Tax Uncertainty: Evidence and Policy Responses

Tax uncertainty typically derives from institutional flaws of the tax policy process and unclear tax rules at the domestic level. At the international level tax uncertainty has its roots in the lack of tax coordination and cooperation between countries, as well as in the increased globalization and the emergence of new business models. Uncertainty may have negative effects on investment, trade and compliance. In this paper, we discuss the main sources of tax uncertainty, review the economic and empirical literature on the effects of tax uncertainty, and examine the policy measures to tackle the issue at the domestic level and the recent policy initiatives at the international level, with a focus on the EU. This survey concludes that to improve tax certainty policy makers should focus their attention on planning tax reforms and tax changes properly, clearly communicating their content and timing, and more generally establishing a structured approach in managing the tax policy process. At the international level, the best policy answers are boosting the cooperation on tax matters, developing common approaches to fighting aggressive tax planning, as well as agreeing on a clear and sustainable distribution of tax revenues for cross-border investment and more generally on a transparent and non-harmful tax competition.