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Weak and wobbly is what they voted for

Kitty Miv, Editor
13 June, 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.

I'm still not entirely sure whether last week's general election in the United Kingdom was a democratic exercise, or a mass psychological experiment, so often did Prime minister Theresa May try and penetrate the electorate's skulls with the mantra "strong and stable" in the hope they would vote Conservative. If it was, it failed. Weak and wobbly is what they voted for, if anything.

Almost needless to say, these are hardly ideal foundations on which to conduct the Brexit negotiations. Indeed, the whole idea behind the calling of the snap election was to strengthen the position of the Conservative Government, based on a healthy lead then in opinion polls, and by extension the UK's hand at the Brexit negotiating table.

This episode heaps yet more doubt on the direction of UK tax policy. The 2017 Finance Bill has already become a casualty of the election, and corporate taxpayers will be interested to hear if a number of business-related measures will make it back into the second bill, assuming one is introduced.

Furthermore, the new deliberations about what sort of Brexit the UK should aim for has ramifications for long-term tax policy, since the strength of the remaining ties the country has with the European Union will determine such important things as legal supremacy, the jurisdiction of the European court, existing and future case law, and the applicability of EU tax legislation and regulations, notably in the area of value-added tax.

There is already some evidence that these events are worrying businesses in the UK, which could obviously have repercussions for private sector investment in the country. According to a recent survey by EY, the UK, the US and Australia are now top tax risk jurisdictions as a result of legislative and regulatory uncertainty. And that they're ranked alongside India and China in the survey shows just how chaotic things have become.

Another ominous sign was the result of the latest monthly business confidence survey from the Institute of Directors, which was published in the aftermath of the election result. This showed that 57 percent of the 700 respondents were either quite pessimistic or very pessimistic about the prospects for the UK economy over the next 12 months, against 20 percent who were optimistic. This translated to a "net confidence" score of -23, whereas last month it was -3.

Compare and contrast that to France, where Emmanuel Macron has apparently breezed into power like a breath of fresh air, backed up by what is likely to be a dominant majority for his fledgling En Marche! party as a result of recent legislative elections.

It wasn't so long ago that we were writing how France was being led by a government seemingly determined to tax the economy out of existence, and how it therefore faced a bleak and uncertain future. Meanwhile, the UK, brash and confident, was laying out the red carpet for France's entrepreneurs and executives, having announced a series of pro-business tax policies. My word, how things can change! If there's a lesson to be learned here, it's that nothing should be taken for granted.

Include in that the reliability of technology. Anybody unlucky enough to have been booked to take a British Airways flight at the end of last month will be all too painfully aware how dependent civilization has become on computer networks. It's fine when such systems have backs-ups, but if they don't, or these fail too, cue chaos, paralysis, and sleepless nights on departure hall floors.

The business of taxation has also become largely computerized now, a development which has been mostly welcomed by taxpayers. Tax returns can now be downloaded and submitted to the tax authority with a few mouse clicks, so there's no need to worry about vital tax information going missing in the post. Except that tax authority computer systems and databases seem just as susceptible to glitches, error, and fraud as any other network — often with devastating results.

Take Australia, for example. In February 2017, the Australian Tax Office experienced a major systems outage that it took four days to recover from, and this came just weeks after a similar failure in December 2016.

In the US, the Internal Revenue Service's computer systems have seemed particularly vulnerable to fraud, with around 200,000 taxpayer accounts having been comprised in a tax refund scam last year, and billions of dollars in tax credits having been paid out as a result of fraudulent claims and error.

And the UK Government is still counting the cost of a botched IT system used to administer the income tax credit system, a public-private sector initiative which was recently described as "catastrophic" by a parliamentary oversight committee.

So, credit is due to the French Government. It's somewhat hard to believe that a nation of France's stature still does not yet have a system of real-time wage withholding in place for employee income tax payments. But the Government's recent decision to delay the implementation of such a system could turn out to be very prudent. If recent experience has shown us anything, it's that rushing IT systems into place rarely pays dividends. In fact, where governments are concerned, it can turn out be very expensive.

The way things are going, perhaps good old-fashioned paper could make a comeback. After all, as far as I'm aware, I don't know of any way that a manila file can be hacked into from half way across the planet. Then again, in the post-BEPS era of large-scale information reporting and automatic exchange of information, there probably aren't enough trees in the world.

Speaking of which, another major milestone on the worldwide implementation of BEPS measures was reached last week, when almost 70 countries signed the BEPS multilateral instrument (MLI), potentially adding substantially to the page count of thousands of bilateral double tax avoidance treaties.

Generally, this development has been welcomed by tax professionals because the adoption of a single multilateral instrument by countries would avoid the painful and prolonged process of renegotiating approximately 3,000 tax treaties in order to make them BEPS-proof. However, as we've almost come to expect with the BEPS project as a whole, delve beneath the surface and things start getting complicated. Indeed, the MLI could be another example where one set of problems – tax treaty abuse – is replaced by another: complexity and uncertainty.

Problematically, the MLI effectively gives jurisdictions flexibility to pick and choose which elements of the text to incorporate into all or parts of their tax treaty networks. And, inevitably, this has led jurisdictions to take a variety of different approaches to the MLI. For example, in the days since the Paris-held signing ceremony, Canada, Ireland, New Zealand, Switzerland, and the UK have indicated how they intend to amend their tax treaties, and it seems that no one policy is the same – uniquely, Switzerland will implement necessary changes through a combination of the MLI and bilateral renegotiations.

Indeed, as jurisdictions seek to reconcile their approaches, it looks like a substantial amount of renegotiation is going to be unavoidable. And while these renegotiations shouldn't be on the same scale required if there weren't the MLI, this outcome isn't ideal.

With countries choosing different options, life is going to be made yet more difficult for taxpayers with cross-border tax affairs, since they will need to somehow keep track of all these changes. Multinational companies with subsidiaries across many territories could be deeply affected by these measures. Will taxpayers be given new maps to help them navigate this ever-changing maze, or will they be left to find their own way out? That remains to be seen, but this is further evidence that tackling tax avoidance often leads to unintended consequences.

 

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

France refreshed

Kitty's Execrations

United Kingdom wobbly

Switzerland unique


Ciao

Kitty


Tags: Euro | Government


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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