Grace Perez-Navarro, the deputy director of the OECD’s Center for Tax Policy and Administration, discusses the findings of the organization’s recent report on tax morale — the willingness of companies and individuals to pay taxes — with Tax Notes Today International chief correspondent Stephanie Soong Johnston in London.
Read the podcast episode's transcript below. The post has been edited for length and clarity.
Stephanie Johnston: Grace Perez-Navarro, welcome back to the podcast.
Grace Perez-Navarro: Thanks, Stephanie. It's great to be here.
Stephanie Johnston: I would like to speak to you about the OECD's work on tax morale. The OECD recently released a report. What is tax morale?
Grace Perez-Navarro: Tax morale is not an obvious concept, but it's basically the initiative or the willingness of taxpayers to pay. What we're looking at in this report is what is it that drives that voluntary compliance. One of the things we've been looking at is behavioral science to see what motivates tax compliant behavior in individuals. Corporations are legal entities, so they don't have morale. But legal entities are still operated by human beings and so they do have a role to play as the CEO, a member of the board, or the tax director. In the individual context, you're talking about the difference between compliance and evasion generally, but in the corporate context, the question we're trying to answer is how can we get them to pay tax responsibly, both with a letter and spirit of law in mind.
Stephanie Johnston: This work started last year?
Grace Perez-Navarro: Yes. We had a conference on this in January, where we brought in different stakeholders. I should say this work that we have done is very much focused on developing countries because obviously they need to raise revenues more and they have a harder time doing that and getting voluntary compliance. What we were trying to do was to see what are the drivers that make companies and individuals comply so that the levels of compliance will increase in these countries. We put out a public consultation document in the spring and have since released the report. This is just one step in the process; we're just beginning to look at this. We've done this overall assessment, but what we have seen in this is that there are regional differences. For example, if you look at some of the drivers of behavior, there are socioeconomic behaviors and there are institutional things that affect this. Things like a person's age makes a difference. The older the person is, the more likely they're willing to pay taxes. Gender has a role to play here, but believe it or not, there is a regional difference. Women tend to be more tax compliant than men, but in Africa, it's the opposite. We need to delve further to see why there is that difference in Africa. There's also educational attainment. The more education a person has, the more likely they are to accept the role of taxes in society than people who are less educated. You also have institutional factors, like – is there trust in government? Is there trust in the tax administration and the legitimacy of the tax administration? Also, the meritocracy of the society. In some cultures it's all about who you know, not meritocracy, so that undermines trust. I think that all ends up being part of the trust equation. Given this initial look at what drives tax morale, we have recognized that we need to look further into regional differences. We actually also need to do country-by-country work. We will be doing another study just looking at 50 countries that have had taxpayer education initiatives to see what has worked, what hasn't, and what have been the results from those initiatives.
Stephanie Johnston: Why is the OECD focusing on this now? The report notes that the domestic resource mobilization conversation has never really addressed tax morale. Why is that?
Grace Perez-Navarro: You know, it's interesting. We have never addressed it in this way. In 2011 the OECD revised its guidelines for multinational enterprises, which are not a tax specific report but rather a guidelines of responsible business conduct for businesses. These guidelines have been approved by not only the governments that adhered to those guidelines, but also business trade unions and civil society. When we did this in 2011, we revised the tax chapter, which is the last and shortest chapter. The big battle we had – and to me this was one of the most challenging things I have ever worked on — was trying to get a revision of that chapter to include the simple statement that businesses should comply with both the letter and the spirit of the law. I can tell you at that point in time business fought hard against that, saying “Oh, we don't know. How do you define the spirit of the law?" We did try to define it in the guidelines, but at that point there wasn't the appetite for it. What happened after that? In 2012, we started the BEPS project, which was about fighting aggressive tax avoidance, and that started a whole chain of different standards being developed. So what do you have now? More reporting requirements, more legislation, and more requirements about reporting uncertain tax positions. It's just not sustainable to keep trying to change the laws and require more from businesses because we're trying to tackle this aggressive tax avoidance. This is a way to look at the behavior of companies and how to change that so that there is responsible tax compliance.
Stephanie Johnston: Did the media have any effect on this? The media is always focused on Apple or Google paying their fair share or not paying their fair share.
Grace Perez-Navarro: Yes, I think it did. I think the work of NGOs bringing this to the forefront also had an impact. If we go back to 2011 when we were trying to get this language of the letter and the spirit of the law as being one of the guiding principles in the tax area, we didn't have this debate. We didn't have these companies on the front pages of the newspapers. I think if we had, then business would've been more willing to do this because I do think now they recognize the reputational risk associated with taking aggressive positions in their taxes.
Stephanie Johnston: What trends did the report identify in regards to corporations?
Grace Perez-Navarro: First, I would say there's not a lot of data out there about what drives tax morale in the corporate space. What we ended up using was information that we had gathered in our survey on tax certainty, which we first did in 2017 and updated in 2018. That was the closest proxy that we had because business keeps telling us the more tax certainty, the easier it is for them to pay taxes and the more willing they are to invest in a country. We looked at that data and we looked at what were the key things that would drive tax certainty, and there were regional differences there as well. It is important to highlight that it's not tax rates that make the difference between investments, or payment, or non-payment. There are many other factors like: How complex is the tax law? How consistent is the treatment the taxpayers receive from the tax authorities? How quickly can tax disputes get resolved? These are the kinds of issues that affect business behavior.
Stephanie Johnston: What would 100 percent tax morale look like? Is it the end of the cat-and-mouse game between governments and business?
Grace Perez-Navarro: Yes, I think that's what it is. Business is looking for different ways of getting to that point, so we have also been working with business on approaches for either dispute resolution, which is after the fact, but also dispute prevention. Things like the [International Compliance Assurance Program] are ways for businesses to comply responsibly in real time. Joint audits may also be a way for them to comply in a responsible way. In a joint audit, every country involved has the same information. That should facilitate the discussion because at the end of the day, tax administration is about managing and using the information that they get from taxpayers and using it to apply the tax laws. Greater transparency from companies is a way to move that forward.
Stephanie Johnston: What will be the next steps mentioned in another report doing a deeper dive into the behaviors that drive tax morale? Ultimately, what does the OECD hope to produce as a tool to give businesses tax administrations to help them boost tax morale?
Grace Perez-Navarro: The first thing is this next report we will be doing on taxpayer education. The other thing is we will be working with specific countries to try and diagnose the current situation and come up with possible ways to address the issues. There's been a lot of good work done on behavioral science approaches, so looking at what they call nudging. Instead of getting a threatening letter from the IRS saying you haven't paid your taxes, you may get a letter saying, “99 percent of your neighbors have paid their property tax. We notice you haven't paid, maybe you want to pay.” That kind of approach seems to work much better. The other thing we are doing is a survey of tax administrations in developing countries to get their perceptions of how they think big business is doing in terms of tax morale and responsible compliance.
Stephanie Johnston: For business and listeners here on the podcast — if you could ask them to help the OECD and its work in this regard, what would you say?
Grace Perez-Navarro: Well, I would say that they should look at how they pay their own taxes or how their tax advisors are advising them and take this whole idea of tax morale and responsible tax compliance into account. Given the changing environment that we are operating in, the reputational risks are high. One quick story of my own personal experience of seeing this live on the ground is when I went to buy my Christmas tree from the little flower market by my apartment in Paris. I asked the Christmas tree guy to remove the little stump they put at the end, which is how they make the Christmas tree stand up.
He said, "Oh, you must be American. You must have one of those tree stands that you can put water in."
I said, "Yes, I am. Yes, I do have one of those."
He said, "I can't find those in France."
And I said, "Tesco online."
He said, "No, I will not buy anything from Amazon because they don't pay tax in France and by the way, I will not drink Starbucks coffee either because they don't pay tax in France.” So, this is a real man of the street issue and it is a reputational issue and eventually it may hit their bottom line. So, I would say for those companies that have not yet woken up to this new reality, they need to take a close look.
Stephanie Johnston: Fair warning. Thanks so much for stopping by and speaking about the OECD’s latest work. It’s exciting and we look forward to hearing more.
Grace Perez-Navarro: Great. Thanks, Stephanie.