A case of keeping your friends close but your enemies closer
Kitty Miv, Editor
22 August, 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.
The sharing economy is supposedly the latest digital revolution to come along and confound the staid world of taxation, giving birth to new business models that seemingly fall outside the traditional realms of tax law. However, perhaps this issue isn't as insoluble as is being made out. Maybe it's a simple matter of just paying your taxes.
Indeed, the message broadcast by tax authorities around the world in sharing economy guidance is for the most part quite basic: declare anything you earn, and pay tax on it.
For sure, there are many tax and legal grey areas in the sharing economy. The line between professional and non-professional (i.e. non-taxable) income is a moveable one. And with regards to ride-sourcing services in particular, the debate rages as to whether these fall within the scope of existing sales tax and employment laws.
But, as a recent working paper by the International Monetary Fund (IMF) observed, many of the tax problems associated with the sharing economy (referred to in the paper as the peer-2-peer economy), stem from plain non-compliance by individuals and companies concerned. In fact, it suggested that as far as tax authorities are concerned, there is little to be afraid of. Services in the P2P economy are invariably shared via an online platform, and these can be the tax man's friend. Because they are the perfect tool to collect and remit certain indirect taxes without the authorities having to lift a finger. Indeed, Airbnb seems to have become the de facto tourist tax collection agency in France.
A case of keeping your friends close, but your enemies closer, you might say.
Nobody is suggesting that the sharing economy should be a tax-free one – a sort of tax haven for the digital age – but few jurisdictions seem to have done much to actually collaborate with the sharing economy, and help individuals and companies overcome tax problems.
We move on from new tax questions now to ones of an older provenance – tax avoidance by multinational enterprises – and from a tax point of view, Diageo's recently published annual report was revealing for a couple of reasons.
First, it showed how large multinational companies are more often than not embroiled in at least one tax dispute across the many jurisdictions in which they operate.
Second, in Diageo's case, one of these tax disputes concerned the United Kingdom's Diverted Profits Tax (DPT). And this development was interesting because this was one of the first times that the UK tax authority, HMRC, has assessed DPT against a company.
The next development of interest will be what happens next in this dispute. And doubtless other multinationals with potential exposure to this charge will be keenly watching how it unfolds, with a view to strengthening their own defences against the tax. However, they'll need a long attention span. Because under the DPT legislation, after a taxpayer is issued with a DPT payment notice (the DPT is a "pay first, argue later" tax), there is a 12-month review period during which the charge may be adjusted. At the end of the review period the business has the opportunity to appeal against any resulting charge, potentially prolonging the dispute further, although the review period can be brought to a conclusion earlier with the agreement of both parties.
It is unsurprising that, given the sum of money at stake, Diageo has chosen to pursue an appeal here. However, some tax experts have wondered, given the wide scope of the DPT legislation, and the fact that the odds seem to be stacked in HMRC's favor, whether taxpayers would be prepared to defend their tax positions if relatively small sums were involved. Indeed, HMRC's Accelerated Payment Notices (APN), under which those accused of using aggressive tax avoidance schemes must also pay up before appealing, has turned out to be pretty successful, and you could say that with the DPT regime, the APN scheme has effectively been extended to large corporates.
It could be argued that the DPT and APNs load the dice too much in favor of the tax authority at the expense of potentially innocent taxpayers, that it presumes guilt before innocence. But hasn't it always been thus? Like governments and sin taxes, tax authorities often profit from your mistakes. Indeed, you could easy accuse them of having a vested interest in tax complexity, because the more complicated it is to complete your tax return, the more likely you are to make mistakes and be fined.
Yes, this judgment does come across as rather harsh and cynical, especially when so much effort is expended by politicians and legislators these days on attempting to simplify tax codes (albeit with little meaningful progress made towards this goal in many jurisdictions). But it can't be an entire coincidence that as the US tax code gets more complicated by the day, more and more taxpayers are paying the price for filing incorrect tax returns, and I dare say that a substantial proportion of the errors are entirely unintentional.
According to Senate Finance Committee Chairman Orrin Hatch, in 1913 the 1040 Income Tax Form consisted of three pages, with one page of instructions. In 2016, that same form consisted of two pages with 106 pages of basic instruction and, depending on taxpayer circumstances, 13 separate schedules with more than 70,000 pages of instructions.
War And Peace is often used as a benchmark to measure the length of the US tax code, and according to Senator Hatch, the code is now seven times the length of Tolstoy's epic tome. And, I would add, infinitely less interesting.
At least life is a lot simpler for taxpayers in some parts of the world. Like Hong Kong. But I'm not sure what to make of Hong Kong's decision to proceed with a lower rate of corporate tax for small businesses.
On the one hand, this is obviously good news for the small businesses in question, and it's hard to knock a Government for lowering somebody's tax liability.
On the other hand, this is Hong Kong's first major foray into the world of progressive taxation, and while many would argue this is a positive development – should a small firm pay the same tax rate as a multi-billion dollar multinational corporation? – there is a downside, and that is that multiple rates of tax tend to increase tax complexity.
True, Hong Kong already offers concessionary rates of tax on income from certain activities, such as fund management and intellectual property rights, but one of Hong Kong's main selling points is that its tax regime is stable and largely simple. It doesn't offer tax incentives as such, because they tend add complexity to the tax system.
Singapore, usually Hong Kong's closest comparator, by contrast has created a vast array of different tax incentive schemes which are often difficult to keep track of. But then again, Hong Kong and Singapore are consistently rated as two of the best places to do business in the world because of their lack of taxes and other bureaucratic barriers, so perhaps there's really nothing to be worried about.
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.
Hong Kong simple
United Kingdom presumptuous
United States weighty
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