Tax Complexity in the Spot Light
Kitty Miv, Editor
01 August, 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.
A new index on tax complexity around the world was published recently, courtesy of TMF Group, the international professional services firm. There were few surprises therein. The top-end of the index featured the usual rogues' gallery of fiendishly complicated tax systems, many of which were found in Latin America, where taxpayers often contend with three layers of taxation - federal, state/regional, and municipal.
The only surprise perhaps was that Brazil, infamous for its tax complexity, as noted here last week, wasn't top of the overall league table. That unwanted accolade went to Turkey, mostly because of extensive local language and currency requirements, and a long and frequently changing tax code. In short, don't think about navigating the Turkish tax code without the services of a knowledgeable local guide, according to TMF. Istanbul is no longer Byzantium by name, but the nation's tax rules certainly seem Byzantine by nature.
Normal order could be restored, however, when, according to TMF, Turkey reduces the number of articles in the tax code by 200 to 321 as it attempts to align tax processes with those of the European Union, which the country hopes to eventually join – at which point Brazil will probably be restored to the top of the table.
It was also quite predictable that Italy and Greece should figure at the top end of TMF's tax complexity index, with Italy deemed the most complicated place in Europe for companies to figure out their taxes by TMF.
However, worthy of mention is Belgium, which sits at eighth place overall. This country is often cited for its high rate of corporate tax, which at 34 percent is now way out of kilter with the EU average. But taxpayers in Belgium also suffer the double whammy of a complex tax system. Yet, in spite of this, the country remains one of the EU's most-favored business locations.
In something of a back-handed compliment, Belgium is described by TMF’s report as being "very creative" with its tax system, having introduced various weird and wonderful tax measures, such as the notional interest deduction, aimed at both narrowing the budget deficit and encouraging certain types of business in the wake of the financial crisis. The upshot of tax code creativity is, however, tax code complexity, and it must be no coincidence that Belgium is also ranked unfavorably by PwC for ease of paying taxes.
The truth is though, in the world of taxation, creativity is not always viewed as a force for good. Sometimes, dull and unimaginative are qualities that taxpayers want from their finance ministers. This makes their lives easier and more predictable.
But there are signs that Belgium is beginning to row back its creative side. The Government has agreed a Budget for 2018 that slashes corporate tax and attempts to remove some of the more imaginative and complex measures. Much like its neighbor the Netherlands has done in fact, and many other jurisdictions are doing in a post-BEPS world.
The Belgian Government could probably go further towards simplifying taxes, but taxpayers might settle for a few years of "boring Belgium" if it means a period of relative stability.
It's not the purpose of this column to endorse a particular political party or tax policy, even if many tax measures do come in for criticism here. But I don't think it's too outrageous a statement to say that a swathe of America's taxpayers breathed a sigh of relief on learning that the House Republicans' controversial border adjustment tax, routinely abbreviated to BAT, has been quietly dropped from their tax reform blueprint.
But don't just take my word for it. In the past couple of weeks, US automotive industry suppliers, in the form of the Motor and Equipment Manufacturers Association, and the National Retail Federation, which claims to be not only America's largest retail trade association but the world's, have spoken out against the proposal.
The idea also proved to be a bone of contention for committee members and witnesses alike at a House Ways and Means Committee's hearing on tax reform in May. And, the International Monetary Fund has said that the BAT would have a limited effect on US competitiveness but would dent global trade flows.
More crucially perhaps, influential sections of the international community have warned the US that the BAT would be illegal under WTO rules, including Germany and China, and have threatened to challenge it if introduced, raising the dreaded prospect of a trade war.
On the other hand, the Washington-based Tax Foundation concluded in a recent report that the BAT as proposed would reduce tax avoidance and improve revenue collections from multinationals. But you'd be hard-pressed to find anything else good said about the proposal beyond the offices of House Speaker Paul Ryan and Ways and Means Chairman Kevin Brady.
The BAT is something of a novel idea, although it is by no means the first time it has been proposed. It's just that this time it has become mainstream thinking among an influential section of the Republican Party, whereas previously such ideas were located more towards the fringe.
To very briefly recap, the BAT sought to remove a perceived competitive disadvantage for US exporters that arises from sales tax being embedded, without credit, in US goods sold overseas. Meanwhile exporters in countries that levy VATs and GSTs receive zero-rated treatment for their exports, allowing them to recover input tax. Known as a "destination-based cash flow tax," the BAT would have tried to rectify this by effectively taxing imports to the US, and providing tax rebates for exports. Hence the outcry from import-dependent industries like retail and the automotive supply chain.
But in the end perhaps the proposal was too novel. Especially in the current political environment, when Congress has been struggling to agree on fairly basic tax reform measures. Indeed, if dropping the BAT has removed a major obstacle to tax reform - many Republicans had spoken out against it - perhaps it needed to happen.
For my final point this week, I return to the topic of resource nationalism. And as the news sprites would have it, just when I thought things had gone a bit quiet in this area, the mother of all cases has emerged, in the form of Tanzania's spectacular claim for USD190bn in unpaid taxes from the mining company Acacia. And no, that's not an error. It really is USD190 billion, not USD190 million.
To put that figure into context, it's more than the gross domestic product of Tanzania itself, which was estimated at USD150.6bn last year, according to the CIA World Factbook. It's also 190 times Acacia's 2016 revenue.
Wimbledon fortnight may have come and gone, but, surely, Tanzania, come on now, "you cannot be serious!" If this were a tennis match, while the initial shot may or may not have been on the line, the Tanzania Revenue Service has smashed the return into another dimension, and is claiming the ball is in. This might render even John McEnroe speechless.
There has long been an emotive ethical debate about large multinational companies' involvement in poor countries, especially in the mining sector. Studies show that developing economies suffer disproportionately at the hands of BEPS - base erosion and profit shifting - with companies often accused of avoiding large sums of tax in the countries that can least afford it, primarily because they can't afford the systems to police the tax regime that are commonplace in the developed world. But then developing and emerging economies don't help themselves with their track record of shifting the tax goal posts on a whim, and issuing punitive and arbitrary tax assessments. And in this case, punitive is putting it mildly.
One suspects that somewhere in the middle, harmony lies. Tanzania appears to be in a far from harmonious mood though where the mining industry is concerned. And as investors all over the world watch on, its Government is unlikely to be doing the economy any favors.
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.
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