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Compromises Looking Unlikely

Kitty Miv, Editor
16 January, 2019

As I posited last week, 2019 is unlikely to go down in history as the year of bipartisanship in Washington. We're barely a couple of weeks into the 116th Congress and look what's happened already: a Mexican standoff between the legislative and executive branches, and between the electorally chastened Republicans and the resurgent Democrats, over money (or the lack thereof) for a wall along the southern border, which has brought the government to a standstill.

For taxpayers, the timing couldn't be much worse. The first post-TCJA tax filing season is nearly upon us, and taxpayers remain unsure whether a) they will actually be able to file their tax returns and b) whether they will receive any refunds due.

For its part, the Internal Revenue Service seems entirely confident that these vital functions will be unaffected by the government shutdown. So much so that it's announced that tax filing will start on January 28, 2019, as planned, and that refunds will be processed as normal, despite the absence of the 70,000 IRS staff on leave due to the funding pause. Maybe the agency has an army of robots in reserve for just such an eventuality. Given the recent dabblings by various governments into the area of robotics and AI, it's not out the of the question. Will this be the time they finally seize their opportunity and take over?

Anyway, back in the earthly world of Washington, and the respective parties in the split Congress have already begun to posture on the issue of tax. In the Senate, Finance Committee Chairman and Iowa Republican Chuck Grassley wants to make permanent the income tax cuts brought about by the Tax Cuts and Jobs Act, which are due to expire at the end of 2025. He is also in favor of additional tax relief measures for those on middle incomes.

The Democrats are unlikely to have any of that though. Indeed, in the land of the Democrats, talk has turned to a corporate tax hike, and even a 70 percent tax on the wealthy. Not even self-confessed socialist Bernie Sanders dared go that far. Not even his reportedly beloved Denmark has gone that far!

Will the parties be able to meet in the middle? Is this going to be a grand tax haggle, where after several rounds of hard bargaining, starting off at ludicrously high/low prices, both parties will reach a mutually acceptable position. Not likely...

So, expect a lot of heat and light in Washington in the coming months, and not much in the way of action. The Republican tax agenda has most probably been stopped in its tracks for the time being by the Democrat takeover of the House. But, equally, the Democrats, lacking the votes in the Senate, won't be able to get up to any real tax mischief either. For taxpayers, this might not be such a bad thing. We've only just got used to the quirks and vagaries of the TCJA. Wouldn't want to spend another year getting un-used to it, would we?

Hot-footing it to Europe, and Nike is the latest multinational company to become embroiled in the European Commission's tax ruling/transfer pricing/state aid investigations. It's probably unlikely to be the last, either.

It's my view these investigations aren't about upholding the state aid rules. They're about the EU being seen to be doing something about corporate tax avoidance. Because the trouble is it's highly likely that the tax arrangements in question are perfectly above board. So it's on shaky legal ground from the off.

For the EU, the probes will have likely damaged its reputation as a place to do business, as for businesses the impact of these cases is less to do with tax breaks and tax avoidance as to do with tax certainty. While we can argue all year long about the rights and wrongs of corporate tax planning, corporations like to know not only what's just around the corner tax-wise, but also what's at the end of the street and beyond the intersection. The actual amount of tax that happens to be is just one part of the equation.

Throwing legal oil slicks in the road, as the Commission is arguably doing with these investigations, can be enormously disruptive for large companies with long-term plans and complex supply chains. Apple's unexpected EUR13bn in tax due in Ireland, to cite one prominent example, was probably not on the company's radar. And now Nike faces the prospect of a potentially similar charge.

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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