Lowtax Network

Back To Top

it's easy to add to tax codes but difficult to subtract from them

Kitty Miv, Editor
10 October, 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 can't be many areas of life left that the taxman doesn't already know or have the right to demand information about. If you are employed in Germany for example, tax authorities even want to know what you're having for breakfast.

But as it turns out, defining something as easily identifiably as "breakfast" is by no means straightforward, and in Germany it has gone all the way to court.

So what is "breakfast" for tax purposes? According to judges in the German city of Munster, as far as German law is concerned, you're having breakfast the moment a dairy-based spread or fruit preserve makes contact with a bread roll, or, better still, if some cheese or cold meat is involved too. Dry rolls washed down with coffee, as offered by the appellant taxpayer to its employees in this case, is sustenance of sorts, but fruhstuck it's not.

Why is this distinction important? Because if a company gives its workers "breakfast" for free, this could be a taxable event, depending on the sums of money involved. Evidently then, what passes for breakfast in the tax offices of Nord Rhein Westphalian is a far cry from the lavish butter and sausage-fueled spreads enjoyed by the state's justices.

Also, it's a clear indication that something is seriously amiss when tax authorities and taxpayers are prepared to spend large sums of money arguing at great length over something that, to a tax layman, must look trivial and utterly absurd. But such cases are far from unique, and they often involve food. For example, countless hours have been spent in the United Kingdom arguing over the value-added tax status of sweetmeats called Jaffa Cakes, not to mention teacakes and Pringles.

I bet someone warned this would happen when the first tax codes were legislated for in the 19th and 20th centuries. Still, the often sublimely ridiculous world of tax keeps people like us in a job, I suppose, so I shouldn't complain too much.

I think the key lesson to be learned from the evolution of taxation over the last 100 years or so is that it is very easy to add to tax codes, but quite difficult to subtract from them.

We find this happening all over the world. Indeed, a bit like Victor Frankenstein, some countries have unwittingly gone and created some monster tax codes, and in many places they seemingly refuse to be tamed. Just look what's happened in the Philippines: its system of tax incentives grew so complicated that it actually deterred foreign investors. And the Philippines is far from alone in this respect. You might as well start calling them tax disincentives.

The Philippines does manage to redeem itself somewhat this week, with parliament expected to soon approve a long-awaited personal income tax and value-added tax reform bill. This is the first stage of a three-phase tax reform that will see those tax (dis)incentives tackled next year, if all goes to plan.

The United States might also want to bear this lesson in mind as it begins to contemplate seriously the prospect of comprehensive tax reform. For the country has recent experience of watching the forest of tax legislation, regulations, rules, and guidance regrow with alarming speed since the last major tax reform took place in the mid-1980s, fueled in large part by the fertile process whereby Congress caters to special interests. Perhaps, in a similar vein to President Trump's "one in two out" rule on regulation, there should be something like a "one in one out" rule written into the forthcoming tax reform bill, to prevent the forest growing once again to the point where the wood can't be seen for the trees within 20 or 30 years, or even less.

That's assuming there will be a tax reform bill; the lack of progress made towards repealing and replacing Obamacare – the Republicans' number one priority – does not augur well. However, at least the Trump administration appears to be delivering on its promise of regulatory reform (which shouldn't, ordinarily, require the consent of Congress, and is therefore much easier). The latest report on potentially burdensome regulations that are lined up for the chop is likely to have been welcomed by many businesses, especially those expected to be adversely affected by the previous administration's anti-inversion regulations, notably concerning Section 385 of the tax code, which were criticized as onerous and heavy-handed.

As for tax reform though, President Trump and the Republican leadership in Congress might be in need of lumberjacks as much as legislators.

Appropriately enough, I now move north to Canada, a country famed for its forests. But while the US Government is attempting to reduce the tax burden on small businesses, Canada seems to want to go the other way. At least its Government does.

Governments these days are fond of claiming their openness, and their willingness to listen to taxpayers. In Canada's case, the Government says it will "act on what it has heard" during a consultation on controversial reform of tax planning rules surrounding the use by middle- and high-income taxpayers of corporate entities as tax planning vehicles.

But even without an official consultation exercise, the Government would have been hard-pressed not to have noticed the stir these proposals caused within Canada's business community. Barely a week has gone by since the draft legislation was published that somebody hasn't spoken out in vociferous tones against the reforms. Indeed, the small business community's "spontaneous, grassroots response," as Dan Kelly, President of the Canadian Federation of Independent Business, put it, has been somewhat unprecedented.

We know this type of individual tax planning is a very grey area, and it can be difficult to find the line delineating the territory between "acceptable" and "abusive" behavior. Yet governments and lawmakers will insist on setting business taxes much lower than individual taxes, and instead of trying to level the two up, they often prefer to crack down with a legislative sledgehammer. This appears to be the case in Canada, where the Government has badly misjudged the situation, judging by the reaction its proposals. We'll find out soon enough though if it is truly in tune with taxpayers or has selective hearing.

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

Philippines disentangles

United States deregulates

Kitty's Execrations

Germany open-mouthed

Canada blocked ears



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


« Go Back to Blogs

Blog Archive

Event Listings

Listings for the leading worldwide conferences and events in accounting, investment, banking and finance, transfer pricing, corporate taxation and more...
See Event Listings »