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Organizing a party without sending invitations

Kitty Miv, Editor
20 March, 2019

Some things will always be incompatible. Australia and carbon taxation? The United Kingdom and the European Union, perhaps? Hong Kong and value-added tax? Germany and tax cuts? How about taxation and digitalization?

Mention of the very word "digital" in the context of taxation seems to visit a collective madness on the world's finance ministers and tax authorities. It's become the tax world's catnip. Politicians who go near it are intoxicated by it. But the effects aren't always pleasant. The most recent meeting of EU finance ministers must have been an entertaining watch!

Finding appropriate tax measures for the digital economy seems to have confounded the European Union, which this week dropped plans for an "interim" revenue tax on digital services. Remember, this is the same EU that is doggedly pursuing an "EU" financial transactions tax, against all the political odds and appeals to logic. After years of division, just 10 member states of the EU bloc are interested and none can agree.

And while the EU is showing no signs of casting aside over a decade's work on proposals for a common corporate tax base, it's thrown in the digital tax towel barely a year after the European Commission released its controversial plans.

There are concerns authorities will take matters into their own hands, now that the EU has dropped its plan for a united front on digital taxation, potentially leading to the creation of a hodgepodge of conflicting laws. On top of this, the US has threatened it will look at legal options to retaliate, on behalf of the mainly US digital companies that would be affected.

For businesses, this stuff is highly toxic. The UK's Chartered Institute of Taxation (CIOT) for instance warned the British Government a few days ago that given the nature of digital taxation, "a pragmatic approach" is required on the issue. "Unilateral measures inevitably lead to less alignment of tax bases globally, resulting in double taxation and a significant compliance burden for businesses and, consequently, stifle economic growth and innovation," the CIOT warned. In other words, all bad.

The CIOT's plea continued: "Multilateral action across the globe is ultimately essential if the aim is to ensure, so far as possible, no double taxation, and we hope unilateral measures can be repealed once a global long-term solution is agreed."

But can mere "hope" triumph over such a seemingly irresistible force. The digital tax idea appears highly contagious. Let's not forget that the UK was one of the first national digital tax unilateralists, having announced plans for a two percent revenue tax last year. Now look. It's spread to France, Spain, Italy – even as far as New Zealand, which last month announced a discussion document on a national digital services tax.

It's not just the taxation of the digital economy that's confounding governments, tax authorities, and of course taxpayers themselves. Digitalization of tax compliance, while seemingly inevitable, is also causing headaches. The United States, for example, has a plethora of IT systems in place, none of which seem able to talk to one another, and some of which date back to the era of The Beatles. The IRS could certainly do with a bit of love at the moment.

At least the UK is attempting, with its flagship "Making Tax Digital" project, to drag tax administration kicking and screaming into the 21st century. "Attempting" being the operative word here. For, despite the fact that most households are connected to the web in one way or another, and that the majority of us are well used to filing things online these days, the project has become a real struggle for HM Revenue and Customs to complete.

How so? Recent research cited by the British Chambers of Commerce suggests that it's not so much the MTD system itself, but a lack of awareness of it among a large section of the business community. That's a bit like spending a lot of time, effort, and money on organizing the party of the century and forgetting to send the invitations.

I wonder if April 1, 2019, when VAT-registered businesses are supposed to begin using MTD, will go off with a bang? Perhaps. But maybe not in a good way. Will this be yet more evidence that taxation and digitalization are a volatile, often intoxicating combination, best approached with extreme caution? We'll soon find out.

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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