For government agencies in charge of levying and collect taxes, the task of gathering and accumulating revenue from taxation is becoming more daunting and challenging since the globalization of the world economy. Previously, collecting taxes from the populace was easy in comparison to recent decades because most of the people who were liable to pay taxes lived, worked and operated their business enterprises within their home countries. However, with the advent of the information revolution and the rapid technological advances in the last few decades, the operating activities of most corporate enterprises and businesses extend beyond the geographical boundaries of home countries. This is the reason why it is imperative for governments to reform their tax systems if they intend to be effective in amassing revenue in the global economy.
The International Tax and Investment Center (ITIC) is a reputed, independent, non-profit research and educational organization that aims at encouraging tax reforms and initiatives within the public-private sector to enhance investment climate in developing nations and countries at a transitional stage. Since its inception in 1993, this organization works in collaboration with the ministries of finance, customs and tax authorities of eight-five countries along with prominent international financial institutes. These include the International Monetary Fund, World Customs Organization, and Organization for Economic Cooperation and Development.
Mobility of labor and commercial activities
The International Tax and Investment Center Tobacco experts say that the increase in the mobility of commercial and economic activities of modern businesses is the main problem that the tax departments in most countries face today. These activities are normally in the form of direct foreign investments by transnational companies, immigration and international trade. This makes it difficult for government agencies to have a complete control over their respective tax bases.
Attracting Foreign Investments
In a bit to attract more direct foreign investments and foreign corporate enterprises to conduct business operations within their territories, countries around global are competing with each other by lowering their tax rates. As a direct consequence of this, these countries would need to cut government spending to insufficiently low levels and in due course lose their potential revenue in order to stay ahead in competition for other tax bases.
Collusion of tax systems is another obstacle that many countries face especially when it comes to taxing the foreign earnings of domestic corporate enterprises. Governments resort to this practice in order to encourage the homegrown companies to run their businesses with their geographical area and deterring such corporate enterprise operating abroad. However, such impediment to a company’s profit decreases amount of money they invest in the home countries and ultimately hurts their individual employees’ interest
Tax avoidance is another cause of concern for many countries as individual companies with large monetary resources would exploit the loopholes in those countries tax system and in the process lose incentives to save and invest.
The International Tax and Investment Center Tobacco experts emphasize that it is essential for government around the world to reform their tax system to meet the challenges of globalization.