Well-designed inheritance and gift taxations and equality considerations

OECD report ‘Inheritance Taxation in OECD Countries’

On 11 May 2021, the OECD published its report entitled 'Inheritance Taxation in OECD Countries'. This report explores the role that inheritance taxation could play in raising revenues, addressing inequalities, and improving efficiency in OECD countries. In addition, the report provides background on the distribution and evolution of household wealth and inheritances, assesses the case for and against inheritance taxation, and examines the design of inheritance, estate, and gift taxes in OECD countries. Finally, the report concludes with several reform options that governments could consider when designing or applying of wealth transfer taxes.

Household wealth distribution and death and gift taxes

According to the OECD, household wealth is highly concentrated at the top of the wealth distribution in 27 OECD countries: the wealthiest ten per cent of households own fifty per cent of all household wealth on average, while the top one per cent of the wealth distribution own 18 per cent of household wealth on average. Ranging from nine per cent in Greece to 43 per cent in the United States.

Currently 24 OECD countries levy death and gift taxes. Another ten OECD countries (amongst others, Australia, Canada, Norway, and Austria) have abolished their death and gift taxes, citing a lack of political support, tax minimization opportunities and high administrative burdens for relatively small amounts of revenue as the main justifications for their repeal.

Lack of political support and the negative public opinion

In my view, lack of political support should be considered in parallel with the negative public opinion about death and gift taxes. In my doctoral thesis entitled 'Taxation of Cross-border Inheritances and Donations: Suggestions For Improvement', I partly attributed such negative public opinion to the nature and design of death taxes that can be particularly complex as well as the difficulty of the public to grasp the justifications of death taxes. Complexity should not run, however, against fairness.

The design of death and gift taxes varies widely across countries. The OECD observes in its report that most countries levy an inheritance tax. Denmark and the United States levy an estate tax while Ireland levies a specific type of recipient-based inheritance and gift tax on lifetime wealth transfers. Apart from the type of tax levied in a state, significant differences exist between elements of national death tax laws, for instance regarding the levels of tax exemption thresholds. While they tend to favor close relatives, they vary considerably across countries, ranging from around 17,000 US dollars in Belgium to 11.6 million US dollars in the United States for transfers to direct descendants, as per the OECD report.

The differences in the types and elements of death and gift taxes make the systemization of death tax laws a challenging task. To address, however, the problems of cross-border inheritance and gift taxation, a systemization of inheritance and gift tax laws is necessary. Both the OECD report and my doctoral thesis systemized the death and gift tax laws.

Inheritance and gift taxation is desirable

According to the OECD report, countries can make greater use of well-designed inheritance and gift taxes, based on equity, efficiency, and administrative considerations. Equality considerations are particularly important. In that regard, the OECD observes that there are strong equity arguments in favor of inheritance taxation, in particular of a recipient-based inheritance tax with an exemption for low-value inheritances.

Apart from an exemption for low-value inheritances, an inheritance tax shall also provide for a credit/allowance/tax-exempt threshold regarding wealth transfers to the spouse and direct descendants as a recognition of their contribution to the creation of the ‘mortis causa’ or ‘inter vivos’ transferred wealth.

Most desirable type of death tax

According to the OECD, an inheritance tax levied on recipients may be more equitable, but it will not be as easy to administer. On the other hand, an estate tax is a simple tax but less equitable. A tax on lifetime wealth transfers is, according to the OECD report, a ‘particularly fair and efficient approach’ and has the potential to be the most progressive form of wealth transfer taxation. The tax liability for each wealth transfer would be determined by considering the amount of wealth previously received by the beneficiary, in combination with a lifetime tax exemption threshold. The lifetime exemption threshold could either be a standard amount applicable regardless of the relationship between the donor and the beneficiary, or could provide for additional tax-free amounts for transfers to direct descendants. Nevertheless, according to the OECD report, a tax on lifetime wealth transfers will likely involve additional tax compliance and administration costs.

Problems of cross-border inheritance and donations

According to the OECD report, taxing rights in respect of cross-border inheritances should be better aligned across countries and adequate double taxation relief should be provided. Considering the differences across countries in rules determining liability for inheritance or estate taxation, non-taxation, double taxation, or even multiple taxation may arise in cross-border wealth transfers. Given that double tax treaty networks to prevent double taxation under inheritance or estate taxes are very limited, there might be merit in preventing risks of non-taxation or double taxation by first improving and harmonizing unilateral inheritance or estate tax relief related to cross-border inheritances.

The alignment of taxing rights between the OECD member countries is a very challenging task: there should be a balance between the states’ fiscal sovereignty and such a need for alignment/coordination of taxing rights. In addition, in my doctoral thesis, I considered the administrative difficulties and discrimination of cross-border inheritances and donations two additional problems in the area, next to the double or multiple taxation or non-taxation problems.

All these problems are confirmed by the 1982 OECD Model Tax Convention for the avoidance of double taxation with respect to taxes on inheritances, estates and gifts and the 2015 report of the European Commission (EC) expert group 'Ways to tackle inheritance cross-border tax obstacles facing individuals within the EU'. This is the reason why I believe policymakers can also look at the current mechanisms at the OECD and EU level to address the problems of cross-border inheritance and gift taxation. These problems may not be a burden from the perspective of a state, but they certainly pose problems for individuals who inherit a cross-border inheritance.

Solutions to the problems of cross-border inheritances and donations

There are several ways to solve (aspects of) the problems of cross-border inheritances and donations. For instance, an update of the OECD model can be considered. I note that the model was last updated back in 1982.In addition, a multilateral convention based on an updated OECD model and the EC’s Recommendation 2011/856/EU regarding relief for double taxation of inheritances may also be considered, at least at the EU level. In the same vein, the EU Tax Dispute Resolution Directive can be updated so to apply to disputes arising from the application of inheritance and gift tax treaties.

Finally, the EC may further need to explore whether the concept ‘one inheritance – one inheritance tax’ – as proposed by the EC’s expert group – can provide a holistic solution to the problems of cross-border inheritance and gift taxation. Under this concept, the EU Member State of the deceased’s personal nexus has the right to tax the whole cross-border inheritance under its own rules, with all other EU Member States (including the EU Member State of the objective nexus, e.g., where the property is located) being, in principle, precluded to do so.

In my doctoral thesis, I explore these solutions based on the available mechanisms at the OECD and EU levels. International organizations, policymakers, legislators, tax professionals and academia should not neglect these solutions.