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many countries have seen partial or total bans on Uber operations

Kitty Miv, Editor
08 January, 2015

Kitty's Kountry Rankings are below, with a description of how they are kompiled. 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.

Vietnam seems to be coming to terms with Uber in a way which will allow tax to be collected on its operations while legacy taxi firms receive some benefit from the revenues they are losing. I'm not quite sure whether this deserves approbation or censure. As with other mold-breaking Internet-based developments, entrenched monopolies, whether they be established taxi firms or central banks, are threatened by such new phenomena, which work outside conventional legal and tax structures, to the benefit of consumers and individuals. Reacting by banning or taxing them is not pro-consumer, and to that extent, Vietnam's efforts to muzzle Uber's operations even before it gets off the ground in the country are reprehensible. So they get an Execration.

Uber's tax structures are indeed complex, and its critics, such as Margaret Hodge, UK Labour Chair of Parliament's Public Accounts Committee, use its fiscal vulnerability as a stick with which to beat the company, although their underlying agenda may have more to do with the defense of existing employment-heavy monopolies. Uber's drivers are self-employed, but unlike most mini-cab drivers are paid out of Uber's credit-card receipts, making it difficult if not impossible for them to cheat the tax-man. The balance of Uber's receipts appear to be divided between national or regional licensed operators and international holding structures, and that's perhaps where there is a chance for BEPS-style tax avoidance, although no-one is suggesting that there is anything illegal as such about Uber's structure. The biggest danger to Uber from a tax perspective may be that its drivers could be classified as employees, and tax authorities the world over are probably exploring their chances of following that route. At first blush, it would seem unpromising: a driver, paying all her maintenance and running expenses, and free to work for any licensed operator (that may be Uber's weakness) seems to be a classic case of self-employment. At all events, one supposes that Uber's lawyers have crawled all over their driver contracts with that in mind.

For Uber's enemies, and there are plenty, the licensing aspect seems more promising ground, and many countries have seen partial or total bans on Uber operations, sometimes as a result of court action taken by taxi operators' associations, and sometimes through direct action by governments. The grounds for such bans are extremely murky, and in many cases there would seem to be a large element of hysteria, whipped up by existing operators. This court activity will run and run, presumably reaching constitutional courts in many cases. Countries taking direct administrative action against Uber (execrations for all of them) include Australia, France, India, South Korea, Spain and Thailand. Government should get out of the way, stop interfering with individuals' freedoms to operate and use motor cars for hire, and concentrate on ensuring a fair and conclusive legal process. There can hardly be a person on the planet who thinks that traditional licensed taxi-drivers are anything other than a conspiracy against the public. Except the taxi-drivers themselves, of course.

It would be carping not to acknowledge Japan's reduction of its corporate tax rate, although it is no great shakes, and still leaves Japan towards the top end of the rates table, currently and ignominiously headed by the USA. It's difficult to believe though that it will be enough to inject real life into the moribund Japanese economy. So one has to ask: what will? And the question can be asked just as well of those European countries which are bidding fair to join Japan in its deflationary stasis. The answer is not to be found in macro-economic nostrums: economic growth happens because individuals make decisions to hire workers, take an entrepreneurial risk, or get a job, if one is available, and not because government pulls a lever. Governments like to think they can influence economies by taking macro-economic decisions, but they are wrong. What Japanese businessperson is going to alter their behaviour even one jot because corporation tax has been reduced by a measly two percent? Ten percent, perhaps, but two percent? And any benefit gained from the reduction is more than wiped out by the reduction in loss offsets from 80 percent to 50 percent. Actually that is a swingeing tax increase of 10 percent for any profitable company with past losses. How can that possibly influence business investment? It is a tax rise, pure and simple. In Europe, of course, there is no question of lowering taxes; they need every penny they can find just to avoid looming default.

So we need to look at the reality of animal spirits at the individual level. Our Japanese hero, Shinzo Abe (no relation) is at breakfast with his wife Yuna. He operates a small sandwich bar, and has nearly finished paying off the loan he took from a local cooperative bank to buy the sandwich stand after losing his salarimen job. He is busy out of sight with corporate lunch orders. "It'is getting you down," says Yuna, "You never laugh any more. And I never see you nowadays. Why don't you take on a helper?"

"You know why," says Shinzo. "I would have to install a toilet, and rest facilities. There is a minimum wage, there is payroll tax, there are social security payments. And there is consumption tax; we already have to charge a high price because of the cost of beef. What if the market gets weaker? If it all goes wrong and the worker is no good, it will cost a fortune to get rid of them, and I might not survive. Then our home would be in danger. It's just too risky."

"But can't you take on a freeter? What about that young lad from the next street, the one who cleans our windows? He wouldn't ask much."

"He's not trained," said Shinzo. "I did ask him, actually, but he lives with his parents and he wants a real job with a corporation. He's not too interested in hard work making sandwiches! If I took him and if he was willing, he would have to be a real employee, with insurance and all the other issues. There are apprenticeship programs, it's true, but he is already quite old. I'm sure he wouldn't want five years as a catering apprentice, and I am not qualified to be his master, anyway."

Very little has been done in Japan to encourage job formation in such situations: no subsidized loans; no entrepreneurial incentives; no tax breaks; no employment subsidies for individual entrepreneurs; no bankruptcy forgiveness or halfway-house insolvency legislation. Of course Shinzo will battle on, on his own, and of course he won't take on an employee. Yuna offers assistance from her aunt, who has recently been widowed, has a substantial pension, and is quite keen to have something to do to take her mind off her problems. She's a dab hand at sandwich-making after a lifetime of putting together her hubbie's lunch-boxes. Yuna will give her aunt small sums of money from her own quite handsome salary as a teacher, and they will get by. It will all be strictly unofficial, and completely outside the recorded economy, and of course no tax will be paid. But a small business with the capacity to become a larger business will be stultified, to no-one's benefit at all.

With minor differences, we could have been talking about almost any Eurozone economy. Until Governments get down and dirty with the reality of life as it is lived in the tenements of Naples, the banlieus of Marseilles and even the back streets of Dusseldorf, there won't be any answer to the problem. There has to be a bonfire of regulations, and widespread abandonment of taxation for start-ups; then, and only then will animal spirits ignite into a blaze of creativity and new jobs. Unfortunately, they are not capable of thinking that way in the Treasuries of Europe, and if they were, the unions and the lawyers would soon stop them.

 

Kitty's Encomiums and Execrations

Methodology: each week (this is the 138th) 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:

Japan one step forward...

And Kitty's Execrations:

Vietnam anti-consumer

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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