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by no means a perfect solution

Kitty Miv, Editor
13 March, 2018

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.

Last August we heard that the OECD's Global Forum on Transparency and Exchange of Information was moving on to the issue of beneficial ownership of corporate entities in its fight against tax avoidance and evasion, and it certainly appears to be the case that once-reluctant jurisdictions are falling into line with this agenda as the next phase of global transparency boundary-pushing gets under way.

As with BEPS, the United Kingdom has set the pace here, having introduced its register of persons with significant control back in 2016. Now, all European Union member states are obligated to put in place procedures for the collection of beneficial ownership information under the Fourth Anti-Money Laundering Directive. Other countries, including Canada and Indonesia, are doing the same.

It was always thought that it would be difficult for the United States to toe this particular transparency line, given that companies are formed under state rather than federal laws. Nevertheless, the idea of greater transparency of beneficial ownership has bipartisan support in Congress, leading to the introduction of the Corporate Transparency Act of 2017 last year.

It is often said that if confidentiality is your thing, then you need look no further than a Delaware or Nevada corporation, and not necessarily to a BVI, Bermuda, or Cayman Islands company. But it is usually to the latter group and their peers that most fingers point when an international tax scandal breaks. But maybe that's a little unfair. Most leading IOFCs now have systems in place to systematically collect and store company ownership information – unlike the majority of OECD and G20 countries. In fact, in 2017, Jersey received an international award from a professional association for its work to enhance the island's central register of information on company beneficial ownership and control.

Offshore jurisdictions have resisted calls to make such data available to the public, pointing out that to do so would make the global transparency playing field decidedly uneven while the rest of the world caught up with their efforts, much to their detriment. Such calls are growing louder though, especially in the European Union, and this could well form the next battleground in the war for greater levels of tax and corporate transparency.

Still, policy makers might be ignoring a crucial question here – will registries of beneficial ownership actually reduce levels of tax avoidance, evasion, and financial crime? The evidence so far is quite inconclusive. Last week, the Isle of Man announced that two-thirds of those who were supposed to provide information under the Beneficial Ownership Act have done so. A remarkably similar proportion of companies made declarations under Jersey's highly-rated beneficial ownership information collection system last year, with 35 percent of expected information returns due by the deadline not filed.

Now, I'm not suggesting that the one-third of company owners that failed to comply with beneficial ownership rules in these jurisdictions have anything to hide. But is it not the case that "clean" companies will have fewer reservations about these rules than dirty ones? After all, what self-respecting criminal is going to enter his details into a government register, to be viewed by the police any time they like, and potentially by the public too? Not to mention the fact that some unsavory types might welcome the chance to use publicly available company ownership data for nefarious purposes? So I think it's fair to conclude that this is by no means a perfect solution.

Remaining on the issue of company formation, and it must be decision time for many business owners in the United States following the introduction of the Tax Cuts and Jobs Act: S Corporation, or C Corporation?

The TCJA was supposed to make tax so much easier for people, for companies, and for people who own companies. But for pass-through entities (S corps) – where business income passes through a company to be taxed at the level of the individual owners or members – things must feel like they have got more uncertain.

True, the TCJA may have cut tax for most pass-throughs by combining the lower top rate of personal income tax with a new 20 percent deduction on business income. But details of what exactly qualifies as business income, and how the deduction will work in practice, was not included in the legislation. And much-needed guidance from Treasury and the Internal Revenue Service is eagerly anticipated. However, the huge corporate tax cut included in the TCJA has added a new dimension to tax planning for SMEs.

The TCJA was designed to allow pass-throughs to be taxed at just below 30 percent, a significant improvement on the prior law, under which they could be taxed at the old top personal rate of 39.6 percent. But corporations, which used to be taxed up to 35 percent, are now subject to income tax at just 21 percent, and can take advantage of generous deductions on capital expenditure themselves.

It will be interesting, therefore, to see if there is a rise in conversions as a result of the TCJA. If it does, I wonder if that was really the intent of Congress at the legislative stage, given that much was made of how the reforms were going to improve the tax situation for pass-throughs.

But then history is littered with well-intended laws that didn't quite live up their billing, or which led to a host of unintended consequences, not least in the area of taxation. And the European Union might be about to add to the historical record with its determination to bring into being a "digital tax," according to a recent critique by the European Centre for International Political Economy.

What's interesting about this is that EU-level tax initiatives – the digital tax included – are often described as EU proposals, which implies they have unanimous support of the member states and the EU's legislative institutions. But in fact, as far as the digital tax is concerned, this is far from the case. Increasingly it seems, "EU" initiatives are not EU initiatives at all, but more like "European Commission/Franco-German + a few other member states" initiatives. The stalled EU financial transactions tax legislation is a classic example. And just look at the difficulties this proposal has encountered, even under the rarely used "enhanced cooperation" (surely a misnomer in this context) mechanism, which bypasses the difficult terrain of consensus-building on controversial matters.

It's dangerous to make too many predictions, but given the EU's political complexities, it wouldn't be too much of shock if the same fate befell the digital tax. It is known that several member states have deep reservations about the idea, with some saying it will be unworkable in practice and possibly economically counterproductive. What's more, other major EU tax files are far from universally supported. Ireland is vehemently opposed to the CCCTB, while the Netherlands is also uncomfortable with it, stating in its recently announced anti-avoidance plan that the idea of a minimum rate of corporate tax, which is fast gaining traction in the EU's core, is not an idea it can back either.

Even the European Commission's much-vaunted value-added tax reforms are unlikely to get an easy ride from member states, if Finland's recently announced reservations about the proposals are anything to go by.

So, while France, Germany, and the Commission are starting to talk about harmonization with a soothsayer's sense of certainty, the harsh reality is that the path towards it is likely to be a long and winding one, with no end in sight yet. I suppose that was always going to be the case with 28 national interests around one table. And it will almost certainly be no different with 27. Maybe "enhanced cooperation" won't be used quite so infrequently in future.

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 States choices, choices...

Finland questions, questions...

Kitty's Execrations

European Union fractured



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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