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Adapting tax systems and international tax rules to the new global environment: A shared challenge for India and the OECD

 

Remarks by Angel Gurría, OECD Secretary-General, delivered at a High Level Tax Seminar


New Delhi, 13-14 June 2011

(As prepared for delivery)
 
Minister Mukherjee,
Ladies and Gentlemen,

We come together at an extraordinary moment in India’s history, both in terms of its phenomenal economic advances and its deepening relationship with the international community, including the OECD. The OECD is releasing this week its latest economic review of India, showing an economy that is enjoying one of the highest growth rates in the world, more than triple the rate of OECD member countries. India’s estimated GDP for 2011 will place it tenth in the world, ahead of 27 OECD members. The prospects for continued high rates of growth in the Indian economy appear strong.

It is both a pleasure and an honour to open, with Minister Mukherjee, this high level seminar on adapting tax systems and rules to the new global environment.

A noteworthy element of India’s economic development in recent years is the speed at which investment flows have been shifting from primarily inward to increasingly outward investment. Between 2000 and 2007, stocks of foreign direct investment into India increased by five fold, but outbound foreign direct investment increased over 16-fold, giving India a ratio of outbound to inbound foreign direct investment stocks which was higher than that of 20% of OECD countries. The pace of the change has continued to quicken. For example, by 2007, India’s exports of services exceeded all but 8 OECD member countries, and its net exports of services grew from $2.9 billion in 2001 to $46.9 billion in 2008.  India’s share of global trade has more than doubled since 2000. 

With these remarkable achievements already attained, it is clear that India’s tax policies are more than ever exposed to international issues. India faces the same challenges as every OECD member country:  how to adapt its domestic tax system and its international tax policies to a borderless economy, and how to ensure that the approaches embraced today will be well suited to meet the needs of the economy of tomorrow. The dramatic trends in India’s economic evolution in recent years plainly point to the need to shed old assumptions and to take a fresh look at how best to design and implement India’s tax policies.

One of the most remarkable trends which has been spurred by globalisation has been the spread of broad based taxes on goods and services, in particular the Value Added Tax, not only across the OECD but throughout the world. VAT is now an essential source of revenue in over 150 countries. It is a particularly neutral tax with regard to international trade and a good revenue-raiser, including as a replacement for customs duties where these have fallen following greater trade liberalization. But a broad based VAT is also an important element in developing the internal market of a country by replacing complex and cascading taxes that distort patterns of production and consumption, so reducing production and economic welfare.

Another major tax reform trend across the OECD has been the reductions in statutory personal and corporate income tax rates, financed in part by broadening tax bases through reducing tax breaks. Reviewing tax incentives to ascertain whether they actually achieve their underlying objectives has become increasingly common.

In the light of these trends, one can see very clearly the benefits to be derived from deepening the relationship that was the spark for this event.  As an organisation, the OECD can offer to India what it has always offered to member countries:  a forum for sharing worldwide experiences and benchmarking national policies against best practices, a place to share expertise and jointly identify solutions to commonly shared problems.  This sort of high level policy dialogue is the natural continuation of the cooperation that has grown up between India and the OECD over the past decade, since the OECD first began offering seminars at the National Academy of Direct Taxes in Nagpur. 

As a key player in the global economy, India also has much to contribute to the OECD. This is already evident from India’s participation in meetings of the Committee on Fiscal Affairs and its Working Parties since 2006, from the key role it plays in the Global Forum on Transparency and Exchange of Information for Tax Purposes (as Vice-Chair of the Peer Review Group), from its active membership in the OECD’s informal Task Force on Tax and Development, from its participation in the Forum on Tax Administration, from its full membership in the Network on Fiscal Relations across Levels of Government and from the leadership it has shown in the G20 tax debates.

I am particularly delighted that today’s event marks the beginning of a new era of enhanced cooperation between India and the OECD on issues of taxation of fundamental importance to both parties.  The high level policy dialogue exemplified by this seminar will be just one of the elements of that programme, the others of which will be focused on the technical development programme centred at the National Academy of Direct Taxes in Nagpur and on India’s deeper involvement in the Committee on Fiscal Affairs and its subsidiary bodies.  We embark on this journey together with great confidence that the reinforced cooperation between India and the OECD will reap increasingly valuable benefits for both of us.

It is also a pleasure to note that this inaugural event will focus largely on transfer pricing, certainly one of the most important issues in international tax today and one that increasingly draws the attention of tax administrations around the world, both here in India and throughout the OECD’s membership. Transfer pricing has been one of the main pillars of the OECD’s tax work for more than 30 years, as our member countries have sought to build and strengthen a consensus on the arm’s length principle. India’s transfer pricing legislation was enacted just a decade ago. Since then, India has become one of the world’s most active countries in the enforcement of the arm’s length principle, vigorously tackling extremely complex issues such as how to perform reliable comparability adjustments and how to deal with intangibles.

We at the OECD have been especially glad to have the active contributions of senior Indian officials to the work we do on transfer pricing in Working Party 6 of our Committee on Fiscal Affairs. In particular, we view India’s involvement in the work we’ve recently begun on the transfer pricing aspects of intangibles as very important to the success of that project. While fully acknowledging India’s impressive development in the area of transfer pricing, I would also note that India is facing enormous challenges in the administrative implementation of the transfer pricing rules, from the process of selecting cases for audit to the strengthening of dispute resolution and dispute prevention mechanisms.

The topics selected for this seminar plainly demonstrate the overlap between the concerns of India and OECD member countries:  how to align international tax arrangements to changing economic patterns; how to apply the arm’s length principle to the challenging areas of intangibles and services; how to develop dispute prevention and resolution mechanisms that will provide certainty, avoid double taxation, efficiently use available resources and ensure faithful application of the arm’s length principle; how to introduce simplification measures intelligently into the administration of transfer pricing.

I have no doubt that the discussions over the next two days will be very fruitful, and that the enhanced policy dialogue we begin today will be very rewarding for India and the OECD in the coming years.

Mr. Minister, thank you very much for hosting this event, and ladies and gentlemen, I wish you a successful seminar.

Thank you.

 

 

 

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