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A topsy-turvy world

Kitty Miv, Editor
15 February, 2018

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.

In the bizarre and esoteric world of taxation, something good – say a 14 percent corporate tax cut – can also be something bad. Just ask the string of companies which have reported multi-billion-dollar hits to their fourth-quarter and full-year 2017 results because of the accounting effects of the United States Tax Cuts and Jobs Act. AIG and GM, for example, reported one-off accounting charges totaling approximately USD14bn last week, taking both companies into the red.

Indeed, in this topsy-turvy world, something you'd think under normal circumstances would be undesirable, like a financial loss, actually becomes an asset. In this case, the ability to use past losses to offset future income, thus enabling the taxpayer to pay less tax. And, as if to underline the point that there's rarely anything straightforward where taxation is concerned, the value of these deferred tax assets (DTAs) is in direct correlation with the rate of income tax. In other words, the higher the tax rate, the more they are worth. So there you have it. In an almost gravity-defying way, tax cuts can sometimes cost taxpayers, as well as benefit them.

The pain of devalued DTAs is, however, expected to be experienced only in the short-term. Unsurprisingly, companies expect to benefit from a substantially lower rate of corporate tax over the long-term. But not overwhelmingly so. There's plenty of devil in the detail of the TCJA. Many companies expect the benefits of the reduced corporate tax rate to be a least partially offset by an acronym soup of anti-avoidance provisions, particularly BEAT (Base Erosion Anti-Abuse Tax) and the tax on GILTI (Global Intangible Low Tax Income). Indeed, I often wonder whether there's a staffer in Congress whose sole job it is to come up with particularly fitting legislative acronyms. For if taxpayers aren't careful, they could indeed get beaten by BEAT, and made to feel guilty about their GILTI.

Japan is also in the process of making corporate tax cuts, although it has taken a different approach to the United States. While the TCJA contains various nudges intended to influence corporate behavior in certain ways that will, it is hoped, ultimately benefit the US economy, companies have largely been given scope to spend the extra cash generated by tax cuts as they see fit. Japan, on the other hand, has tied the awarding of corporate tax cuts to wage rises and productivity gains. This is not so much a nudge as a push.

On the face of it, there are all sorts of problems with this policy. For starters, it could be difficult to enforce, as companies could struggle to demonstrate that they have raised wages and productivity by the required amounts. Will penalties await those companies which fall just under the required thresholds? What's more, by tying corporate tax cuts to pay rises, companies could be prevented from investing in other ways that may produce a benefit to the Japanese economy.

Ultimately, companies in Japan will have to decide whether the benefit of the corporate tax cut being offered is outweighed by the extra costs and administrative hassle of qualifying for it. By contrast, this is an equation that employers in the US won't have to face, at least not to the same extent, yet many have already announced pay rises as a result of the tax reforms.

Moving on, and I wonder what the aforementioned acronym-maker would make of events in the United Kingdom. They'd be too late now to claim the credit for "Brexit." And in any case, that's strictly speaking a portmanteau rather than an acronym. But I think there's plenty of scope for a scathing acronym relating to the UK's process of fiscal devolution – how about Constitutional Meddling Practically Legislatively Inexplicable – COMPLEX? Or, Not As Simple Today as Yesterday – NASTY? Not bad for a first go, if I say so myself – that staffer had better up their game!

The idea behind tax devolution in the UK is laudable. Traditionally, power in the UK has been highly centralized (although for certainty's sake, this has been a strength rather than a weakness), and you can see why the constituent nations would want more control and influence over local affairs. However, its execution, I would posit, has been highly questionable, and has created confusing layers of tax powers and obligations. Indeed, it's probably fair to say that Scotland's new income tax system has got off to an inauspicious start. According to a report from the UK National Audit Office, GBP26.8m of the extra GBP127m in revenue expected by the Scottish Government from its personal income tax threshold changes will be lost in administrative costs in 2019-20. Furthermore, HM Revenue and Customs failed to identify 420,000 people as potential Scottish taxpayers last year – that's a big chunk for a country with a resident population of less than 5.5 million. I just hope lessons have been learned as Wales prepares for the introduction of the first purely Welsh taxes for 800 years.

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 nudge

Kitty's Execrations

Japan push

United Kingdom nasty



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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