A warren of rabbit holes
Kitty Miv, Editor
07 August, 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.
There are plenty of things in this life that can do us harm. One of them can be taxation. But not, as conventional wisdom might have it, because taxes are too high, and too difficult to work out. No, in the world of BEPS and uber-transparency, taxes become harmful when they are too low. Or, as the European Union's Code of Conduct Group (Business Taxation), a body tasked with rooting out harmful tax regimes, puts it, when tax measures "unduly affect the location of business activity." Which is quite ironic really, given that the mysterious and shadowy Code Group has itself been accused of operating in a less-than-transparent fashion.
However, despite the time and resources devoted to this matter, the war against harmful taxation has yet to be won. Although, if recent OECD figures are anything to go by, the final push must be just around the corner, with the harmful tax brigade in full retreat. As of May 2018, of the 175 preferential tax regimes assessed in more than 50 jurisdictions since the creation of the BEPS inclusive Framework in 2016, only four were considered as having harmful or potentially harmful features. Moreover, 31 regimes have been changed and 81 regimes required legislative changes which were in progress at the time of the report, with 12 regimes under review. The remainder were not deemed to pose a BEPS risk.
Recent battles won include the suspension of Malaysia's 'MSC Malaysia' tax regime for domestic and foreign information and communication technology-related businesses, and last month, the partial repeal of Thailand's International Headquarters tax system. But will the playing field ever be truly level? More to the point, can it ever be level? As jurisdictions continue to compete on tax, a level playing field is looking more and more like and unobtainable goal. Furthermore, it seems there's another irony here, in that by suspending these tax breaks, Malaysia and Thailand may have provided reasons for business activity, to repeat the Code Group's observation, to be located elsewhere.
A technical victory for the campaign against harmful taxes may well be at hand. But as alluded to above, this hasn't been a quick process, and the harmful tax agenda predates the BEPS project by some considerable margin. In fact, 2018 marks the 20th anniversary of the OECD's landmark report on harmful tax competition – so long ago, that the report's release was closer the previous US tax reform enacted under President Reagan than the one passed under President Trump.
However, when the OECD launched this campaign against harmful, mainly offshore, tax regimes, I wonder whether it ever envisaged that 20 years later, offshore jurisdictions would still be very much in business, and, more surprising perhaps, topping the international tax and legal transparency tables, like Guernsey for example?
If the OECD's mission was to force international offshore financial centers (IOFCs) to change their business models, then it has largely succeeded. Most ring-fenced offshore regimes targeting non-resident taxpayers have long since been dissolved.
Yet most IOFCs are still, well, IOFCs. And many are thriving. How come? It is a success story that can be attributed in large part to certain jurisdictions' ability to change with the times and adapt to a rapidly evolving global economic environment. But perhaps it is also because the cannier jurisdictions recognized fairly early on that reputation – a clean one – was going to be a very saleable quality. And that means cooperating fully with the OECD on such matters, rather than fighting them.
Of course, many would argue that if tax havens are among the most transparent jurisdictions in the world, then there is something wrong with the international standards they are judged against in the first place. But that's a whole warren of rabbit holes for another day. But at least we can now say taxation is officially harmless. Mostly.
Finally, it has been well-documented that the US Internal Revenue Service is struggling to cope with its ever-expanding remit and what amounts to a shrinking budget. Indeed, this subject routinely features prominently in the National Taxpayer Advocate's annual and semi-annual reports to Congress, with taxpayers experiencing declining levels of service and often arbitrary and disproportionate penalties for making seemingly innocuous mistakes with their taxes. You only need to look at the number of bills piling up in Congress promising to overhaul some or all of the IRS's key functions to realize that all is not well with the agency.
Indeed, I'm beginning to lose count of them. Pending, we've got the Taxpayers First Act, the Protecting Taxpayers Act (introduced in the Senate just a couple of weeks ago), the IRS Accountability Act, the IRS Whistleblower Improvements Act, the Ensuring Integrity in the IRS Workforce Act, the Eliminate Failed IRS Oversight Board Act, the IRS Data Verification Modernization Act, [*draws breath*] the IRS Information Technology Accountability Act, the 21st Century IRS Act, and numerous other bills intended to make the IRS more accountable, service-orientated, automated, secure and modern, and less likely to over-reach its authority.
Most of us must know a variant of the old joke "how many [insert subjects here] does it take to change a light bulb?" Well, I'd like to know how many legislative bills it takes to fix a tax authority.
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