*”We have a tax code that has not kept pace with the globalisation that has transpired over the last 40 years. It is time for us to reconsider the rules based on today’s realities and the future unfolding before us.”* So said Assistant Secretary for Tax Policy at the US Treasury, Pam Olson, addressing the Tax Executives Institute in New York City last week. Ms. Olson spoke on a wide range of tax issues, including international tax rules, inversions, and tax shelters.

She described the international tax rules as a relatively small part of the tax code that has caused a lot of headaches, and created a competitive disadvantage for many U.S. companies doing business abroad. She said, *”Viewed from the vantage point of an increasingly global marketplace, our tax rules appear outmoded, at best, and punitive of U.S. economic interests, at worst.”* The Assistant Secretary further claimed that while most other developed countries of the world are concerned with setting a competitiveness policy that permits their workers to benefit from globalisation, the international tax policy of the United States seems to have been based on the principle that *”if we have a competitive advantage, we should tax it!”*

Quoting from Professor Michael Graetz’s book, “The Decline (and Fall?) of the Income Tax”, Mrs. Olson said the internationalisation of the world economy has made it far more difficult for the United States, or any other country for that matter, to enact a tax system radically different from those in place elsewhere in the world. *”In today’s worldwide economy, we can no longer look solely to our own navels to answer questions of tax policy,”* the quote continued.

Pointing out that “inversions” is a problem that is a corollary to the U.S.’s international tax rules, the Assistant Secretary said no one wants to see a company effectively renounce its citizenship for tax purposes; however, inversions highlight two serious problems with U.S. tax laws: (i) the opportunities for reducing U.S. income tax on U.S.-based operations, and (ii) the extent to which the tax laws are out of step with the global economy and the laws of the U.S.’s major trading partners.

The rapid response to inversion transactions by Treasury and both tax-writing committees of the U.S. Congress was credited with having halted the transactions, with this united front reportedly making it unlikely that the transactions will return before Congress has the opportunity to act next year. The delay in enacting legislation was seen as an opportunity for Treasury to consider an appropriate response that will address the “underlying disease” rather than the symptoms. This could involve a reconsideration of many of the U.S.’s international tax rules and removing opportunities to inappropriately reduce U.S.-based income, something Treasury feels must be done without discouraging or harming foreign investment.

On the matter of tax shelters, Ms. Olson admits that there is a lot of cleaning up to be done, but that the effort is underway. She acknowledged that the new disclosure and list keeping regulations will impose an additional burden on some who have never entered into an abusive tax avoidance device, and said Treasury is considering ways to minimise that burden while preserving its goals of increased transparency and certainty. (Note: Shelter legislation the Treasury Department helped to craft was introduced in both Houses of Congress this year, but was not enacted.)

Ms. Olson was of the opinion that citizens should not always need laws to tell the difference between right and wrong or what ought to be done. Currently, the IRS and Treasury are exploring what can be done to implement provisions of the draft legislation on a voluntary basis. *”It is time for us as good citizens to adopt best practices without an act of Congress compelling us to do so. We’ll be considering what action we can take to support the voluntary adoption of best practices,”* she said.

Reportedly, the Treasury Department is developing recommendations for a thorough overhaul of the U.S. tax system, on the premise that citizens deserve a tax system that is transparent, fair, and that assists rather than impedes economic growth. *”Our current system meets none of those objectives. We must step back and design a system that will drive our economic engine through the 21st Century and beyond,”* said Ms. Olson, who also expressed the Department’s commitment to a better and more open dialogue with the public.