TAXATION PAPERS Literature Review WORKING PAPER No 70 .

1y ago
27 Views
1 Downloads
8.61 MB
259 Pages
Last View : 9d ago
Last Download : 2m ago
Upload by : Vicente Bone
Transcription

ISSN 1725-7565 (PDF)ISSN 1725-7557 (Printed)TAXATION PAPERSWORKING PAPER No 70 – 2017Dondena (project leader)CASE - Center for Social andEconomic Research, WarsawIEBPwCLiterature reviewon taxation,entrepreneurshipand collaborativeeconomyTaxation andCustoms Union

Taxation Papers are written by the staff of the European Commission’s Directorate-General for Taxation andCustoms Union, or by experts working in association with them. Taxation Papers are intended to increaseawareness of the work being done by the staff and to seek comments and suggestions for further analyses.These papers often represent preliminary work, circulated to encourage discussion and comment. Citationand use of such a paper should take into account of its provisional character. The views expressed in theTaxation Papers are solely those of the authors and do not necessarily reflect the views of the EuropeanCommission.Comments and inquiries should be addressed to:TAXUD [email protected] photo made by Milan PeinDespite all our efforts, we have not yet succeeded in identifying the authors and rights holders for some ofthe images. If you believe that you may be a rights holder, we invite you to contact the Central AudiovisualLibrary of the European Commission.This paper is available in English only.Europe Direct is a service to help you find answersto your questions about the European UnionFreephone number:00 800 6 7 8 9 10 11A great deal of additional information on the European Union is available on the Internet.It can be accessed through EUROPA at: http://europa.eu.For information on EU tax policy visit the European Commission’s website at:http://ec.europa.eu/taxation customs/taxation/index en.htmDo you want to remain informed of EU tax and customs initiatives? Subscribe now to the Commission’se-mail newsflash at: http://ec.europa.eu/taxation customs/common/newsflash/index en.htmCataloguing data can be found at the end of this publication.Luxembourg: Publications Office of the European Union, 2017doi:10.2778/924259 (printed)ISBN 978-92-79-74017-6 (printed)doi:10.2778/101308 (PDF)ISBN 978-92-79-74016-9 (PDF) European Union, 2017Reproduction is authorised provided the source is acknowledged.PRINTED ON WHITE CHLORINE-FREE PAPER

Literature review on taxation,entrepreneurship andcollaborative economyFinal ReportTAXUD/2016/DE/315FWC No. TAXUD/2015/CC/131Dondena (Project leader)Institute for Advanced Studies (Consortium leader)In consortium withCASECPBDIWDONDENAETLAIEBIFSIPPPWCISER

European CommissionLiterature review on taxation, entrepreneurshipand collaborative economyPrefaceThis report has been prepared for the project “Taxation, entrepreneurship andcollaborative economy”, Specific Contract No.4 TAXUD/2016/DE/315 implementing theFramework Service Contract No. TAXUD/2015/CC/131 for the provision of economicanalysis in the area of taxation.The following institutions and persons contributed to this projectDondena (project leader)Alessandra CasaricoGiampaolo ArachiMassimo D’AntoniLuca SalvadoriCASE - Center for Social and Economic Research, WarsawIzabela StyczyńskaGrzegorz PoniatowskiKrzysztof GłowackiIakov FrizisKarolina BeaumontIEBAlejandro Esteller-MoréJavier Vázquez-GrennoJordi Jofre-MonsenyPwCJohn SteveniJonathan GillhamRobert VaughanCharlotte HackerEleanor KeebleThe information and views set out in this report are those of the author(s) and do notnecessarily reflect the official opinion of the Commission. The Commission does notguarantee the accuracy of the data included in this study. Neither the Commission norany person acting on the Commission’s behalf may be held responsible for the usewhich may be made of the information contained therein.October 2017 2

European CommissionLiterature review on taxation, entrepreneurshipand collaborative economyTable of contentsPreface . 2Table of contents . 3Executive Summary . 5Résumé .13Introduction .23Chapter 1 The definition of entrepreneurship in the traditional and thecollaborative economy .271 Introduction .272 What is entrepreneurship? What are its determinants? .273 What is the collaborative economy? What are its determinants?.293.1The economic potential of the collaborative economy .313.2What are the features of the collaborative economy business models? .344 What are the differences between entrepreneurship in the traditional andcollaborative economy? .35Chapter 2 The impact of taxation on entrepreneurship in the traditional andthe collaborative economy .391 Introduction .392 The rationales for reforming the tax system and providing specific incentives tofoster entrepreneurship .402.1Market failures justifying special tax treatment of entrepreneurship in thetraditional economy .402.2The rationale for differential tax treatment of entrepreneurship in thecollaborative economy .423 Interaction of taxation and entrepreneurship .493.1Impact of taxation on the decision to become an entrepreneur .493.2Impact of taxation on the legal form of conducting a business (i.e.incorporation) .573.3Impact of taxation on investment .593.4Impact of taxation on access to financing resources and on capital structure .653.5Impact of taxation on business location .743.6The impact of taxes on employment in entrepreneurial firms .803.7Tax compliance, tax evasion and the informal economy .834 Additional issues on the interaction between taxation and entrepreneurship in thecollaborative economy .874.1The principle of fiscal neutrality .884.2Design of tax policy .894.3Design of tax administration .984.4The impact on government revenue – an illustrative simulation . 1065 Effectiveness of tax incentives . 112Appendix 1 . 114Chapter 3 Tax Policy experiences . 1251 Rationale for selection of case studies and their relevance. 1252 Policy experiences and case studies on taxation and entrepreneurship . 1282.1The European Commission’s Agenda for entrepreneurship . 1282.2Summary of Member States’ engagement with taxation and entrepreneurship. 1282.3Entrepreneurship and taxation case studies . 130October 2017 3

European CommissionLiterature review on taxation, entrepreneurshipand collaborative economy3 Policy experiences and case studies in the area of taxation of the collaborativeeconomy . 1493.1The European Commission’s Agenda for the Collaborative economy . 1493.2Summary of Member States’ engagement with taxation and the collaborativeeconomy. 1503.3Collaborative economy and taxation case studies . 152Annex 1 – Additional detail on case studies . 168Chapter 4 Framework of Analysis . 1891 Introduction . 1892 Relevant tax features and available policies . 1893 Discussion . 214References. 224October 2017 4

European CommissionLiterature review on taxation, entrepreneurshipand collaborative economyExecutive SummaryBackground and overviewEntrepreneurship is an engine of economic development. Governments aroundthe world are searching for or implementing policies to stimulate entrepreneurship asa means to create new employment opportunities, reduce poverty and fosterinnovation and economic growth. Promoting entrepreneurship is also one of thepriorities of the European Commission, in line with the objectives of the Single Market.The European Commission supports entrepreneurship through action plans, whichinclude funding for entrepreneurship education, creating opportunities for womenthrough gender-sensitive policies, easing administrative requirements and fosteringproductive investments.Taxation is one of the main tools at governments’ disposal to affectentrepreneurship in order to maximize its benefits.The goal of this study is to provide a comprehensive and updated review of thetheoretical and empirical economic literature on tax and entrepreneurship, taking alsointo account a number of open, tax-related questions raised by the changing nature ofentrepreneurship, symbolised by the growing importance of the collaborativeeconomy.Case studies complement the literature review by exemplifying the key relationshipsbetween entrepreneurship, the collaborative economy and the tax system.Based on the literature review and the case studies, the report develops a frameworkof analysis that allows to highlight the main tax policy options to supportentrepreneurship in the traditional and the collaborative economy.ApproachEntrepreneurship is a multidimensional phenomenon. One fundamental problemfaced in the literature on taxation and entrepreneurship is in defining“entrepreneurship.” Only a small fraction of firms generates non-trivial effects oneconomic growth through the development of new products, new technologies, or newinternal forms of organization. In trying to judge to what degree the tax system mayencourage or discourage entrepreneurship, the challenge is measuring the extent towhich any given firm has generated (or will likely generate) such innovative activity.The literature identifies two key characteristics of entrepreneurship:innovation and uncertainty. These features do not allow to label unambiguously asingle category of firms as entrepreneurial, as they can be present at different degreesamong the self-employed, and in firms of different dimensions and of different age;however, studies on entrepreneurship tend to focus on:- start-ups and young firms;- firms investing in R&D,but consider in some instances also self-employment and small firms as proxies forentrepreneurship.Collaborative economy activity can be distinguished as digital platforms thatconnect spare capacity and demand; use reputational currency mechanisms tounderpin consumption; and enable individuals to share “access” to assets rather thanown them outright.October 2017 5

European CommissionLiterature review on taxation, entrepreneurshipand collaborative economyThe identification of entrepreneurs in the collaborative economy is straightforwardwith respect to the founders of collaborative economy platforms. They share the twomain characteristics of the traditional entrepreneur, as they are creating an innovativenew concept that requires an initial investment cost (e.g. to develop the software) andthe take up of which is uncertain. The classification of the providers that participate inthe platforms is more problematic. Such “micro-entrepreneurs” may use platformsonly occasionally, or regularly to “top-up” income from a full-time job, combining themin a “portfolio” of different earning sources or even engage in the activity for nonfinancial motivations. In this way these individuals often do not exhibit the uncertaintyand innovation that define traditional entrepreneurs, and will not behave or respond toincentives in the same way as traditional entrepreneurs. However, it should be notedthat this picture is complicated by the multiple variety of individuals that engage withthe collaborative economy, often including professional traders using platforms as anew channel to market, and these individuals may respond more in line with the“traditional entrepreneurs” described at length in our review.To study the link between taxation and entrepreneurship, the report identifies therelevant entrepreneurial choices that may be affected by the tax system. Namely,taxation can influence the choice:a)b)c)d)e)f)g)to become an entrepreneurof the legal form of businessto investto use internal or external financewhere to locate the businessto hire employeesto comply with taxes or move to the informal sector.By surveying the literature, the reports points out which type of taxes may be relevantfor each choice and describe both the features of the current tax systems that can bean obstacle to entrepreneurship, and the way through which the tax system can bedesigned to actively encourage it.“Micro-entrepreneurs” operating within the collaborative economy face the samechoices as traditional entrepreneurs over whether (and how/to what extent) to engagein their form of entrepreneurship, and whether to comply with taxes. However, theremaining entrepreneurial choices are less relevant, and our review has identifiedexisting issues in the tax system that the collaborative economy has exacerbated,such as identifying the commercial nature of transactions, as well as new issues thathave arose as a result of its emergence, such as the potential for unequal competitionbetween individuals providing similar services.The survey of the economic literature is complemented by a series of case studies toillustrate how selected countries have tackled relevant aspects of the relationshipbetween taxation and entrepreneurship and what tax policies they have adopted tosolve critical aspects emerging in entrepreneurial activities in the traditional andcollaborative economy. The countries covered by our case studies on entrepreneurshipin the traditional economy are Denmark, Italy and Latvia; those on entrepreneurshipin the collaborative economy are Estonia, France and the UK.The report combines the results of the literature review and of the case studies todeliver a framework of analysis, which illustrates the available policy options to reducedistortions and to enhance the level and quality of entrepreneurial activity.October 2017 6

European CommissionLiterature review on taxation, entrepreneurshipand collaborative economyKey findingsThe review of the literature and the case studies cover many tax instruments thatcould affect entrepreneurship. Here we summarize the policy options, which findstronger support in the theoretical and empirical literature and that are observed incountries covered by the case studies. We group them in three broad sets according towhether they target entrepreneurial risk, costs or returns. We have indicated belowwhere these policies also apply to the collaborative economy – however, we havefound that the specific characteristics of the collaborative economy have largely raiseddistinct challenges for policy makers which require different policy responses, whichwe discuss separately.1. Policies which can reduce entrepreneurial risk.Provision of full offset of business losses may encourage risk taking by reducingthe asymmetric treatment between gains and losses that results in a “success tax”. Inparticular, full offset of initial losses in new firms may be beneficial for entrepreneurialstart-ups, given potentially large upfront cost to develop new products or businessmodels. However, this may be difficult to implement when firms, at their initial stages,do not have enough income. In these cases, innovative solutions such as thepossibility to match losses with taxes other than the income tax, or even totransfer and negotiate tax credits, could be experimented.2. Policies which can reduce costs of entrepreneurial activityThe Allowance for Corporate Equity (ACE) reduces the cost of financing throughequity, by allowing the deduction from the corporate tax base of the imputed cost ofequity. This may be particularly relevant for entrepreneurial firms that have usuallymore limited access to debt financing. Italy offers an interesting example on how toimplement an ACE for both incorporated and unincorporated firms in a way that limitsthe revenue loss and favors new firms.A tax credit on expenditure in R&D seems to be a very effective way to encourageinvestments in R&D. There are three main elements that influence the effectiveness ofthis policy: the design, the complexity of the procedures and targeting. Volume-basedR&D tax credits (applied to the total amount of R&D expenditure) are preferred toincremental ones. In addition, refundability should be granted to allow firms to makefull use of the incentive. One-stop and on-line application procedures reducecompliance costs; targeting may be achieved by restricting the tax credit to young andsmall companies and by favouring specific types of R&D. Denmark, Italy, and Latviaoffer specific examples of how these policies are implemented and illustrate thechoices faced by policy-makers in designing them.Simplified taxation regimes for small firms may encourage entrepreneurship byreducing compliance costs, since their burden is disproportionately large for smallfirms. There are two main tools to implement a simplified tax scheme for smallentrepreneurial firms: the use of thresholds for income and VAT taxation and theadoption of presumptive taxation. Although simplified systems may have positiveeffects on compliance, the literature suggests that they should be coupled withincentives for firms to enter the normal system, otherwise they may be an obstacle tofirm growth. Examples of adoption of simplified taxation are provided by Italy andLatvia, whereas the United Kingdom has proposed specific allowances for microentrepreneurs. Italy, in particular, has long used simplified tax regimes and offers anexample of the difficulties in finding the right balance between their pros and cons. Asimplified tax system may be particularly encouragi

Taxation Papers are written by the staff of the European Commission’s Directorate-General for Taxation and Customs Union, or by experts working in association with them. Taxation Papers are intended to increase awareness of the work being done by the staff and to seek comments and suggestions for further analyses.