A walk in the park
Kitty Miv, Editor
13 June, 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.
Well, it's been another mixed week for US tax reform. First, the good news. Last week, the Internal Revenue Service announced that, in certain circumstances, relief from tax penalties will be offered to those struggling to come to terms with the new transition tax. This demonstrates that Treasury and the IRS have at least been listening to the concerns of tax practitioners and other tax campaigners that a law primarily aimed at large corporations could swamp smaller taxpayers with new reporting and administrative requirements.
Now the bad: we saw more suggestions last week that the TCJA, or certain aspects of it, have not only muddied the tax-planning waters when the intent was to make them clearer, but has also become a law of unintended consequences. Indeed, that the IRS felt compelled to provide transition tax penalty relief in the first place shouldn't really be a cause for celebration.
Not only this, it's difficult to deny that it is also becoming a law of unintended consequences. A key aim of the reform was to reverse a situation whereby companies were perceived to be rewarded for investing and holding profits overseas and effectively punished for investing profits in the US. However, as a recently published critique of the TCJA's international tax provisions by the Institute on Taxation and Economic Policy (ITEP) concluded, the drafters of the legislation may have merely exacerbated this problem (unwittingly, it is assumed) with the new Global Intangible Low Tax Income (GILTI) regime and the foreign-derived income attributable to intangibles (FDII) deduction.
To cut a long story short, GILTI is an anti-profit shifting measure designed to discourage US corporations from shifting highly mobile income from intellectual property rights to low-tax jurisdictions. But, according to ITEP, in so doing, the GILTI rules have actually created an incentive for US corporations to send their tangible assets abroad. Likewise, the FDII deduction, which is supposed to be a carrot for American companies holding their IP portfolios in the US, might achieve a similar result, says ITEP.
Whether this turns out to be the case or not remains to be seen. It is certainly too early to tell how the TCJA, with its hundreds of changes to the tax code, will affect corporate decision-making in the long-term. So perhaps we should reserve judgment for now. Innocent until proven GILTI, as they say.
Nevertheless, it is certainly the case that US tax reforms are causing a certain amount of competitive anxiety in some of world's major economies, especially in Canada, given that its geographical proximity to the US makes it doubly vulnerable to such competitive pressures. And the results of the International Monetary Fund's latest assessment of the Canadian economy will have done nothing to assuage these concerns.
Often, the IMF's messages get lost behind a thick fog of economic jargon. But in this case its conclusions were quite clear. Its staffers wrote of "economic anxiety," of Canada as "a less attractive destination for investment," of substantial "shifting of real activity and profit," and of the need for a "careful rethink of Canadian tax policy."
Surveys suggest that businesses on the ground in Canada are growing increasingly worried about the future too, due largely to the tax and trade policies of the US. The IMF's report therefore lends some credibility to these fears, which cannot now be so readily dismissed by the Government as the usual call for tax cuts by the business lobby.
However, it is not so clear how seriously the Canadian Government itself is taking this matter. It has at least acknowledged that US tax reform could have an impact on the Canadian economy, and in February Finance Minister Bill Morneau revealed that an analysis of the US tax changes is underway. But it's fair to say that corporate tax competitiveness hasn't been high on the Trudeau administration's list of priorities, and, aside from the ongoing review, there are few signs to suggest a dramatic policy shift on tax, which has hitherto been largely focused on fairness in the individual tax system. So, Canada might be famed for having a leader that's easy on the eye, but as an investment destination, it could be becoming significantly less attractive.
Finally, and one wonders what companies in India are making of tax developments in the US. Given that Indian tax legislation and administration is no stranger to complexity, perhaps they are wondering what all the fuss is about – transition tax? A walk in the park!
Then again, perhaps too many are preoccupied with defending tax positions in court to notice. With companies such as Vodafone locked into a seemingly never-ending cycle of tax claim and appeal, and with billions of dollars of disputed tax locked up in ongoing proceedings in the tax tribunals, India's reputation as the land of litigation where tax is concerned would appear to be well-earned.
But perhaps there is a small chink of light at the end of the litigious tunnel for many taxpayers. And I mean small! According to the Government, expediting the resolution of tax disputes is the Central Board of Direct Taxation's top priority for the first two weeks of June. Well I hope the CBDT works expeditiously. Because that sounds a bit like giving yourself a couple of hours to fell a mighty oak tree equipped with nothing but a spoon – there's certainly going to be quite a lot of oak left afterwards. So, yes, a token effort perhaps. But it's a step in the right direction at least.
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.
United States gilti
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