the subcommittee decided on a broad base. There would be a single rate, with limited exemptions and some zero-rating. It would aim to cover 80% of revenue. In an underdeveloped country such as Qumar, this could mean that the threshold could be as high as the top 20% of businesses.
The exemptions would be limited to domestic housing and B2C banking with appropriate rules under Sharia law.
To limit any embedded GST, zero-rating would apply to exports and B2B financial services. Slightly more controversially, telecoms would also be zero-rated, because in such an underdeveloped country with limited infrastructure, mobile phones would be essential tools for people wishing to trade.
The subcommittee recognised there would be potential for regressivity. So, without strict terms reference holding them back, the team recommended a comprehensive benefit system: this was critical for poorer people adversely affected by the GST, with the subcommittee determined to avoid the Qumari equivalent of the Arab Spring.
With a broad base – and keeping in mind the brief to increase the tax take by 6% of GDP overall – the subcommittee settled on a rate of 10%.
However, with such an underdeveloped tax rate, even a low rate would not guarantee compliance. For the GST to have any effect, the administration of the whole tax system – including personal and business taxation - had to be reformed. The first step would be a three-year education scheme for inspectors and businesses. Non-compliance through misunderstanding would be more easily tolerated while the scheme was ongoing.
On a logistical level, notices would be available in two languages – Urdu (the national language) and English – and forms would be available in paper and online. Taxpayers would also be able to pay by mobile phone because of the limited internet outside large cities. There would be quarterly filings and monthly payments on account.
Corporate tax
The corporate tax subcommittee endorsed the indirect tax group’s reform of the administration of the tax system.
Economically, the subcommittee felt the priority must be to attract overseas investment, and the subcommittee said the three best ways of doing so would be a low rate, targeted incentives and a high degree of certainty – these three aims would run through the whole system.
The scope of the business tax would include all businesses, including joint ventures. However, for the purposes of simplification, small and medium size enterprises would only be required to submit three-line accounts.
The subcommittee decided on a split rate – there should be a 10% rate for economically important activities such as trading and business investment; for other activities, where foreign investment is not a major factor, there would be a 25% rate. The 10% rate especially would encourage multinationals to invest in Qumar.
These rates would apply broadly, with few targeted incentives, which would apply to employment or specific infrastructure investments. The subcommittee also questioned whether some of the donor agencies investment should be incentivised, or whether donor agencies are distorting the labour market. This would need further research and, if nothing else, would create controversy in the Western world.
The subcommittee felt there was a need for extra taxes. There would be domestic withholding taxes but the subcommittee concluded it would negate the effects of the 10% rate if international companies had to pay tax on their dividends, interest or royalties.
There would also be a levy of 3% on the value of business property. Royalties on the mining of Qumar’s rare earth would be subject to a 4% tax acquired on sale or export, with a new mechanism helping the state value the land.
Turning its attention to creating certainty, the subcommittee felt that a system of safe harbours and bilateral agreements with other states would attract multinationals to Qumar. It was also suggested that companies could be persuaded to grandfather existing incentives for the certainty of a new, stable regime.
Finally, in an effort to increase transparency, businesses’ statutory accounts would become publicly available.
Individual taxation
With the new tax system beginning to take shape, the subcommittee with the unenviable task of reforming individual taxation reported back. It was noticeable that the design of the system and setting the basic principles was more important than the target revenue for this subcommittee. This reflected the difficulties involved when one taxes individuals.
The subcommittee decided to tackle this vast area issue by issue, starting off with how stop the capital flight from the country. Ideas included introducing legal requirements to disclose foreign accounts and to negotiate disclosure agreements with foreign jurisdictions; the aim was to create a situation where taxpayers would realise that money held abroad would definitely be taxed, so reducing the appeal of taking money offshore.
Perhaps the main challenge was to extract tax from the vast agricultural sector. Finding a basis was almost impossible, the subcommittee warned. The most efficient way was to look at the UK’s parts and introduce the old Schedule B – a tax on activities. The aim would be to create a formulaic ‘deemed income’ approach rather than allow prolonged appeals and under reporting opportunities around actual income. But this could harm small farmers, who might not be able to turn activity into profit. In this case, it would be implemented alongside compensation for crop failure, for example.
For this to succeed, it was necessary to determine the ownership of land, which in Qumar is currently a ‘fluid’ concept, the subcommittee said. To address this, the state should instigate a census. To prevent people simply failing to fill their forms in, this would be backed with a threat of confiscation and redistribution of land.
Of course, not everyone works in the agricultural sector. For people in the legitimate economy and using the banking system, there was some merit for applying taxation at source and the government would work with banks to implement this. Balanced against this, there was the concern that this would encourage the movement of money to the black market sector.
However efficient the design of a system, in practice it would be inefficient without a programme of education, the subcommittee concluded. An obvious way of doing these was to show that revenue was being put back into society – one example being the compensation for crop failure mentioned above.
Following on from this, employees of multinational companies would be taxed through PAYE – a system in which the companies will already have had experience. Indigenous businesses would be taxed directly for the people they employ, lifting many employees out of the tax system altogether, at least until the education programme begins to bear fruit.
Even with this programme of education, there would still be the problem of corruption and without a culture of paying taxes there would be a need to police the revenue authorities themselves. This would need ‘an Elliot Ness-style’ group of ‘untouchables’ above corruption.
Intelligent design
Interestingly, announcements from the Qumari secret service about terrorist threats and farmers protesting against the taxation reforms had very little effect on the select committee’s thinking, bar a few minor political measures and perhaps tax relief for additional security costs.
In part this was as protests had been assumed by many, and so the proposals had already begun to think about this. One of the more controversial suggestions was to use conditionality of development funding, through reform minded parts of the government asking for funding to be conditional on reform of the tax system enabling the blame for reform to be passed elsewhere. Perhaps less controversially it was suggested that with the right policies and education programme it would be possible to isolate the landed elite from the rest of the farmers and allow reform to pass.
Perhaps the main lesson of the workshop was identifying the importance of creating tax payer morale, and so educating the population on the benefits of paying tax and being able to quickly demonstrate the resulting welfare expenditure it would fund, to encourage better tax compliance. Without creating a favourable ‘brand image’ for paying, it was thought that it would be difficult to ensure effective compliance with any system of taxation.
Note: The views expressed in the report are a summation of a broad high level consensus and aren't necessarily the full view of each individual and still less their organisations.
At a seminar organised by Christian Aid and Tolley, ten leading tax professionals give their recommendations on how to design the tax system for a fictional developing country.
It’s often said that if you wanted to simplify the UK tax system, you wouldn’t start from here. Well, the Treasury select committee of Qumar had a luxury not afforded to John Whiting and his Office of Tax Simplification – they were able to build their tax system from scratch.
You might not have heard of Qumar, despite its population of over 177 million. That’s because Qumar is a fictional country created for the purposes of a workshop organised by Christian Aid and Tolley.
In attendance were ten leading tax professionals drawn from a range of backgrounds: Paul Morton; Lee Corrick; Douglas Rankin; Andrew Gotch; John Cullinane; David Heaton; Steve Wade; Chris Needham and Aili Nurk.
These professionals, whose role it was to play the imposing Treasury select committee, were tasked with formulating the principles of a personal tax system, a business tax system and an indirect tax system. With less than two hours to complete this task, the exercise did not result in the complete Tolley Yellow & Orange handbooks, presumably to the relief of the fictional Qumari tax professionals.
But it did raise a number of issues that could be of practical use – not just for the benefit of developing states, which was the primary aim of the event, but even for our very own tax system.
Qumar
The state of Qumar – based on either an episode of the West Wing or Yes Minister, depending on your age – covers more than 796,000 square kilometres and has a GDP of $482.913 billion, or $2,851 per capita. It is mainly agricultural based and it is ranked 145th in the Human Development Index.
It has achieved impressive growth levels, averaging 4.8% annual growth in the 2000s. However, it had to be bailed out by the International Monetary Fund in 2008 and poverty levels have been increasing since then, reversing the trend of a few years previous.
The World Bank suggests that the increases in poverty levels are, in part, because of inequalities in the tax base. The tax gap stands at 79% now, and the tax take is around 10% of GDP. The task of the new committee was to increase this to 16%.
The various subcommittees had to decide on the structure of the revenue service, the scope of the taxes, punishments for non-payment, how it is to be collected, incentives to attract the right businesses and a host of other issues. They also had to face many hurdles, such as a lack of a taxpaying culture, a political class determined to maintain the status quo, poor education and a predominantly cash-based economy. So how did our groups do?
Indirect tax
It was perhaps telling that, of the three subcommittees, the recommendations from the indirect tax group were the most orderly, perhaps reflecting the nature of the tax itself.
The first task of the Qumari subcommittee was to decide on the name of the tax, choosing the name Goods and Services Tax (GST) over Value Added Tax (‘VAT’) as it was felt that GST was a better description than VAT.
For the purposes of simplicity for both inspectors and the public, the subcommittee decided on a broad base. There would be a single rate, with limited exemptions and some zero-rating. It would aim to cover 80% of revenue. In an underdeveloped country such as Qumar, this could mean that the threshold could be as high as the top 20% of businesses.
The exemptions would be limited to domestic housing and B2C banking with appropriate rules under Sharia law.
To limit any embedded GST, zero-rating would apply to exports and B2B financial services. Slightly more controversially, telecoms would also be zero-rated, because in such an underdeveloped country with limited infrastructure, mobile phones would be essential tools for people wishing to trade.
The subcommittee recognised there would be potential for regressivity. So, without strict terms reference holding them back, the team recommended a comprehensive benefit system: this was critical for poorer people adversely affected by the GST, with the subcommittee determined to avoid the Qumari equivalent of the Arab Spring.
With a broad base – and keeping in mind the brief to increase the tax take by 6% of GDP overall – the subcommittee settled on a rate of 10%.
However, with such an underdeveloped tax rate, even a low rate would not guarantee compliance. For the GST to have any effect, the administration of the whole tax system – including personal and business taxation - had to be reformed. The first step would be a three-year education scheme for inspectors and businesses. Non-compliance through misunderstanding would be more easily tolerated while the scheme was ongoing.
On a logistical level, notices would be available in two languages – Urdu (the national language) and English – and forms would be available in paper and online. Taxpayers would also be able to pay by mobile phone because of the limited internet outside large cities. There would be quarterly filings and monthly payments on account.
Corporate tax
The corporate tax subcommittee endorsed the indirect tax group’s reform of the administration of the tax system.
Economically, the subcommittee felt the priority must be to attract overseas investment, and the subcommittee said the three best ways of doing so would be a low rate, targeted incentives and a high degree of certainty – these three aims would run through the whole system.
The scope of the business tax would include all businesses, including joint ventures. However, for the purposes of simplification, small and medium size enterprises would only be required to submit three-line accounts.
The subcommittee decided on a split rate – there should be a 10% rate for economically important activities such as trading and business investment; for other activities, where foreign investment is not a major factor, there would be a 25% rate. The 10% rate especially would encourage multinationals to invest in Qumar.
These rates would apply broadly, with few targeted incentives, which would apply to employment or specific infrastructure investments. The subcommittee also questioned whether some of the donor agencies investment should be incentivised, or whether donor agencies are distorting the labour market. This would need further research and, if nothing else, would create controversy in the Western world.
The subcommittee felt there was a need for extra taxes. There would be domestic withholding taxes but the subcommittee concluded it would negate the effects of the 10% rate if international companies had to pay tax on their dividends, interest or royalties.
There would also be a levy of 3% on the value of business property. Royalties on the mining of Qumar’s rare earth would be subject to a 4% tax acquired on sale or export, with a new mechanism helping the state value the land.
Turning its attention to creating certainty, the subcommittee felt that a system of safe harbours and bilateral agreements with other states would attract multinationals to Qumar. It was also suggested that companies could be persuaded to grandfather existing incentives for the certainty of a new, stable regime.
Finally, in an effort to increase transparency, businesses’ statutory accounts would become publicly available.
Individual taxation
With the new tax system beginning to take shape, the subcommittee with the unenviable task of reforming individual taxation reported back. It was noticeable that the design of the system and setting the basic principles was more important than the target revenue for this subcommittee. This reflected the difficulties involved when one taxes individuals.
The subcommittee decided to tackle this vast area issue by issue, starting off with how stop the capital flight from the country. Ideas included introducing legal requirements to disclose foreign accounts and to negotiate disclosure agreements with foreign jurisdictions; the aim was to create a situation where taxpayers would realise that money held abroad would definitely be taxed, so reducing the appeal of taking money offshore.
Perhaps the main challenge was to extract tax from the vast agricultural sector. Finding a basis was almost impossible, the subcommittee warned. The most efficient way was to look at the UK’s parts and introduce the old Schedule B – a tax on activities. The aim would be to create a formulaic ‘deemed income’ approach rather than allow prolonged appeals and under reporting opportunities around actual income. But this could harm small farmers, who might not be able to turn activity into profit. In this case, it would be implemented alongside compensation for crop failure, for example.
For this to succeed, it was necessary to determine the ownership of land, which in Qumar is currently a ‘fluid’ concept, the subcommittee said. To address this, the state should instigate a census. To prevent people simply failing to fill their forms in, this would be backed with a threat of confiscation and redistribution of land.
Of course, not everyone works in the agricultural sector. For people in the legitimate economy and using the banking system, there was some merit for applying taxation at source and the government would work with banks to implement this. Balanced against this, there was the concern that this would encourage the movement of money to the black market sector.
However efficient the design of a system, in practice it would be inefficient without a programme of education, the subcommittee concluded. An obvious way of doing these was to show that revenue was being put back into society – one example being the compensation for crop failure mentioned above.
Following on from this, employees of multinational companies would be taxed through PAYE – a system in which the companies will already have had experience. Indigenous businesses would be taxed directly for the people they employ, lifting many employees out of the tax system altogether, at least until the education programme begins to bear fruit.
Even with this programme of education, there would still be the problem of corruption and without a culture of paying taxes there would be a need to police the revenue authorities themselves. This would need ‘an Elliot Ness-style’ group of ‘untouchables’ above corruption.
Intelligent design
Interestingly, announcements from the Qumari secret service about terrorist threats and farmers protesting against the taxation reforms had very little effect on the select committee’s thinking, bar a few minor political measures and perhaps tax relief for additional security costs.
In part this was as protests had been assumed by many, and so the proposals had already begun to think about this. One of the more controversial suggestions was to use conditionality of development funding, through reform minded parts of the government asking for funding to be conditional on reform of the tax system enabling the blame for reform to be passed elsewhere. Perhaps less controversially it was suggested that with the right policies and education programme it would be possible to isolate the landed elite from the rest of the farmers and allow reform to pass.
Perhaps the main lesson of the workshop was identifying the importance of creating tax payer morale, and so educating the population on the benefits of paying tax and being able to quickly demonstrate the resulting welfare expenditure it would fund, to encourage better tax compliance. Without creating a favourable ‘brand image’ for paying, it was thought that it would be difficult to ensure effective compliance with any system of taxation.
Note: The views expressed in the report are a summation of a broad high level consensus and aren't necessarily the full view of each individual and still less their organisations.
.jpg?sfvrsn=335a554c_0 "300 x 250 (MPU)")