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a trade war doesn't help matters

Kitty Miv, Editor
21 March, 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.

There are many alternative phrases to describe the sharing economy. One of them is the "collaborative" economy. Collaboration seems to be in very short supply, however, when it comes to the taxation of the companies and individuals involved.

It seems that the attitude of many tax authorities when confronted with new ways of doing business in the digital economy is to tax first and ask questions later. Indeed, in many cases, they just tax, and don't bother with awkward questions.

Uber's business model seems to be a particularly challenging one for traditional tax regimes. Uber insists that its drivers provide "ride-sourcing" services, rather than traditional "taxi" services. Many governments, on the other hand, beg to differ, which puts Uber drivers and the company itself in a very uncertain position with regards to tax and regulation.

It's at this point I would like to single out Estonia as a shining example of how things can be done. Back in 2015, Estonia's Tax and Customs Board (MTA) and Uber decided to establish a working group to discuss the best way forward on tax. It was an approach, said Enn Mestar, CEO of Uber Estonia, that marked the MTA out as "a far-sighted and innovative public authority." Now that's something you don't hear very often!

Unfortunately, most tax authorities are still taking a confrontational, rather than a collaborative, attitude to the collaborative economy, like Taiwan, which recently went as far as freezing Uber's assets in the country, in the latest step in a long-running tax dispute between the company and the Taiwan tax authority.

So perhaps "sharing economy" is the more accurate term to use after all. Because tax authorities are showing little inclination to collaborate with taxpayers, but they still want their share.

Some government ministers learn about the value of consultation with taxpayers the hard way. And the most recent example was United Kingdom Finance Minister Philip Hammond, when, barely a week after he made a splash in his first full Budget by hiking tax on the self-employed, he was forced to retract the measure. Seldom has a government backtracked on a tax measure so rapidly. If there was a prize for fastest ministerial u-turn – the George H W Bush "Read My Lips" award perhaps – Hammond must surely be in contention!

It remains baffling how Hammond could have misjudged the situation to such an extent. The backlash from the small business community and the five-million-strong self-employed community was one thing, but the rebellion within the ranks of the governing Conservative Party was also not surprising – it was always asking a lot for a supposedly pro-enterprise party to support what was effectively an anti-business measure, especially as it also broke a fundamental manifesto commitment.

However, if Hammond had taken the time to consult on the wider issue of the taxation of the self-employed, which, appropriately enough, could have tackled the sharing economy at the same time, he might have made more considered decisions, and I wouldn't be writing about him in negative terms for the second week in a row.

Another act worthy of an execration was Hammond's decision to index Air Passenger Duty to inflation, instead of reducing it, or, better still, scrapping it completely. It's coming to something when the plethora of taxes and fees added to the price of a long-haul flight ticket add up to well over half of the cost of the ticket, as I discovered to my amazement when flying out of Heathrow recently. Indeed, according to the International Air Transport Association (IATA), airlines and their customers are forecast to generate USD123bn in tax revenues for governments around the world this year, up from USD118bn last year. Considering that IATA expects the airline industry to make a total profit of just under USD30bn this year, that's a hefty whack.

However, I'm going to award an encomium instead. Not to the UK, but to Austria, which has decided to reduce its air passenger tax by half from 2018. It'll be interesting to see how Austrian airports perform in comparison to their competitors across the border in Germany, a country singled out by IATA for its high taxes alongside the UK.

Then again, perhaps the Germans won't notice, because much of their attention seems to have been diverted by the possibility of a border tax in the United States, either in the form of House Speaker Paul Ryan's border adjustment tax, or the blunter instrument of President Trump's import tariffs on firms shifting production overseas. And it's not surprising that this issue has attracted Germany's interest, as it has a huge trade surplus with the US.

However, judging by Germany's reaction to these proposals, it seems that the country is unsure what to make of them. On the one hand, a survey of German manufacturers by the Munich-based Ifo institute concluded that – and I quote directly from the English language press release – "companies do not seem to be over-concerned" by the proposed measures. Maybe something was lost in translation, because another report suggested that German business is "terrified" by the prospect of US border taxes. And against the backdrop of Chancellor Angela Merkel's keenly watched visit to Washington for talks with President Trump, senior figures in the German Government have begun to talk openly about the possibility of the European Union challenging the taxes at the World Trade Organization, should they come about.

Germany is not the only one of America's major trading partners to talk in such terms however. Canada recently criticized the border adjustment idea, and, more ominously, China has said it would "respond" to any US border tax measure. What with we're not sure. But the fact that we don't know is part the problem.

Nobody knows for sure whether the US will even proceed with any of its border tax proposals yet, which itself is fueling a great deal of uncertainty among multinational investors. But governments entertaining the possibility of a trade war doesn't help matters either.

So, I'll end this week where I started, by extolling the virtues of collaboration. For taxpayers everywhere, it tends to produce far more positive results than confrontation.

 

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

Austria lift off

Kitty's Execrations

United Kingdom backtracks

Taiwan confrontational

United States provokes


Ciao

Kitty



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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