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Talk The Talk, Walk The Walk

Kitty Miv, Editor
22 June, 2015

Kitty's Kountry Rankings are below, with a description of how they are kompiled. 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.

If the European Union put as much effort into making taxes more competitive as it does to enforcing those tax laws, surely it would be the most powerful economic area on the planet. But it hasnt. And while it is true that the EU economy is the largest in the world in nominal GDP terms, the recent economic travails of some of its constituent parts have exposed many of the failings of the European system. Yet it continues to be one-way traffic. The recently announced corporate tax plan was dressed up by the European Commission as a series of measures to strengthen the Single Market for businesses. But it will merely serve to stifle tax competition further, being increasingly frowned upon in Brussels. The central pillar that the plan seems to rest on is the proposed Common Consolidated Corporate Tax Base, or CCCTB for short. As the name suggests, this would harmonize the 28 disparate tax bases of EU states into a single tax base. At first glance, the CCCTB appears a sensible measure that could save companies hundreds of millions of euros in compliance costs (EUR700m, according to the Commission, and a further EUR1.3bn through consolidation). Predictably, though, there are many drawbacks. Getting the technical design right is going to be a near-impossible task for the EU. For example, member states have differing interpretations of what constitutes business and non-business income, and a requirement to segregate business and non-business income and costs would introduce subjectivity and uncertainty into the determination of taxable income. And how will income and tax be apportioned between member states? A complex allocation mechanism could heighten the risk of more regular transfer pricing disputes occurring, defeating the purpose of the CCCTB, which is to reduce to compliance costs and increase tax certainty. Also, lets not forget that some corporate tax regimes in the EU are considerably better than others, and the better ones are going to lose their advantage as a result of this. But then the CCCTB isnt really about saving companies money anymore, is it? Its more about trying to stop them from avoiding tax, regardless of whether it makes a member states corporate tax regime better or worse. One country cant erode anothers tax base if there is only one tax base! Having said all of this, the CCCTB has been a tough sell for the European Commission. It was first proposed in 2001, but the idea has largely lain dormant. BEPS may have breathed new life into the proposals, but as long as Ireland, the UK, and a select few other member states continue to jealously guard their tax sovereignty, there wont be a CCCTB.

The Affordable Care Act – or Obamacare, as it is more popularly known these days (I suspect more disparagingly rather than affectionately) – is still a hugely divisive piece (or, to be more accurate, pieces) of legislation that highlights the ideological schism separating most Democrats from most Republicans in the United States, probably more than any other. Its something Im not going to pass judgment on here directly, except to say that the health care reforms are hugely expensive; involve a lot of taxes (about 50 of them); and perhaps could have achieved the same goals in a less clumsy way. One particularly ill-thought-through measure is the medical device tax. Obamacares supporters might argue that it is only right that big pharmaceutical companies pay a small portion of their mega profits to help the needy access health care. Except that the medical device tax isnt a tax on profit; its a tax on revenue. And small companies pay it too, regardless of whether theyre profitable or not. It cant be very helpful to the cause of innovation in the healthcare sector, or the advancement of medical science, if companies are forced to use money earmarked for the research and development of new medical devices to pay this tax. Its also encouraging US medical device makers to – using one of President Obamas favorite phrases – ship jobs overseas, with numerous firms said to have already established operations in lower-tax jurisdictions, or they are now actively considering such a move. According to Senator Patrick Toomey (R – Pennsylvania), the Chairman of the Senate Finance Committee on Health Care, 55 percent of clinical trials are now being conducted overseas, and most novel medical devices are now launched outside the US. The fact that Democrats have in the past joined Republicans to seek repeal of the tax suggests that its not just the medical device industry that thinks it was a bad idea. So I suppose the House of Representatives deserves an encomium for voting to scrap the tax, if only because it shows that the two sides can agree on something. Unhelpfully, the authors of the bill have neglected to say how the lost revenue will be offset. And this will give President Obama further justification for wielding the veto over this particular law.

In the beginning, when the internet broke out from its traditional role as a communications device for academics, college nerds, and the US military, offshore was predicted to be the center of the e-commerce universe. By locating websites offshore and in low-tax jurisdictions to carry out functions previously based in high-tax jurisdictions, businesses would be able to take advantage of low rates of taxation for increasingly substantial parts of their operation, or so the theory went. Indeed, in many cases, thered be no need to have a presence “onshore” at all. Obviously, most internet-based businesses have taken full advantage of their almost ethereal presence to pay less tax in places like the US and Europe, and the worlds governments are only now starting to catch up. However, while many offshore jurisdictions talked the talk during the early phases of the growth in e-commerce and the digitalization of services, announcing grandiose plans to become the next e-commerce hub, very few actually walked the walk, and only a select few have been prepared to back up words with solid investment in telecoms infrastructure. The Isle of Man can be considered part of this offshore e-commerce elite group. Indeed, the jurisdictions telecommunication systems are probably among the most advanced in Europe, if not the world. I bet you didnt know that Manx Telecom was the first European operator to launch a 3G mobile service and the first in the world to launch a 3.5G mobile service? And the islands telecoms infrastructure is now so resilient it has almost magical “self-healing” properties in the event of a failure somewhere in the system (called the Tolkien-esque “self-healing ring” by the Government). Its certainly an investment that has paid off, for the e-business sector now accounts for 20 percent of the Manx economy. The island isnt resting on its laurels either, having announced its new digital strategy, which, appropriate enough, was published online last week. It remains to be seen how BEPS affects places like the Isle of Man. Nevertheless, the island is showing the world what can be achieved in the area of technology with a well-thought-out digital strategy backed up by serious investment.

Kittys Encomiums

United States unites

Isle of Man digitizes

Kittys Execrations

European Union harmonizes




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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