Business Recorder (BR) Research
‘Broader base and low level of taxation needed’ Head of Taxation, ACCA
Chas Roy Chowdhury, Head of taxation at ACCA, has a degree in applied economics as well as being a fellow of ACCA. He worked in public practice from 1980 until 1991 when he joined ACCA Technical Department.
He sits on the European Commission Platform for tax governance, represents ACCA at BIAC on tax matters, and chairs Taxation Working Group of small business organisation. He is also a member of indirect and direct tax working parties at Federation des Experts Compatables Europeens (FEE) – the umbrella group for first-tier European accountants.
He has presented on key international tax issues like money laundering and global environmental taxation to the European Parliament as well as at international conferences. Following is the edited transcript of what Chad Roy Chowdhury had to say in a recent sit-down with BR Research during his short visit to Pakistan.
Chas Roy Chowdhury: I have worked in practice in large and small firms which gave good insight into lots of different types of businesses and orgnaisations in terms of audits and tax. I have been working at ACCA (the Association of Chartered Certified Accountants) since 1991, and I would say that it’s very fulfilling when you see some legislation coming through in which you have some say.
And also, in the work we do, it is important that we are more articulate, particularly when accountants are being pushed in the forefront of the media in terms of financial reporting, auditing and tax.
CRC: The feeling I get from the tax system in Pakistan is that, in common with other jurisdictions, it is very complex and fragmented.
Ideally, taxes should be developed in a coordinated, flexible and rational way, which however is easier said than done. The UK’s tax system, one of the most complex in the world, is getting more complex with new elements being added, subtracted and changed on an ad hoc basis.
It would be helpful in tax regimes such as Pakistan if there were clarity and certainty – so , for example, it would be helpful to have a roadmap in the tax system for areas such as VAT, GST detailing how where and when it can be implemented. Also, all tax and related issues need to be done transparently and effectively.
CRC: Tax regulators and government need to have a democratic take on taxes so they need to look at them holistically. In UK, we have something called Patent Box – a low level corporation tax – that acts as a proxy for research and development. But is that really the right way? Should we be giving special treatment? I think inevitably this will happen because there are certain categories of business which the governments want to encourage e.g. Better tax breaks in Singapore, Malaysia, Luxembourg, Ireland, and Netherland.
CRC: The taxation system is an evolving game. What we have in UK is a 21 percent corporation tax which will go down to 20 percent next year. The 12.5 percent corporate tax rate in Ireland, which is the lowest in the EU, has actually helped the country get the second highest level of IT business it its jurisdiction. Then there are double tax treaties that enable countries to pay corporation tax of even lower than 12.5 percent. China introduced a couple of reforms in its taxation system where it slashed its corporate tax and dispensed a lot of special treatments.
It might be difficult to pin down specific tax policies to a country’s success in attracting investment or increasing its global trade, but there are many instances where tax has had considerable impact on investments.
CRC: In many developing countries, the tax system is like a pyramid where the base comprises the poorest people who may not pay income tax. One way to broaden the tax base, is to bring more people into the tax net through GST and VAT which they pay on good or services they buy or use.
I believe we need to have a broad base and low levels of taxes to get much more acceptance and higher degree of compliance. You can have very low levels of income tax, GST, VAT to broaden the tax base. Here care must be taken to keep tax levels low to enforce compliance, and increasing the base bit by bit.
Singapore introduced VAT at three percent, and now its seven percent. The idea is to move it up to 10 percent in due course of time. Malaysia is finally introducing GST; it has been trying to introduce it for the last 15 years. The key is to do it gradually, and try using different measures; there is no silver bullet in getting tax compliance and increasing the tax base.
CRC: Five years ago, the level of interest, understanding and interaction in terms of environmental taxation was almost non-existent in China. Now it is actively pursuing the idea. But it is important to remember that environmental taxes alone will not fund government schemes – they need to be part of a mix. If an environmental tax on petrol is successful, you would actually be discouraging petrol cars, and thus reduce the tax base.
Also a lot of the taxes that are now called environmental taxes were never so; they were simply revenue raisers like fuel duty, taxes on petrol and diesel etc.
What we need right now is a pragmatic view of environmental taxes. With global temperatures rising by four degree Celsius by the end of the century, we need to work quickly.
CRC: The issue is that such a thing has never happened and countries have never been that altruistic. I just cannot see it happening right now. We need to be more practical and address the issue through awareness, incentives, taxes and regulation.
The European Union has been planning to tax countries that are producing high carbon emissions. But it has not happened so far because big players like US, China and India have not signed up to the Kyoto agreement, and without them there is little likelihood of wider success.
CRC: A lot has been done with regards to money laundering regulations. It is very important for a jurisdiction that wants to show that it is clean and has good governance. The UK has adopted very tough regimes, and there are some fairly relaxed ones as well, which need to be tightened up because money laundering regulation is a pivotal part of the global landscape in ensuring there is no illicit money circulating the global economy and no tax evasion and criminal activity is being overlooked.
Steps should be taken to stop informal channels from helping the evaders and launderers from whitening this money through remittances.
People who got away with it might not be able to anymore as FATCA and OEDC have started working on tax transparency and exchange of information. Tax authorities are not willing to be just the bystanders; they are willing to get relevant tax information that can help them to be proactive in their action.
CRC: Base Evasion Profit Shifting (BEPS) at the OEDC level has been a game changer for bringing out people’s awareness around the world. In Pakistan it is perhaps not well known, but it is the main game in town within the larger OECD and G20. The work is going on, and BEPS will permeate across the world in terms of how exactly businesses pay taxes.
A lot of changes are expected to come onto the global scene: the rules will be tweaked, changes in information in terms of tax evasion, transfer pricing documentation requirements in terms of double tax treaties and changes in the digital economy. So, there is a whole array of different tax areas that will come out of this work.
CRC: If a company gives one transfer pricing documentation to one tax jurisdiction, it has to replicate the same document elsewhere as it is a global join-up. This might not be happening right now, but it will happen in the foreseeable future where different jurisdictions will be able share information. So eventually, multinationals won’t be able to remain opaque.
What Pakistan needs to do is to be commercially aware and business friendly, and try not to over tax its multinationals. Maybe it can import some good measures from the UK as it is considered to be one of the best tax authorities in Europe.
CRC: Digital economy is action plan one of the BEPS program. The issue is between the source and residence tax. How the tax system works depends on where the permit was established and where it is created. BEPS program is trying to provide a panacea against the source-residence dichotomy where the country where the business is occurring would charge the GST or VAT. So Pakistan might not be getting the direct tax, but it would get indirect tax in form of GST or VAT on services being sold in the country. This will bring some order to the way taxes work in the digital economy.
CRC: The tax system in Pakistan and elsewhere needs to have integrity. It has to be simple, specific, and as politics-free as possible. What ACCA has been advocating for a long time is the idea of a tax policy committee (TPC) where government might set the overall economic framework, while this independent body will set the tax policy.
ACCA is committed to delivering public value to Pakistan by leveraging on its global recognised qualification whether it is the export of professional accountants or claiming a fair share for Pakistan from $35 billion global; finance and accounting outsourcing market. ACCA strongly believes in collaborating with all national bodies and would bring research and best-in-class experience to add value to Pakistan’s economy.
