Important Pieces Of The BEPS Puzzle
Kitty Miv, Editor
28 November, 2017
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.
Are we in danger of seeing the wheels fall off the BEPS vehicle? If multilateralism is supposed to the be lynchpin holding the whole thing together then some members of the international community, intentionally or not, seem to be doing their best to pull it out. And the danger is that the wheels could go careering off in different directions, which surely helps nobody.
The European Union is one party in an awful hurry to find solutions to the riddle of the digital economy. Indeed, EU Competition Commissioner Margrethe Vestager more or less threatened to wrest the digital taxation project from the OECD last week, when she said that the Commission would publish its own proposals for more effective taxation of the digital economy early next year if the OECD hadn't got its act together by then.
Some would applaud the European Commission for taking this issue by the scruff of the neck and dragging it forward, given the public outrages over the tax affairs of big internet-based companies. But equally there is a danger that rushing to quell public uproar could result in measures that are ill-conceived and have unintended consequences in practice. And perhaps this is the reason why the OECD isn't moving as fast as the EU would like, because it recognizes that there are no easy answers, and that blunt tax instruments (as the EU's proposed equalization has been described) tend, by definition, to result in collateral damage.
As many have observed, taxing company revenue is a major departure from international norms in taxation, and could lead to instances of double taxation, not to mention legal uncertainty with regards to the application of double tax avoidance treaties. And as the OECD's final report on BEPS Action 1 acknowledged, it would be difficult, if not impossible, to "ring-fence" the digital economy from the rest of the economy for tax purposes because of the increasingly pervasive nature of digitalization.
The strong response to the OECD's latest consultation on the taxation of the digital economy – it received comments from a total of 62 stakeholders, an unusually high number compared with the responses received in earlier consultations on BEPS Action items – certainly suggests that taxpayers and other stakeholders consider this to be one of the most important pieces of the BEPS puzzle. And by extension, this calls for considered and measured responses from the relevant authorities. Marry in haste, repent at leisure, as they say.
But perhaps the OECD is fighting a losing battle against unilateralism, which seems to have taken root in certain member states of the EU, ironically, since the institution's intention is to bring about unity. The UK, to name one culprit, has a growing rap sheet of unilateral misdemeanors. The controversial diverted profits tax (DPT), which was put in place before the final BEPS recommendations were published, and which attempts to catch profits artificially shifted to low-tax jurisdictions in the UK tax net and subject them to a special tax, is a prime example. And the 2017 Budget, announced last week, featured another experimental BEPS measure, in the form of a new withholding tax on royalty payments, and payments for certain other rights, made to low- or no-tax jurisdictions in connection with sales to UK customers. I can already foresee that "in connection with" is going to be the key (and troublesome?) phrase here...
Yet, the UK is fast heading towards becoming a low-tax jurisdiction itself, albeit for just for corporate tax purposes. By 2020, it will have a corporate tax rate of 17 percent, which is just 0.5 percent above the current level of corporate tax in Hong Kong, and the same as that in place in Singapore. Certainly, corporate tax of zero percent, as remains the case in many offshore jurisdictions, is hard to beat. But take those territories out of the equation, and the UK must be very competitive on corporate taxalready.
Therefore, it could be argued whether there is a desperate need for such measures. The UK expects to collect a relatively small amount of revenue – about GBP200m (USD267m) – from the new withholding tax.
But in a sense, focussing on the tax itself might be to miss the point; this is designed to change the behavior of multinational entities, in a way that exposes them to more UK corporate tax in the first place. Just look at the revenue figures for the DPT. According to HMRC, GBP137m was raised from DPT charging notices in 2016/17. However, the department puts total DPT yield at GBP281m for the year, with the remainder due to behavioral change.
Whether these amounts represent success or failure is debatable. You could say that, in combination, the DPT and royalty withholding tax revenues are not insubstantial returns from what superficially appear to be two tweaks to the corporate tax system. On the other hand, multinational taxpayers would likely counter that these are hardly "tweaks" to the UK tax regime, given they are designed to encourage them to restructure their tax affairs, and the additional revenue raised may be more than offset by the decrease in business and investment that targeted companies will do in the UK as a result. Nevertheless, ultimately, these moves are as much about the Government being seen to be doing something about BEPS.
As to the remainder of the Budget, a mixed bag is probably the best way to describe Chancellor Philip Hammond's announcements. Given Brexit-fuelled uncertainty, we were never likely to see anything spectacular. Indeed, it carried on the tradition of tinkering at the edges of the tax regime, without doing anything significant to improve it. At least now, we only have one UK Budget to contend with, after Hammond moved the announcement from spring to autumn and replaced the Autumn Statement (effectively Budget No. 2) in the process. So UK taxpayers should be grateful for small mercies. On balance, this commitment to stability earns Hammond an encomium. But only just.
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.
European Union usurper
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