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complications for businesses looking to invest across borders

Kitty Miv, Editor
17 March, 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.

At the risk of sounding old, there are times when I miss the days before 24-hour rolling news; when news programs offered hefty, solid reporting, and newspaper morning headlines really mattered. These days, news agencies constantly scout around for the latest leak or soundbite to fill their endlessly dreary hours of TV, radio and Internet coverage, and government departments and politicians happily oblige, at the very least to make themselves look like they are actually doing something, I suppose, and aren't sitting around on their hands at the taxpayers' expense.

I recall the United Kingdom's annual Budget being a lengthy speech announced on Budget Day alone, and at no other time. As I write this, the UK's Channel 4 news program is covering exactly this issue: back then, the Budget details remained in the Chancellor's red box: there were no pre-Budget announcements, leaks were rare, and there was no "half-Budget" announcement dressed up as an Autumn Statement. While George Osborne has become famous for pulling a rabbit out of the hat at each of his budget announcements, these pale against the "oohs" and gasps of those gathered around TVs and radios to witness Budgets of yesteryears, littered with unexpected fiscal treats or tricks. Budget Day really was a grand Parliamentary event.

All a far cry from today's constant layering and drip-feeding of Budget details pre- and post-announcement.

Back then, of course, there was also no devolution. Tax rules generally applied across the Union. Now, with Scotland continuing to champ at the bit for more fiscal powers of its own (the latest news is that Scotland wants to cut its Air Passenger Duty by half), and Northern Ireland potentially slashing its corporate tax rate to 12.5 percent from April 2018 (in line with the Republic of Ireland's current rate), the UK is fast becoming a confusing mishmash of tax rates and rules that will surely lead to complications for businesses looking to invest across borders.

On the plus side, one might argue that a reduced corporate tax rate for Northern Ireland could be the welcome shot in the arm that is needed. Despite the Republic's post-financial crisis troubles, Northern Ireland very much remains overshadowed by its southern neighbor, so a reduced rate should certainly help level the playing field; that said, I'd say it is worth placing bets that the European Commission will raise concerns over the region becoming a "tax haven" to the wider UK, which already has its arguably problematic Crown Dependencies and Overseas Territories. Then again, with Northern Ireland weighted down by the UK's regulatory regime and keen interest in BEPS, in contrast to the Republic of Ireland, the latter likely has little to concern itself on competitive terms anytime soon.

The European Council, with the Netherlands at the presidency helm, last month released its BEPS Roadmap for the short and medium term. It lays out plans for further work on the Interest and Royalties Directive to include further restrictions on interest deductions, and on the Anti Avoidance Directive, with key focus on tightening controlled foreign company rules across the EU.

This is perhaps an uncomfortable position for the Netherlands to be in; during much of the BEPS initiative, it remained largely silent on the proposals being put forward, choosing to wait for recommendations. And while it has made a few changes to its laws to reflect certain BEPS developments, in part in line with EU requirements, the Netherlands has not done so with the sheer gusto demonstrated by, say, the UK.

There are times, owing to the Netherlands' renowned business-friendly tax rules (a tasty Dutch sandwich, anyone?) and wide tax treaty network, that the Commission and the Netherlands have often not seen eye to eye. It is therefore understandable why, as EU Council President, the Netherlands has had to present the Roadmap as a fait accompli so as to maintain the EU-BEPS juggernaut. So it probably wasn't too helpful that the Dutch Association of Tax Advisers felt the need to draw attention to the potentially negative BEPS impacts on the Dutch economy, thus denting the Netherlands' temporary, shiny EU presidential crown. With the Association bouncing around words like "overkill" and remonstrating that the EU is going beyond the BEPS "guidance" offered by the OECD and instead binding its BEPS measures into law, it seems the Netherlands' silence has turned out to be anything but golden.

In a world in which indirect tax is becoming more a prominent revenue-raiser in many fiscal regimes, the United States is one nation that has largely eschewed the concept of a federal value-added tax. Its uncomfortably liberal Canadian bedfellows north of the land border have had no such qualms, of course, with their various provincial, goods and services, and harmonized sales taxes. However, quite how the US is reacting to a VAT being introduced on its doorstep, in Puerto Rico – an unincorporated US territory – is anyone's guess. Perhaps it has been lost in the more boisterous-than-usual bluster of the US election primaries. Or maybe because there literally is clear blue Caribbean water between the States and Puerto Rico means the unthinkable tax is "over there" and hardly worth worrying about.

Of course, as with any jurisdiction (one word: India) introducing a new VAT system, there have been problems, so it is little surprise that the schedule for introducing the tax has been deferred for several months, from April 1 to June 1, 2016.

Admittedly, the new VAT largely replaces the existing sales and use tax, but it's still a VAT. On US territory (even if it is unincorporated).

Could this be the beginning of a VAT being more seriously considered in a wider US tax reform? That's doubtful. Even a strong argument that reduced income taxes and correspondingly raised consumption taxes could potentially be fairer and more cost-effective is unlikely to have any effect. Unless and until there is a key shift in tax policy away from the taxation of US citizens – wherever they are on the globe – on their worldwide income, while much of the rest of the developed world taxes on a territorial basis, fundamental change and the introduction of consumer-based taxes remain a distant dream. And with a skeptical electorate struggling with the ever more complex rules of the US tax code, it can't really be blamed for suspicion over any major reform put forward by politicians at loggerheads, unable to move from their rigid fiscal stances.

Perhaps the November 8 result can be the juncture needed to significantly move US tax reform forward. But as I often say: hope for the best, and expect the worst. That way, you won't be disappointed, whatever happens.



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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