Lowtax Network

Back To Top

no regulation without taxation

Kitty Miv, Editor
03 April, 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.

By definition, this is supposed to be a somewhat light-hearted look at developments in global taxation. But it's no joke for natural resource companies operating in Africa at present.

Resource nationalism, if it ever went away, is now back with a vengeance, and several companies have found themselves on the receiving end of unrealistic and seemingly arbitrary demands for back taxes in recent weeks and months. First Quantum Mineral's receipt of an assessment for back taxes in the order of USD8bn is but one of the latest examples. To put that amount into some sort of context, it is double the amount the Zambian government collected in tax revenues last year.

This was not even the most extreme of recent examples. Last year, Tanzania's revenue authority served up an incredible back tax claim of USD190bn on Acacia Mining, an amount almost four times the size of Tanzania's entire project GDP for 2018. Something doesn't quite add up here, does it? Nevertheless, these demands are merely part of a renewed trend that is resulting in natural resource companies question their investments in certain African states. In one notable example, several mining firms recently pulled out of the chamber of commerce in the Democratic Republics of Congo amid recent tax changes.

So why do some governments behave in such a way? After all, for all the criticisms the mining sector receives about its operations in the developing world, mining firms are a major source of employment, often funding vital infrastructure projects, and providing substantial tax revenue. So, making the operating environment so difficult would hardly appear to be a sensible economic strategy. I'm guessing that certain African governments, particularly those with acute budgetary problems, are playing to the gallery, a show of strength to the people against the rich mining firms, all the while hoping that the companies will quietly settle for a billion or two, maybe even a few, to make the dispute go away. And then things will carry on as normal, until the next fiscal crisis.

For small businesses and their owners, tax reform in the United States is hardly turning out to be a barrel of laughs either. This is, of course, a contentious point, and those responsible for pushing through the Tax Cuts and Jobs Act last year would hotly dispute the accusation that the tax reforms favor large corporations to the detriment of SMEs, especially as small firms are the backbone of the US economy. Therefore, it follows that they would be unlikely to go out of their way to upset them. Doesn't it? That would seem like a logical argument to make. However, it is undeniable that the TCJA has given individuals in business some very tough choices to make, even though they are not yet armed with sufficient informational tools to make them.

The Democrats are certainly attempting to make some political capital out of this. A report released recently by Senate Finance Committee Ranking Member Ron Wyden (D-OR) says that the TCJA has resulted in financial uncertainty for small firms and suggests that the new pass-through deduction could result in small business owners spending more on tax professionals' advice than on growing their operations. Wyden also pointed how the tax deduction picks winners and losers: "architects are in, accountants are out; engineers made the cut, doctors did not," he said.

At least accountants will be able to recoup what they lose in tax terms by advising all those wealthy doctors, I suppose.

Certainly, the accusation could be leveled at Wyden that by raising this issue, he is trying to score political points. But other tax concerns have been flagged by organizations representing the interests of US expats, including those affiliated to both major parties, and those with no particular political leanings. Specifically, they are worried that the transition tax on deferred foreign income and its reporting requirements will cripple individuals with interests in controlled foreign corporations with a heavy tax burden, and they are calling for the introduction of a transition tax de minimis rule.

The fact that nobody apparently foresaw such problems when the TCJA was being legislated would tend to support the view that the tax reform legislation was rushed through Congress. So, in a sense, with many legislative and regulatory loose ends still to be tied up, tax reform remains only half done.

Companies in the remote gambling sector aren't exactly having a happy time of it either, as they face an increasingly dangerous tax and regulatory minefield in the jurisdictions in which they operate, especially in Europe. Two recent cases highlight how the European market has become something of a lottery for the remote gambling sector. The first was in Germany, where a recent court decision appeared to all but slam the door on e-gaming and gambling firms, but, with this ruling apparently contradicting earlier jurisprudence, including from the EU courts, this situation is far from clear. The other was in Belgium, where remote gambling firms won a major tax victory after legislation that imposed value-added tax on the supply of e-gaming services, while leaving the legacy gambling sector exempt from VAT, was annulled.

Culturally, some countries, including in Europe, have been hostile to the gambling industry, and governments have seen it as their role to protect vulnerable citizens against the scourge of gambling addiction. However, just as it has done with most other areas of life, the borderless world of the internet has come along and completely changed the game. And governments have reasoned that it is probably better to open up to the gambling industry and keep a firm eye on it through regulation, rather than turn a blind eye to those gambling and gaming on their home computers.

Despite these contradictory developments, we are nevertheless witnessing a trend of "liberalization" in the gambling markets, as legislatures pass laws allowing foreign providers to compete with domestic counterparts and lifting bans on e-gaming. However, as we know, the word "liberal" has become increasingly flexible in its meaning. And in the context of the gambling industry, "liberalization" usually means "regulation." And for many governments, there is to be no regulation without taxation.

The price it seems for access to the internet connections of country's citizenry is tax. And the industry is often heard to bemoan how these taxes often make their businesses uneconomic. Poland, for example, introduced a 12 percent tax on the turnover (not profit) of sports betting operations as part of a new regulatory framework, then sat by and watched as an exodus of bookmakers became a stampede. With rumblings of discontent in the industry over the Dutch Government's new gambling regulations, which will impose a 29 percent tax on gross gaming revenue in July, I'm willing to wager that gambling firms won't exactly be falling over themselves to enter the Dutch market.

Nevertheless, for the remote gambling firms, the penalties for defying regulations or prohibitions on gambling can be severe in many jurisdictions, not to mention the reputational damage a company may suffer from having its name dragged through the mud by the authorities. Anybody who's been to Las Vegas knows that the house never loses. Perhaps the world of tax is the exception.

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

Belgium gambles



Tags: Euro | Government | Gaming

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 »