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TAXATION OF FINANCIAL INCOME: Taxation of capital gains:
AN INTERNATIONAL PERSPECTIVE INTERNATIONAL PERSPECTIVE
GG
EORGE EORGE
KK
OPITS OPITS
* 83 83 *
governments can not reform the tax system without taking Governments Can not Reform the tax system
without taking due account of the implications that this external behavioral consideration two Implications to the external behavior-That this
ta. ta. This observation is valid especially for Reform This observation is valid
Especially for the Reform of the taxation of financial assets or income derived from them. Taxation of financial assets or income Arising therefrom.
In an open economy, the greater mobility of production factors, in an open economy, Greater mobility of production factors,
greater the opportunities to evade taxes or to move to Greater opportunities to evade taxes or move
inputs characterized by a lower mobility. inputs characterized by a lower mobility. The increased
Increased mobility of capital at international level is demonstrated by the fact that mobility of capital is the fact Internationally That
the mid-nineties the flow of financial investment the mid-nineties the flow of financial
-border investment has increased to reach the 200 per cent cross-border Increased
to reach 200 percent of GDP compared to 10 percent of Gross Domestic Product beginning Compared to 10 percent
of the early eighties. Eighties. Highly integrated world economy - or eco-Highly integrated world economy - or eco-
globalized economy, as is usually defined by the newspapers eco-globalized economy, as is defined by newspapers Usually eco-nomic
- is the result of an account liberalization intensified ness - is the result of liberalization Account
Increased capital, combined with financial and technological innovations. capital, coupled with financial and Technological Innovations.
The European Union (and, more generally, the European Economic Area) and The European Union (and, more Generally, the European Economic Area) is
was a harbinger of this trend, especially since heralded this trend,
Especially since the time they remove all capital controls to remove all capital controls to When
following the adoption of the Single European Market. Following the adoption of the Single European Market.
In this context, the current reform of the taxation of Italian In this context, the current Italian Reform of the taxation of capital gains
has several positive points. income from capital has many positive points. First it First, it
represents a significant step forward in simplicity, transparency Represents a Significant Step Towards simplicity, transparency and neutrality
competition, thus promoting efficiency allocative and a ence and neutrality, thereby Promoting allocative efficiency and to
more equitable income distribution. more equitable income distribution. It also recognizes the restric-It
Also Recognizes the restric-tions imposed by globalization by imposing a moderate rate of globalization tions by Imposing a moderate rate
minimum withholding tax of 12.5 percent on income from interest withholding tax of minimum 12.5 percent on interest earnings
and strengthening the monitoring of tax compliance. and Strengthening the monitoring of tax compliance. On both on Both
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* International Monetary Fund. * International Monetary Fund.
Revised version of a speech at the conference on the taxation of financial income Revised version of a speech at the conference on taxation of financial income
after the reorganization: rules, requirements and opportunities for operators, held at after the Reorganization: regulatory, compliance and opportunities for operators, Held at the Duchy
Management, Siena on June 6, 1998. the Duchy Management, Siena on June 6, 1998. The author thanks Luigi Spaventa and The author thanks Luigi Spaventa
and Vito Tanzi for their comments. Vito Tanzi for Their comments. The views expressed are those of the author and The Views Expressed are Those of the author
and not necessarily those of the International Monetary Fund. Necessarily Reflect Those of the International Monetary Fund.
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these points - as noted by the Minister Visco - Italy is These points - as Noted by the Minister Visco - Italy
stands in a better position than other European countries in facing-in a better position Than other European countries "in dealing with re-
tax competition from abroad, or otherwise, to participate in King tax competition from abroad, or Com,
Participate in a joint effort at the international level in a joint international effort in this area 1 1
this area. .
Despite these improvements, it is likely that Italy will help to Despi These improvements, It Is Likely That Italy will help to
a continuous decrease in the tax on investment flows continued economic losses of revenue on investment flows
induced by taxes and a relatively higher tax burden induced incurred charges and taxes incurred by
Relatively higher labor and other non-mobile factors. the workforce and other factors not mobile. These shortcomings These failures may be corrected only May
are co-ordinating tax Shall be corrected only by international tax coordination
broader base, or by approximating International Broader base, or by approximating
tax. tax.
The draft directive on the taxation of interest-The recent draft directive on the taxation of interest income Recen-fearing
issued by the European Commission - in line with the proposed ciently issued by the European Commission - in line with the Proposed
is ECOFIN Council in December 1997 - surely they can-is the ECOFIN Council in December 1997 - They can surely re-
seen as a timely and decisive step in the right direction. Timely and king seen as a decisive step in the right direction.
From a strategic point of view, the introduction of the minimum tax From a strategic point of view, the introduction of the minimum tax
(minimum tax) for non-EU citizens resident is (Minimum Tax) for residents living in the EU is not
never been so timely and interesting. Never Been So Timely and interesting. The appearance The most interesting aspect Most
- under the so-called coexistence model - consists interesting - under the so-called Coexistence model - Consists
offering to European Union countries can sce-EU member countries "in Possibility of offering the choice between whether
-impose a withholding tax at source at least 20 per Choice Between Imposing a withholding tax at source at least 20 per cent or
provide information to other member countries on income from interest-cent or Provide information to other countries "on income from interest-
interests. ESTs. Moreover, the reduction of nominal and real interest rates, which MoreOver, the reduction of nominal and real interest rates,
Which reflects the expectations of low inflation and the disappearance of the Reflects Expectations of low inflation and the risk of disappearance of
exchange rate for countries belonging to the Union of exchange rate risk for Countries Within The European Monetary Union
thanks to the advent of the euro, European Monetary Union would make it somewhat with the advent of the Euro, Would Rather
appropriate to adopt the minimum tax (minimum tax), as Timely adoption of the minimum tax (minimum tax), since
it would be seen as a burden less onerous than Would it to be seen as a burden less burdensome Than
interest rates higher. interest rates higher. At the same time, the biggest opportunity At the Same Time, Greater
arbitrage opportunities within the euro area strengthens the proposal of arbitration Within the euro area strengthens the Proposed
reduce both the tax rate differential of the 'rate of im-reduce the tax rate That Both the differential rate of im-mail
throughout the area. Placed throughout the area. From a substantive point of view, the current pro-From a substantive point of view, the current pro-
item represents an improvement over the directive presented Mail is an improvement over the directive presented
in 1989, by eliminating tax loopholes in 1989, as it Eliminates Tax Loopholes many
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and tries and tries
wider application, extending to all courts of the countries Wider application, Extending to all courts of the countries "
EU members, to get then to include all European Union members to arrive and then to include all
STUDIES AND NOTES IN ECONOMICS - PAPERS / 3 STUDIES OF ECONOMICS AND NOTES - PAPERS / 3
84 84 --- ---------- -------------
¹ ¹
For example, in the absence of the transparency, Belgium and Germany For example, in the Absence of the transparency, Belgium and Germany
witnessed significant financial outflows due to the withholding tax on income from two Witnessed Significant financial outflows to the withholding tax on rents
interests. Interests. On the other hand, Denmark, France and Spain, economic theory suggest On the other hand, Denmark, France and Spain, Economic Theory sug-
sce tax liability, imposed by the mandatory reporting, has spo- eg the tax liability, Imposed by the mandatory reporting, has been shifted to-
inputs characterized by a lower mobility. Was to inputs characterized by a lower mobility.
² ²
A major loophole tax in the previous proposal was represented by the e-tax A major loophole in the previous Proposal Was represented by the e-
exemption of interest on Eurobonds. exemption of interest on Eurobonds. The limits in dealing with financial instruments The limits in dealing with financial instruments
derivatives are far less important to the extent that these instruments do not make less important are derivatives to the extent That
These instruments do not generate risk-free fixed income. generate fixed income without risk.
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"dependent and associated territories" "Dependent and Associated Territories"
3 3. . However, despite these However, Despi
These innovations, in the context of globalization, the current proposed innovations in the current context of globalization, the current Proposed
is incomplete, since it extends the application of is incomplete, Because It extends the application of
minimum tax (minimum tax) and the exchange of information as well as minimum tax (minimum tax) and exchange of information over
the borders of the European Union. EU borders. It is known that, in considera-It Is Known That, well-entertained
them ample opportunities for arbitrage between investment locations-any of the ample investment opportunities for arbitrage Between locations
like minds (or equivalent in terms of considerations about rap - tion like (or equivalent Considerations on representative in terms of risk-reward
port) outside the European Union, similar risk-reward-port) outside the European Union, Affinity-
that the tax withheld at source by the European Union could That the tax withheld at source by the European Union
can be effective, its rate must not exceed the costs of transaction be effective, the ITS must not Exceed the rate of transaction costs
tion net, including the differential risk associated with investment tion net, Including differential Risk Associated with
investment minds in third countries. ments in third countries. From this point of view, the tax rate From this point of view the proposed tax rate is
clearly excessive. Clearly Proposal is excessive. The exclusion of exclusion of major
The main financial centers outside the European Union for which financial centers outside the EU-Which-
to bring the exemption or a low tax rate on income to bring the exemption or a low tax rate on income from
interests of non-residents probably would encourage Interests of substantial non-residents Probably Would Encourage
Significant capital flight capital flight
4 4. .
Consequently, the minimum withholding tax should Consequently, the minimum withholding tax
Should be less than projected in the draft directive. Less Than be projected in the draft directive. Or, Or
date the proposed rate, it should be applied in a count-date the Proposed rate, it Should Be Applied in a with-
'm much bigger, at least in all OECD member countries, I'm much bigger, at least in all OECD member countries "to get
then to embrace the largest group of then to get to embrace the Wider
grouping of countries with similar investment. Countries with similar investment. To this end, there are two To this end, there are two
international agreements that could provide a useful precedent. international agreements That Could Provide a useful precedents. The
The first is the Basel Accord of 1988 on the minimum ratio of first-adjusting Is the Basel Accord of 1988 on the minimum ratios of height adjustment
of capital for international commercial banks, which is of capital adequacy for international commercial banks, Which Is
still applied in more countries than pre- Applied Countries Than in still more pre-
saw the original agreement. Saw the original agreement. The second is the previous The second is the previous
OECD Code of 1978 on minimum interest rates for loans OECD Code of 1978 on minimum interest rates for loans
export subsidies extended by the member countries export subsidies extended by the member countries "
5 5. . Both
Both these agreements were introduced to avoid a disastrous and counter-These agreements Were Introduced to Avoid a Disastrous
and counter-productive competition between similar countries, that are likely to be similar Productive Competition Between Countries, Which in all likelihood
occur in the presence of uncontrolled competition between different - Occur in the presence of uncontrolled competition Between
if dif-tax jurisdictions. if tax jurisdictions. In conclusion, a concerted action Harmoni-In conclusion, a Concerted Action Harmoni-
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