a legal can of worms
Kitty Miv, Editor
28 December, 2016
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.
Well, that was certainly an interesting year! Indeed, it's difficult to pick out just three or four tax developments in a year that has been so eventful. But I'm not planning on sitting here until Christmas 2017 writing about what happened in 2016, so I'm going to have to try!
Oh, where to start? Brexit? It's not a tax development in and of itself, but it's going to have huge ramifications for tax legislation and future tax policy in the United Kingdom, especially if the Government goes for the "hard Brexit" option i.e. out means out.
Let's start at the beginning of the alphabet. And one can always trust the European Commission to stir things up and upset the apple cart. In 2016 that's precisely what it did, with its demand that Ireland recover EUR13bn in state aid from US technology firm Apple.
EU law experts could argue at length over the Commission's detailed legal justification for its ruling. Indeed, Ireland and the EC are expected to battle long and hard over it in the European Court of Justice over the coming months, and probably years. But in a sense, it is not the legal nuances of the case that are the concerning aspect of this. It's the fallout in store for the tax environment of the EU.
The Apple case shows the lengths that the Commission is prepared to go to combat tax avoidance. This is laudable, but it is also worrying for taxpayers. Much uncertainty has already been generated by the ongoing investigations into private tax agreements between member states and multinationals. But what the Commission is essentially telling taxpayers now is that you can no longer rely on arrangements negotiated in good faith with tax authorities, or tax legislation that may have been in place for many years.
Imagine if the Commission's logic was applied to a sport. Let's say soccer. There was your team, two-nothing up and seeing the game out comfortably. Then some official rocks up and tells the referee that under local law, he's been applying the wrong rules since the first minute. And, actually, your team is 10-nothing down. I'd probably pick up the ball and play elsewhere. Preferably somewhere out of said official's jurisdiction.
In many ways, it's been a year of numbers and milestones, particularly with respect to global anti-tax avoidance and tax transparency efforts. In late November, the OECD announced that the number of jurisdictions participating in the BEPS "inclusive framework" had reached the 90 mark. Later that month, 100 countries concluded negotiations on a multilateral instrument that will transpose BEPS recommendations into over 2,000 tax treaties worldwide. By late July, 101 jurisdictions had committed to exchange financial account information with each other automatically, and more than 50 of them will do so from next year.
These are feats of multilateral cooperation around tax that probably seemed impossible to most just a few years ago, and they are an indication of how determined the international community is to stamp out aggressive tax avoidance and evasion.
Yet, at the same time, it could be argued that perceptions about the level of tax evasion don't quite meet the reality, at least as far as corporations are concerned. For instance, a recent report by PwC showed that the total tax paid by the 100 largest companies in the United Kingdom increased to more than USD100bn this year.
Nevertheless, even though USD100bn sounds like a huge amount in isolation, does this amount represent the "fair share" that many politicians and members of the public demand that big companies pay? Looking at the total amount of tax these companies pay as a percentage of profit might be a better way of tackling this question. PwC's report concluded that these companies are contributing close to 50 percent of their profits in tax costs – of which corporate tax is just one component – so they might argue that they are already paying their "fair share" to the public finances. And the UK is certainly not unique in having a total tax contribution around the 50 percent mark for companies.
It is probably the case that the perception that large companies don't pay their fair share arises because corporate tax is a relatively small percentage of overall tax receipts in many countries now. For example, in the United States, corporate tax revenues accounted for 11 percent of total federal revenues in the 2015 fiscal year, while individual taxpayers contributed almost half.
When looking purely at companies' corporate tax contributions, it is understandable that there is an ongoing debate about how much companies pay in comparison to individuals. However, the fact is that corporate tax has been diminishing in importance as a revenue stream for governments all over the world in recent years, as tax burdens have been shifted away from income and towards consumption.
Corporate tax rates have also fallen sharply as countries compete for foreign investment. In which case, you could say that it is the fault of governments – and the legislatures that vote such tax cuts through – that companies are paying less corporate tax, rather than because of skulduggery by companies themselves.
The United States looks set to follow the corporate tax downtrend after the Republican victory in November's elections – an event that may even trump (ahem) the UK's Brexit vote in terms of shock value.
In a sense, cutting the federal corporate tax will be the easy bit. A headline rate of 35 percent may have been competitive 30 or 40 years ago, but it's not in an era of aggressive corporate tax competition, and Washington is largely agreed that a cut is long overdue. It's just a question of how much to cut it by.
Proposals for some form of "border adjustment tax," on the other hand, may be a harder sell, especially in the form proposed in the tax policy blueprint published by House Speaker Paul Ryan earlier in the year. This proposed measure is designed to level the playing field for US companies penalized by foreign value-added tax and similar systems. But, even though the idea is intended to boost the US economy, it's a controversial one. For starters, US companies dependent on imports, such as retailers of apparel and consumer electronics, could be hit hard. Indeed, a coalition of business organizations has already been formed to fight the proposal in Washington. What's more, the measure could open a legal can of worms in terms of US obligations under world trade agreements.
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.
United States tax reform
United Kingdom fair share
European Union destabilized
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