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Outlook mixed for UK taxpayers

Kitty Miv, Editor
26 July, 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.

It's been another mixed bag of a week for the United Kingdom. On the one hand, corporate taxpayers will have welcomed the publication of an updated 2017 Finance Bill, after the previous version became a casualty of Prime Minister May's decision to call a snap election. This should go at least a little way towards soothing concerns about tax uncertainty (if only a teeny weeny bit).

In addition, many small businesses, freelancers, and contractors probably exhaled a sigh of relief when they heard the news that the Making Tax Digital project had been further postponed.

But then there are the negatives, and unfortunately, they continue to be no trifling matters.

The perception that the UK Government has no Brexit strategy was heightened again after pictures emerged of a folderless Brexit Secretary David Davis seated opposite EU negotiators behind bundles of documents. The camera doesn't always show the whole picture, however, and Davis could have had a suitcase full of papers just out of shot, ready to stun Michel Barnier with an intricately detailed Brexit plan which left no stone left unturned.

Nevertheless, many taxpayers and business representatives in the UK are growing increasing worried that the Government has a rather blasé attitude to Brexit, and Trade Secretary Liam Fox's assertion that securing a post-Brexit trade deal would be a "simple" matter, doubtless quickened a few pulses in UK PLC.

Fox may well turn out to be right. But it's probably fair to say that most businesses in the UK, especially those doing substantial volumes of business in the EU, don't share his level of confidence. Still, I want to focus on a positive, rather than engage in a round of Brexit-bashing.

Figures from HM Revenue and Customs show record take-up of the UK film and television tax incentive last year, which suggests that if nothing else, the UK film industry is in good shape.

The interesting thing to note here is that the UK had to run these tax breaks past the European Union before the measure could be introduced, in case they failed the state aid test. So when (if?) the UK finally withdraws from the EU, it presumably won't be required to seek Mother Brussels's permission to support other industries or economically depressed areas of the country with similar tax incentives. Indeed, a clean break from the EU's legal jurisdiction would give the UK a great deal more freedom over its tax regime.

Such freedom would of course have to be exercised wisely by the Government and Parliament of the day, and that's by no means guaranteed. But if things do go wrong, then at least the country's movie theaters should be well attended.

Now, staying on a televisual theme for a moment, the John Cleese award, for "stating the bleedin' obvious," goes to the International Monetary Fund this time, for advising Brazil that it - and its taxpayers - would benefit from a simpler tax regime.

Of course, those who follow international tax developments are likely to be well aware that Brazil has one of the most complex tax regimes in the world for businesses. But for those who aren't in the know, let me apprise you of some of the grizzly details.

Brazil routinely props up PwC's "Paying Taxes" time-to-comply league table, and last year it took the average medium-sized firm more than 2,000 hours to complete its tax compliance obligations. And that actually represented a considerable improvement over the previous year, when PwC put the figure at 2,600 hours.

But what makes Brazil's tax system so nightmarish, when multinational companies are accustomed to tax complexity in the world's emerging markets (not to mention most developed ones too)? The interaction of national and state-level taxation must play a large part, as does the Government's incessant tinkering with aspects of taxation.

Corporate tax, at a headline rate of 15 percent, looks fairly competitive at first glance. But that's before you factor in a 10 percent surtax and a nine percent social contribution, which takes the effective rate to 34 percent.

This isn't an unusual occurrence, with many jurisdictions having effective corporate tax rates well above the headline level. Nor is the fact that taxpayers in Brazil face value-added tax at the federal level.

What is more unique is that firms must also contend with the state level VAT system known as ICMS, several layers of labor taxes, including PIS/COFINS which are based on a company's revenue, and INSS, which is a payroll tax. Furthermore, taxpayers must also be mindful of the IOF, a tax on certain financial transactions at varying rates that are subject to frequent change.

I suppose some credit is due to the Brazilian administration, which has managed to make some progress towards simplification at a time when the country has faced political crises. Nevertheless, if you were starting a tax system from a clean slate, Brazil could be held up as an example of how not to do it.

Complexity is one thing. However, taxing retrospectively, extra-territorially, in breach of international law, or just down-right unreasonably, are probably greater sins in the eyes of taxpayers. And this week's sinner-in-chief must be Romania, which has allegedly dished out an erroneous demand for unpaid value-added tax to Toronto-listed firm Gabriel Resources in retaliation for the commencement of arbitration proceedings against the Government.

Gabriel's accusations are pretty serious. In the press release announcing its decision to file a statement of claim with the World Bank arbitration panel, the company said that Romania had expropriated investment in the country without compensation, impaired its investments with discriminatory and unreasonable measures, and generally acted extremely shabbily towards it, in the process breaching the terms of two investment treaties.

Damning claims indeed, as reflected by the firm's demand for compensation of USD5.7bn. And while it would be unwise to comment until the allegations have been examined by an independent arbitration panel, one gets the feeling that the firm hasn't taken this step lightly. Indeed, Vodafone's treatment at the hands of the tax authorities in India demonstrates arbitration is a last resort, made when a taxpayer feels they have no chance of receiving a fair hearing in the judicial system of the jurisdiction concerned.

Of course, the VAT claim could be entirely coincidental. Gabriel's CEO doesn't think so though. And this affair is hardly selling Romania to foreign investment in a positive light. No smoke without fire, as they say.


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.

Kitty's Encomiums

United Kingdom action!

Kitty's Execrations

Brazil complex



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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