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Who needs enemies when you've got friends

Kitty Miv, Editor
29 August, 2018

If Machiavelli were alive today, I think he would have swapped Tuscany for the Australian Capital Territory long ago (although with a name more suited to 21st century Australia perhaps – MacVelly maybe?). For renaissance Italy has nothing on Canberra in the political machinations stakes after Prime Minister Turnbull became the latest in a growing list of Australian leaders deposed by his or her own party. All told, the last 11 years have seen seven Australian PMs come and go. Who needs enemies when you've got friends – or frenemies.

In fact, the rate at which Australia seems to be going through its prime ministers is making the famously unpredictable Italian system look like a paragon of stability. Age doesn't seem to be a barrier to office these days, does it. In Austria, Alexander Kurz is barely out of his 20s. Before long, aspiring leaders will be barely out of their diapers. Not that this situation is unprecedented. In the 18th century, William Pitt the Younger was a fresh-faced 24-year old when he became Prime Minister of Britain at one of the most pivotal points in its history. So what's next? Terry the Teenager? Timmy the Toddler?

But what has all this got to do with tax? Quite a lot actually. Legal and tax uncertainty go hand in hand with political instability. In Australia, long overdue corporate tax cuts have been on and off the table more times than tableware at an all-you-can-eat buffet as a result of the government's lack of a full parliamentary majority. Now a sudden change of leadership, and maybe of policy too, is being thrown into the stew.

The problem is, even if new PM Scott Morrison wants to resurrect the corporate tax cut plan, it would just be blocked by the Senate, like it was last week, and in the weeks leading up to that, and in the months leading up to that. This raises the prospect of fresh elections (they seem to roll around on a remarkably regular basis too in Australia) to clear the stagnant political air, as a result of which firms may eventually get their tax cut. But taxpayers beware: MacVelly is already writing the next chapter, so who knows what's around the corner.

Certainly, we shouldn't rule out any unexpected turns. We've had plenty of those recently on the political front, and, as we have seen, they can have a major bearing on tax policy. The latest twist comes courtesy of Colombia. There, the newly installed government wants to reduce the jurisdiction's 33 percent corporate tax rate. Nothing unusual about that, you might think, given how corporate tax rates continue to fall, and that 33 percent is considered high these days. More atypically, the Government also wants to raise the tax burden for those at the lower end of the income scale by reducing the income tax threshold. Now that it quite novel. In normal circumstances, you'd think pairing a corporate tax cut with a personal income tax hike on the low-paid would be a guaranteed vote loser, and quite possibly political suicide for whomever proposed it. Clearly, normal circumstances no longer apply.

Now, we all know that corporate taxation entails more than just a simple percentage of a company's profits; it is far, far more involved than that. The 15 weighty tomes that are the final reports of the base erosion and profit shifting project – the fruits of the OECD's countless hours of labor – are a testament to that.

At the heart of it all is transfer pricing. But, mention the phrase "transfer pricing" to the uninitiated, and they will probably return a blank, bovine stare, almost puppy-like in its wide-eyed, head-slightly-tilted innocence. You'd almost see cartoon-esque question marks forming in their eyes. Start to talk about transfer pricing to them for any length of time, and you might be in danger of losing a valued friend or acquaintance ("where're you going? I haven't finished explaining the comparable uncontrolled transaction method yet!"). Forevermore, they would dart into the janitor's store as you approach the office water cooler.

But for those in the know, those of us initiated into the secret codex of international taxation, of multilateral instruments, of hybrid mismatches, of country-by-country reports, transfer pricing is very important. Numerous board-level surveys tell us as much. And not for nothing are four of the 15 BEPS Actions devoted to the subject.

Governments know it too, which is why, emboldened by BEPS, they have become increasingly willing to scrutinize these intercompany pricing arrangements, and in many cases it has been worth their while in doing so. Take the United Kingdom for example, where earlier this month HM Revenue and Customs revealed that in the six fiscal years between 2012/13 and 2017/18, it secured an additional GBP6.5bn (USD8.2bn) by challenging the transfer pricing arrangements of multinationals.

In the United States, the Internal Revenue Service's victory in the Altera case is set to shake-up the US transfer pricing environment (although an impending review of that decision by the same court does subject this to some uncertainty). Hot on the heels of Altera was a federal appeals court decision in the Medtronic case, which again backed the IRS.

There can be few doubts that the ground has shifted considerably in the world of international corporate tax, and it continues to move in governments' favor. Indeed, taxation has probably never been so exciting! Just don't tell your friends.

Tags: 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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