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not quite a postcard

Kitty Miv, Editor
11 July, 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.

Here's a conundrum: How do you go about BEPSifying the entire global network of double tax avoidance treaties – or the majority of them at least – without testing out the theory that time is infinite? You use an instrument of course! By which I don't mean you rewrite the world's tax treaties using the power of song. This is the OECD's BEPS Multilateral Instrument, which is considerably less entertaining. But more effective. Probably.

Given that the MLI went into effect on July 1, it's too early to tell how the changes to be brought about will work in practice. But while it's likely to shorten the global treaty reform process by several years, the process isn't going to be an easy one by any stretch of the imagination.

Here's the thing about the MLI: it's not a one size fits all solution. It's more like 40 sizes fits a few thousand. And the danger of having so many sartorial options to choose from is that you'd never leave the house. How, therefore, are taxpayers doing business across multiple jurisdictions expected to cope with this vast and ever-changing wardrobe of treaty positions, covered agreements, and optional arrangements? The answer is actually quite simple. Get a computer to work it all out for you. Indeed, the OECD is already developing an MLI matching database to help taxpayers navigate this complex matrix of signatories' MLI positions. Thank goodness for that!

But hold on just a minute. Don't get your hopes up too high that this system will solve all the problems. For starters, it's still in beta mode. And, as the OECD itself cautions, it can only provide "projections" of treaty changes in cases where a signatory has yet to ratify the instrument. But, even when a country has completed its ratification procedures, it is permitted to change its MLI positions at any time. Let's hope somebody remembers to tell the computer when the changes do occur, then.

A lot has been said and written about how BEPS changes at jurisdictional level are making life difficult for multinational entities, especially with regards to transfer pricing and audits. But perhaps the impact of the MLI, which will help change the very legal fabric of international commerce, has been somewhat overlooked.

Here's another question for you: How do you go about increasing a tax authority's efficiency? Why, you split it into seven, of course! At least, that's what Denmark has done. And considering the Danes can do no wrong in many people's eyes, and that, as I wrote here recently, the traditionally monolithic super-authorities elsewhere aren't exactly covering themselves in glory at the moment, who are we to argue?

It will be interesting to see how this goes. For me, it feels like there's going to be too many bureaucratic edges on show. Too many administrative gaps for taxpayer issues to fall into and disappear without trace. Will all these separate entities, with their narrow remits, talk to each other? Will they be allowed to? Will they actually want to? It was a dream project perhaps for someone whose job it is to re-organize organizations. But will these reforms turn out to be a nightmare for taxpayers? Time will tell. Perhaps I'm going to be proved completely wrong. But "liaison" seems to be the key word here.

On the subject of dreams, sometimes they do come true. Like in the United States, where the personal income tax return is being shrunk down to the size of a postcard. Except it's not. Not quite anyway.

You could probably count on one hand the number of presidential candidates down the years who haven't promised to shrink Form 1040 to postcard proportions. Indeed, there's probably at least one who pledged to reduce it to the size of a postage stamp, providing just enough room, I imagine, to scribble the letters I O and U. You won't have nearly enough fingers or toes to count the number who have failed to deliver the postcard, though. Maybe they kept forgetting about the stamp. And anyway, they probably would have been voted out of office by the time the postcard arrived.

So, while President Trump can't quite claim to be the exception to the rule, taxpayers will nevertheless soon be filing a 1040 lite, instead of the full-fat, high-carb, calorific version they have become accustomed to. In dimension, it's not quite a postcard, more a boring letter home. But it's progress, I suppose.

The question is, though, can the diet be persevered with? We all know Congress has an overwhelming urge at times to feed taxpayers an unhealthy diet of fattening credits and sugary deductions. Here, the key word is "moderation."

Finally, and as the old saying goes, less is often more. Except when it comes to tax amnesties, which appear to be as popular as ever. The trouble is, where tax amnesties are concerned, more often leads to less, more or less. Studies suggest that while a tax amnesty may provide the government with a short-term revenue boost, they tend to erode tax compliance over the longer-term, especially if used regularly. In other words, such schemes almost become self-defeating. So surely, it's a terrible idea for governments to keep turning to them, especially those countries desperately trying to boost their tax-to-GDP ratios, like Pakistan? Maybe. But nobody seems to have told governments that. If they have, the message clearly isn't getting through.

Besides Pakistan, in the last few days we've reported amnesties in Guyana and the Philippines. The previous few weeks have seen amnesty-related developments in Australia, St Vincent, Guam, Nigeria, South Africa, and Russia. Indeed, given the sporting event currently being staged in that latter country, you could call it the World Cup of amnesties. Except this competition never ends, and there's no real winners. It's the taking part that counts.

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 slimline

Kitty's Execrations

Denmark fragments

Pakistan shamnesty

Ciao

Kitty


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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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