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a giant game of legislative whack-a-mole

Kitty Miv, Editor
30 March, 2017

Kitty's Country Rankings are below, with a description of how they are compiled. This week, as every week, I give out Encomiums to countries which have done Good Things, and award Execrations for countries which according to my highly personal and partial views have done Bad Things.

Canada's small businesses urged the Government to cut corporate tax in the 2017 Budget. What they got instead was something entirely unsatisfactory.

It has to be said that the Liberal Government elected in October 2015 hasn't had a great track record on small-business tax issues. After pledging to match the then Conservative Government's plans to continue to reduce the small business tax rate in the lead up to the election, Liberal Finance Minister Bill Morneau promptly backtracked in his first Budget announcement last year, deciding instead to freeze the cut at 10.5 percent and defer any more reductions indefinitely.

Since then the Government has focussed its efforts on reducing tax avoidance, and ensuring that the wealthy and large businesses pay their "fair share." This is all well and good, and a very commendable position for a Government to take. However, the 2017 Budget doesn't go anywhere near enough in addressing the root causes of tax avoidance – the state of the tax code – focussing heavily instead on closing loopholes.

Canada is not unique in this by any means. Almost from the day the first tax codes came into existence, governments and legislatures all over the world have used them to pick winners and curry favor with certain groups of taxpayers. They're then aghast that companies and individuals use the loopholes they created to avoid tax. And the standard response has been to create yet more tax legislation, which while closing one loophole may open one or more elsewhere in the system. Perhaps a policy of removal, rather than closure, might be a better way to tackle loopholes. Because at the moment it's like a giant game of legislative whack-a-mole. And generally, governments are totally useless at it.

Another unintended consequence of a tax code riddled with loopholes is that not only does it provide taxpayers with opportunities to legally (for the most part) avoid tax, it also creates trapdoors for the unwary. This leads to higher levels of conflict between taxpayers and tax authorities than would be the case under a simpler regime.

It is an unfortunate fact of modern life that small businesses suffer most from such adversarial tax systems, because most can't afford to employ armies of tax attorneys to fight their corner, or expend the time necessary to defend themselves.

Indeed, as any small business owner who has been audit will no doubt testify, these procedures can be extremely stressful. The House of Representatives Small Business Committee held a hearing on this very matter last year. It heard how in some cases small firms had shut down as a direct consequence of an audit. As Steve Chabot, the panel's chariman, observed in his introductory remarks: "I know members of this Committee have heard from constituents who were audited so aggressively by the IRS that they had to close their doors. Others are engaged in protracted audits that seem like vague fishing expeditions, with no end in sight."

So, rare praise for the Internal Revenue Service this week for its new commitment to expedite small business tax audits, limiting their length to a maximum of 60 days. That's still an awfully long time for a small business owner to sweat over the implications of an audit, with the prospect of penalties draining precious resources from their firm. But it's a slight improvement on the current situation nonetheless. At present, IRS guidance on small business audits doesn't offer taxpayers any clues as to how long a tax audit may take – not even a ballpark figure. Which hints at the terrifying prospect that one might be audited in perpetuity. So perhaps we should be grateful for this small mercy.

Yes, it's fair to say that the IRS is not everyone's favorite arm of the US Government. But you could probably quite easily say that about any tax authority, anywhere in world.

That said, the South African Revenue Service seems to be actively trying to make itself disliked. Not only is it about to be investigated by the Tax Ombud on charges of deliberately withholding tax refunds to make its revenue collection figures look better, it has also called for Judge Dennis Davis to be removed as head of the eponymously named tax review committee.

These are worrying times for South Africa; the Government is busy attempting to head off economic and fiscal crises, but it appears to be doing so with one arm tied behind its back. Recent and serious claims of corruption have gone to the heart of government, and its unelected officials seem to be faring little better in the public eye, with Davis having alleged that the "erosion of the integrity of SARS was one of the biggest challenges facing South Africa today" – allegations that are behind SARS's call for Davis's removal from his own tax committee.

Not being acquainted with the day-to-day workings of SARS, perhaps the tax authority is entirely justified in describing Davis's accusations as "unprovoked and unwarranted." Then again, taking the tax refund probe into account as well, perhaps a case no smoke without fire?

Last, but by no means least, we come to Brexit. And it was certainly no secret that the British Government intended to trigger Article 50 – effectively the starting gun on its EU exit negotiations – in March. But, for the sake of clarity, at least we now know the date that gun will be fired – March 29 – even if we don't know what the outcome will be. What is significant however, is that the mood music coming out of Brussels seems to be much softer in tone than it was a few months ago.

The latent threat that the UK would be punished for leaving the EU with harsh post-Brexit trade terms seems to have dissipated – for now. Instead, the key actors on the EU side of the negotiations – particularly Chief Negotiator Michel Barnier and Commission President Jean-Claude Juncker – seem more amenable to a mutually beneficial free trade agreement between the UK and the EU.

This may come as something of a relief to UK-based businesses currently trading in the EU. But it doesn't answer the many questions companies have about important tax matters in post-Brexit Britain, especially in the area of value-added tax. Indeed, the British Chambers of Commerce suggested recently that most firms care little about the actual Article 50 process, but care a lot about "an unexpected VAT hit to their cash flow."

Since VAT is an EU tax, the UK Government could smooth the transition to Brexit by assuring companies that the UK VAT system would continue to mirror its EU counterpart for a certain period of time after the deal is done, say five years. This would, to a large extent, avoid the unappealing prospect of the two regimes diverging and causing firms considerable VAT compliance headaches as a result. This principle could also apply to the numerous other EU tax directives and regulations transposed into UK law.

Ultimately there probably isn't much that either side can do to avoid at least some legal and regulatory upheaval. It's just a question of when this will begin, and to what magnitude it will shake things up.

 

Kitty's Encomiums and Execrations

Methodology: each week (this is the 147th) one or more countries are given encomiums and one or more are given execrations. Those are the entries below with descriptive links. In the following week, each encomium counts as + 1 for that country, and each execration counts as – 1, being added to that country's existing score. Over time, therefore, a ranking will build up for each country, and further countries will join the listing. Germany is at minus 2, since in the second week it had an execration and in the first week it had an encomium, leaving it at neutral; then it had an execration in week four, thus dropping to – 1, and another one in week six, dropping to – 2; finally in week 13 it got something right, so it went back up to – 1; then in week 16 it gained a further star, so then it was in neutral territory until week 23 when it dropped back to minus one, but reverting to neutral territory in the following week, then dropping to minus one in week 50, and back up to plus one in week 51, then to plus two in week 52. Some weeks ago it dropped a place, but then quickly recovered one step. Etc etc.

The rankings are intended to be a proxy for business friendliness; evidently they are highly partisan, but as time goes by they are becoming useful for decision-making. For any country in negative territory, you should think carefully before starting a business there.

Kitty's Encomiums

United States expeditious

United Kingdom ready, steady…

Kitty's Execrations

Canada loop the loop

South Africa combustible


Ciao

Kitty



About the Author

Kitty Miv, Editor

Kitty was born in Argentina in 1960 to a Scottish cattle rancher and his Argentine wife. Educated in Edinburgh and at Princeton, Kitty worked for the World Bank as an economist, where she met and married an emigre Iranian banker. During her time with the Bank, Kitty worked in a number of emerging markets, including a spell in the ex-USSR as a Transition Economies Team Leader. Kitty is now a consultant in Brussels and has free-lance writing relationships with a number of prominent economic publications. kitty@lowtax.net

 

 

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