A far-from-perfect compromise
Kitty Miv, Editor
11 July, 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.
Some countries procrastinate endlessly over tax reform (naming no names), while others get on and do it. Like China.
Of course, major legislative reforms are a lot easier to undertake when politicians are singing from the same hymn sheet, as they are in China's one-party state. Nevertheless, China has managed to reduce business taxes by almost USD150bn this year alone, and that is an impressive achievement.
The bulk of these tax savings have come from the replacement of the Business Tax regime with a value-added tax, and it is to be hoped that a similar reform in India will produce similar results. There, numerous inefficient indirect taxes have been subsumed by the long-awaited goods and services tax, which was finally introduced on July 1, 2017.
India's indirect tax reform promises to be a transformational, generational change that will unleash the full potential of this sleeping economic giant while modernizing the tax system and widening the tax base. And the Government deserves a great deal of credit for driving the reforms through in the face of hostility from state governments and with a political opposition which initially opposed the reforms for opposing's sake (ironically, the same opposition that proposed GST in the first place when in government some years ago – that's politics for you!).
Nevertheless, this is a reform made by committee i.e. it recognizes several competing interests and consequently is one big, far-from-perfect compromise. And this is reflected in the somewhat complex three-tier state/central/interstate regime, which effectively has two standard rates (one is the norm), in addition to a reduced rate and a "luxury" rate.
One suspects that in a country where most businesses will probably have little or no experience of value-added tax regimes, which by their very nature tend to be record-keeping intensive, this is going to take some getting used to.
There is scope for simplification down the line, for example by consolidating the four rates – actually, it's potentially five, as the legislation allows room for states to apply GST in excess of 28 percent on certain items – to three or two. For the sake of taxpayers in India, I certainly hope the regime isn't added to and complicated further. However, I'm not optimistic.
While China and India have taken substantial strides towards better tax systems for businesses, Deloitte's most recent Asia Pacific Tax Complexity Survey came to the rather unsurprising conclusion that, on the whole, the region's tax regimes remain complex. Except, of course, in Hong Kong and Singapore. Still, the survey did uncover some surprising results.
One key finding was that there seems to be competing forces at work. On the one hand, Asia-Pac's emerging economies have poured resources into projects aimed at improving the predictability of taxation. China was cited as a notable example, where thousands of tax officers have recently received training, resulting in more consistent interpretation of tax laws and regulations, and more predictable handling of tax cases.
Yet these efforts are being undermined on the other hand by frequent changes to tax regimes, which are being made both to modernize tax systems and to integrate BEPS measures into tax frameworks.
Another noteworthy finding was that taxpayers in the region no longer consider tax complexity as their number one concern – they have come to accept complexity as a fact of life of doing business in places like China, India, and other leading emerging economies. No, predictability and consistency are now much more valued by businesses, and in their absence, firms are tending to take much more conservative tax positions.
While complexity is less of an issue now for business taxpayers, it was nevertheless interesting to see that Australia ranks highly for tax complexity, beside Japan, Indonesia, and South Korea. Not only this, the Australian tax authority is particularly vigorous in the pursuit of possible back taxes, with one respondent describing an audit by the Australian Tax Office as the most aggressive the company had ever experienced.
These findings certainly jar against other surveys, which generally rank Australia highly for economic openness and dynamism, and could provide further evidence for those arguing that the country's business climate has deteriorated recently, amid tax policy reversals and against the backdrop of a moderate fiscal crisis.
It does seem to be the case that the Government has stepped up its enforcement of the tax laws where multinational businesses are concerned, and it is of course perfectly entitled to ensure that they are paying the correct amount of tax, and not aggressively trying to avoid it. The much-criticized diverted profits tax, which entered into force on July 1, is one example of this.
However, the Government should be mindful that there is a balance to be struck here. Deloitte's survey shows that companies are prepared to put up with complexity, and not push the avoidance envelope, as long as they are reasonably able to predict the tax outcome of operating in a given jurisdiction. Those jurisdiction in which they can't may well be given a wide berth in future.
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.
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