One of the Tax Foundation’s principles for sound tax policy is simplicity; tax codes must be easy to comply with, administer, and enforce.

This principle is rarely followed in fiscal policy, although politicians attach great importance to it. Simplicity is especially difficult to achieve in international tax policy, when multinational companies invest and earn profits in multiple countries. The current global efforts to reorganize where companies pay taxes and adopt a global minimum tax are making the problem worse.

The new rules will overlap with a variety of other rules adopted over the past decade. Thousands of pages of legislative documents and guidance have left many companies with more questions than answers.

It’s time to change course and make simplification a reality for taxpayers and collectors.

Imagine you have a garden that has become a mix of plants you meant to be there and unwanted weeds. Then, because he wants different plants in his garden, he proceeds to plant new seeds without removing the other plants or weeds. No one in his neighborhood would compliment him on his efforts. Some may even point and laugh.

That is what is happening with international tax rules. There are taxes on digital services, rules to limit interest deductions, rules about how you determine the prices of items you sell between units of your company, rules that generate additional taxes in the country of your headquarters, and rules about how to align your activities and profits. The United States also has its own special trio of minimum taxes. Without removing any of these rules, lawmakers are trying to introduce a new set of rules as part of the global minimum tax.

This comes with three different costs: adjustment costs, uncertainty, and compliance costs.

Anything new will require a certain amount of adjustment, but the global minimum tax represents a new set of costs for businesses and governments. This includes digging up relevant data that hasn’t been used to calculate tax liability in the past, learning accounting rules that have rarely been used for tax policy, and keeping everything in new systems that are designed to meet the requirements of the rules.

The uncertainty stems in part from new tax legislation that does not harmonize with existing legal frameworks and may require litigation to resolve the real meaning of the new concepts and rules. It also comes from moving targets and a lack of clarity from governing bodies. Final regulations for the new US minimum tax on countable income have not been enacted despite taxpayers being bound by the new rules in 2023. Global minimum tax rules are regularly updated even as countries try to legislate them. It doesn’t help that they include novel definitions and strange new offshore rules that will lead to many legal issues in the future.

When it comes to compliance, both the taxpayer and the tax collector must be considered. TO recent study for the European Parliament found that tax compliance costs account for 1 to 2 percent of business revenue; For a company making a 10 percent markup (many companies would be quite happy with that markup), that suggests a 10 to 20 percent compliance tax on profits. Relative to revenue collected, compliance costs average 30 percent across the 27 countries of the European Union and the United Kingdom.

This administrative burden falls on both taxpayers and tax collectors. There are plenty of skilled people working at large companies these days doing nothing more than navigating through dense legislative material and ever-changing corporate tax standards. Whether or not your work generates significant additional income seems to be ignored. The cost of compliance crowds out other useful activities and uses up resources that could be channeled into new investment, research, and innovation.

Some policymakers are beginning to notice these costs (although much later than they should have). The Organization for Economic Co-operation and Development (OECD) has convened many international debates over the years, and some of its key political officials have begun noting that international tax rules need some attention. They call it a “clutter” project.

So if the garden has become unwieldy or the closet has become too cluttered, how should policymakers determine what should stay and what should go?

There are two possible paths that policymakers can take. One option would be to make generous exceptions to the rules for businesses and transactions that are less likely to be risky. This could avoid having a lot of useless paperwork for taxpayers and tax collectors. To be fair, this approach is already being used for some limited portions of the global minimum tax.

The second path, and certainly the most challenging, would be to go in and really simplify the policy landscape. Duplicate rules need to be reviewed and only the most direct approach for both taxpayers and governments should be maintained. The very nature of an alternative calculation to tax (such as the global minimum tax) suggests that there is some duplication of policy, and something deserves to be in the trash. Attention should win out towards regulations that are more supportive of cross-border investment.

Cleaning up international tax policy will require technical and political leadership. A lot of paper, ink and political capital has been spent getting us into this mess, and it will take a lot more to get us out.

Countries that have legacy provisions for taxing multinationals (such as controlled foreign corporation rules), should eliminate any duplication between those rules and their new minimum tax rules. In the European Union, this should take the form of reviewing the overlap between global minimum tax rules and the various layers of the Directive against tax avoidance.

Arguably, US lawmakers have more work to do with the legacy regimes found alongside the recent 2017 and 2022 rules. Simplification of the US rules should be prioritized, even if the global minimum tax is not part of the discussion.

And that’s a general lesson to be learned here. One of the reasons there is so much complexity in today’s international tax rules is because policy has trumped policy work. Politicians in Europe who were eager to tax big American corporations ignored the growing complexity that now weighs on multinationals around the world (including in Europe).

Leaders around the world must see the value of simplification to achieve this, and they must connect this problem with the other challenges facing countries around the world. The result will be more stability in tax legislation, more legal certainty and less administrative burden for taxpayers and tax collectors.

He UNCTAD World Investment Report 2023 pointed to serious weaknesses in cross-border investment, particularly for countries in Africa and developing countries in Asia. The concern among the developed world is which country is going to outbid the others with subsidies (expect them designed to circumvent global minimum tax rules). In 2022, that report it was clear that the new cross-border rules would increase the tax costs of foreign direct investment (FDI) by 14 percent globally and reduce the stock of FDI by 2 percent.

Simplifying international tax rules won’t solve all the challenges that stand in the way of healthy cross-border investment, but removing unnecessary provisions would be a welcome turnaround from the trajectory of recent years. It is time that policymakers stop looking for increasingly complex rules and start the hard work of simplifying.

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