As unlikely as palm trees in Pall Mall
Kitty Miv, Editor
10 January, 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.
Despite plunging corporate tax rates across the world, the jury's still out on whether there's truly a corporate tax rate to the bottom occurring. Many have predicted the death of corporate tax in the not-too-distant-future. As I surmised on this subject recently, such claims feel somewhat exaggerated and a tad hysterical. Surely, public opinion would be so hostile to such an eventuality that governments simply wouldn't allow it? It's a safe argument for me; an argument that can only be settled after the next decade or three.
Nevertheless, there can be little doubt that robust competition is taking place between jurisdictions on corporate tax at present, and the recently completed tax reform legislation in the United States, which slashed corporate tax to 21 percent, has probably intensified it. It can't be a complete coincidence that China kicked off 2018 by announcing new company tax exemptions, particularly for foreign-investment-funded enterprises.
I doubt it will end with Argentina, where the Senate recently signed off on a Budget for 2018 that includes a staggered 10 percent cut in corporate tax. Indeed, from the point of view of businesses and foreign investors, if this notably large corporate tax cut triggered a wave of copycat measures across the region, few would likely complain. After all, Latin American countries have gained notoriety for their complex and fragmented tax and regulatory regimes.
Certainly, there is plenty of scope for additional tax reform in Argentina itself, and looking at the country's ease of tax compliance ratings, a simple corporate tax cut isn't going to make a great deal of difference to the lives of taxpayers. This is because taxes on company profits are already small relative to the overall tax contribution of businesses. But, astonishingly, according to PwC, the total tax rate faced by companies in Argentina is still 106 percent.
Argentina has actually made significant improvements to tax compliance processes in recent years, largely through increasing digitalization of tax filing and payment procedures. But, as PwC observed in its latest Paying Taxes report, technology can only achieve so much, as can changes to corporate tax at the federal level. Ultimately, in countries with multi-layered governments like Argentina, there needs to be political reform, before necessary administrative reforms can take place, and there are few signs that this is about to happen.
Indeed, I suspect that most businesses would take a slightly higher tax rate in return for simpler regulations and more efficient compliance mechanisms. In Canada, for example, there are probably lots of small businesses that would willingly forgo the 0.5 percent reduction in their corporate tax rate that kicked in this year to avoid the complex new "income sprinkling" rules, given the ongoing concern about the changes in the small business community.
According to the Government, income sprinkling is a strategy that can be used by high-income owners of Canadian-controlled private corporations to lower their personal income taxes by sprinkling their income among family members who do not contribute to the business. But small businesses have complained loudly that the new measures are onerous, and will punish the vast majority of compliant taxpayers to punish a relatively small number of those pushing at the boundaries of the tax avoidance envelope. So it looks as if it will take more than sprinkling of minor tax rate cuts to keep Canada's entrepreneurs and business owners sweet.
But perhaps we could say that such developments are a negative by-product of corporate tax rate competition. As the gap between top rates of personal income tax and corporate tax grows, so it becomes more tempting for high-earners to limit their exposure to tax by incorporating, which in turn necessitates increasingly complex and draconian anti-avoidance rules to ensure only business income is subject to corporate tax. And, as the example of Canada shows, such measures can be poorly targeted and catch compliant small businesses in the crossfire. However, most governments in jurisdictions with progressive tax systems would never contemplate slashing top rates of personal tax to the sorts of levels that corporate taxes are now at. So I'm afraid this far-from-perfect solution – the anti-avoidance cat-and-mouse game – is likely to remain the status quo.
Finally, I'd like to conclude on a slightly lighter note: the Trans-Pacific Partnership. Not that there is something inherently funny about the TPP. More that the United Kingdom is thinking of joining. Those with even a vague sense of geography will immediately work out the UK isn't anywhere near the Pacific. And as much as some people in the UK are determined to sever ties with Europe, relocating the British Isles to somewhere in the vicinity of Hawaii is a somewhat extreme and impractical measure, to put it mildly. Although, Britons might be thankful for a milder climate.
Of course, in a globalized economy, a country doesn't have to be situated in a certain place to be able to join a free trade agreement. Nations on opposite sides of the planet have arranged FTAs with one another, and many thousands of miles separate the 11 members of the TPP. So there's nothing to stop the UK from asking to join. But would it really want to? And would the TPP11 want the UK on board anyway? The TPP took several years of hard bargaining. Then the US dropped out and the talks had to start again. Therefore, the remaining participants may baulk at the thought of the UK rocking the boat, especially as the hastily rearranged TPP11 agreement is thought largely finished, in which case the UK would probably have to accept the deal largely as it stands.
I like the fact that the UK is thinking out of the box. But this all seems a bit unlikely. As unlikely as palm trees in Pall Mall, perhaps?
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 Kingdom out of the box
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