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You live and learn

Kitty Miv, Editor
27 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.

Perhaps one ray of light exists for taxpayers attempting to make sense of the United Kingdom's chaotic political backdrop – there won't after all be yet another "emergency" summer budget. Taxpayers have no doubt had quite enough of summer budgets, autumns statements, and spring announcements, and therefore the decision by Chancellor of the Exchequer Philip Hammond to forgo a post-election fiscal statement in favor of waiting for the scheduled Budget towards the end of this year could be interpreted as a sensible move, allowing time for the dust storm to settle.

On the other hand, it could be argued that if there was ever a need for an emergency budget, it is now. For if attempting to leave the European Union with a weak Government wrought with internal divisions, and with a leader who in political terms looks increasingly like a dead woman walking, isn't an emergency, I don't know what is!

Still, perhaps the pragmatic "spreadsheet Phil," as the Chancellor is rather unflatteringly known by his colleagues, has come to the conclusion that doing nothing, at least for the time being, is preferable to doing something that could quickly backfire (the shambles around raising  the UK's social security levy springs to mind). Indeed, as the Government backfires its way through the Brexit negotiations, it's in danger of earning its own unflattering nickname from its EU neighbors: chitty chitty bang bang. It's to be hoped that the wheels don't completely fall off.

As has been pointed out here before, the only other country to successfully leave the EU was Greenland. And the fact that this particular Grexit took years to come to fruition when the only serious issue at stake was fishing rights doesn't bode well for Brexit. Which is probably why the UK's cabinet minister for Brexit, David Davis, has more or less decided it's not worth trying to extract concession from the EU vis-à-vis the Single Market and Customs Union, and that it would be a better use of time trying to arrive at a mutually agreeable free trade agreement instead.

However, rather than focusing here on the intricate details of Brexit, which are already filling countless column inches elsewhere, it's Greenland's next-door neighbour, Iceland, that I wish to move on to next. And that is because Iceland has done a quite unusual thing in the modern tax environment – announce a cut in its standard rate of value-added tax.

It has been well document that a shift towards indirect taxation has taken place around the world in recent years – a period that has coincided with a substantial fall in corporate tax rates. This has meant that VATs and GSTs – the main sources of indirect tax revenue in most jurisdictions – have increased, both in terms of their rates and scope, or have been introduced where such taxes didn't exist before.

For instance, in the EU, the average standard rate of VAT has moved well above 20 percent, with some member states having pushed rates out to 25 percent or more. And in other areas of the world, there seems to be unrelenting upward pressure on indirect taxes as governments attempt to increase tax revenue without resorting to more visible measures like income tax hikes.

So Iceland, a nation which has been in dire fiscal straits recently, appears to be swimming against the tide with its intended VAT cut. Which is a good move, right? Yes and no. Don't be fooled into thinking that this is some sort of gift from the Government. Since the financial crisis, tourism has been Iceland's fastest-growing economic sector. And as part of the VAT changes, tourism-related services will be standard-rated instead of benefiting from a reduced rate of VAT. This is another example of how taxpayers are kidded into thinking they're getting a tax cut, when in fact their not, or at least not as substantial as the one being advertised.

So, VATs, GSTs, and taxes with similar characteristics are now a major source of revenue for governments all over the world, and such taxes are relatively easy for them to collect and enforce, which is likely another reason they have come into favor. However, consumption taxes are far from perfect. Because if not drafted precisely, VAT legislation is almost guaranteed to keep the tribunals and courts busy come rain or shine.

Viewed from the outside, disputes between taxpayers and tax authorities can arise over the most trivial of details. Trivial to the layman maybe. But for affected taxpayers, it can sometimes be the difference between a viable business and an extinct one.

In one of the most recent examples, litigators and judges in the UK and the EU have expended considerable time and energy arguing whether the card game "bridge" is a sport – and therefore VATable in certain circumstances – or a pastime, and therefore beyond the tax man's reach. And, according to the European court of Justice, bridge, it turns out, is a sport.

As incredible as that decision appears, the key, as I understand it, is not the fact that you're sweating when participating in a few hands of bridge, but that you're competing.

You'd think that there's been enough court cases around the world involving interpretation of VAT legislation for those drafting such laws to realize that their work must be as watertight as possible. But that doesn't seem to be happening.

This is why I fear that the application of India's incoming GST – as mighty an achievement as the new law is for the Government – will be dogged with such problems in the years to come. The fact that the Government has chosen a complex four-tier rate structure, and is already chopping and changing which goods and services fit where within that structure, doesn't exactly inspire confidence.

You live and learn, as they say. Sadly, governments don't!


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 wait and see

Kitty's Execrations

Iceland give and take

India chop and change



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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