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perhaps it is time to wake up and smell the coffee

Kitty Miv, Editor
05 June, 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.

Many people, it seems, are worried about the international effects of corporate tax reform in United States. Understandably, Canada, given its long land border with the US, is concerned about investment going south after the US slashes corporate tax. Similarly anxious is Ireland, a major recipient of foreign direct investment from the United States. Heck, even the International Monetary Fund is worried on Canada's behalf, while international ratings agencies have been at pains to point out how US tax changes are but one of Ireland's economic challenges.

However, perhaps we should all stop getting ahead of ourselves here. After all, nothing has changed. And the outcomes that analysts are talking about – a vastly more competitive US tax code coupled with high barriers to US trade – aren't a foregone conclusion.

Indeed, for those wishing that US tax reform would come sooner, the White House's 2018 Budget blueprint must have been something of a worry. For it was just as vague in its language on tax as President Trump's one-pager on tax reform, published in April. Or maybe this was a good thing – why get yourself bogged down in detail this early in the process? That's what members of Congress (or their unfortunate staffers and interns) are paid to do.

Either way, the interminable wait for legislative action in this area is certainly not ideal. And one wonders whether tax reform is going to be a Sisyphean task – just when it seems we're getting close to the summit, the boulder comes crashing down to earth again!

Maybe the United States should take a leaf out of Switzerland's book. After all, the Swiss legislative system is far from streamlined. But after an important corporate tax reform was rejected in a referendum in February, the Government has already made good progress towards its replacement.

There are still several steps to go before Switzerland's corporate tax reform is fully rebooted; parliament is expected to not begin scrutinizing the draft proposals until well into 2018. But if the increasingly pessimistic predictions of US business executives are anything to go by, Switzerland could well pass its second attempt at tax reform before the US completes its first.

Most of us are probably familiar with the dreaded vote of confidence from a superior, even if only an unlucky few have experienced it. For example, when a Prime Minister gives his full and unequivocal support to a scandal-mired minister one day, only for said minister to be hauled in front of a phalanx of photographers to read his "resignation" letter the next. Or when a team owner tells the media his beleaguered coach is going nowhere, only for nowhere to turn out to somewhere else well before the season's over.

The European Commission has been doing a similar thing with tax. It used to insist that it had no interest in tax harmonization. Then it came up with the common consolidated corporate tax base. Its denials that the CCCTB is a step towards harmonizing corporate tax rates have also become something of a mantra. But perhaps we're reaching a point where tax rate harmonization is inevitable. Almost.

A minimum EU corporate tax rate has long been talked about in the context of stifling harmful taxation, and tackling base erosion and profit shifting, but never seemed like a realistic possibility with low-(corporate) tax member states determined to preserve their tax sovereignty and competitive advantages. However, the election of the pro-EU Emmanuel Macron in France seems to have changed the atmosphere. Just when the EU looked like it might be pulling apart, France and Germany seem more determined than ever that it should pull together.

In a display of unity, France and Germany are exploring the possibility of merging their corporate tax systems. This is by no means a new proposal, and it is questionable how feasible such a proposition is. But perhaps that's not the point. France and Germany intend to lead by example, or at least be seen to be doing so.

For their part, companies in the EU have tended to be wary about proposals to align rates. The fear is that it would leave them stuck paying a relatively high rate, with little flexibility to reduce tax. But according to a recent survey, even some business taxpayers in the EU are now in support of tax rate harmonization, mainly for the sake of simplification. When taxpayers and the EU are in agreement on such a matter, perhaps it is time to wake up and smell the coffee!

However, it was telling that the majority of those in support of a single or minimum EU tax rate resided in member states with high corporate taxes. The majority of respondents resident in low-tax countries were opposed to the idea – overwhelmingly so in the case of Ireland. Which is perhaps further evidence that, despite the renewed emphasis on integration, the EU is splitting into a coalition of the willing, and a collection of member states for whom one size doesn't always fit.

Ever booked a hotel room online and wondered why the "final" price is higher than the price quoted on the screen? Or gone to check out of your room only to find that your bill has mysteriously increased, even though you assiduously avoided the mini-bar, and definitely did not spirit away the bathrobe in your luggage? Well, there's a word for it, and one with which readers of this column should be very familiar: tax.

It's certainly no coincidence that tourism-based taxes have multiplied considerably since the financial crisis. And it is no coincidence either that such taxes have sprouted up in the eurozone's most cash-strapped countries, and especially those with substantial tourism industries. Spain and Greece are two examples. And in Portugal, companies are starting to complain about the increasing prevalence of these "discreet taxes."

An indication of how widespread tourist taxes have become was recently provided by home rental portal Airbnb, which is putting in place systems to pay accommodation taxes on behalf of its users in 700 locations around the world.

Tourism taxes come in various guises. An extra charge for a hotel or bed and breakfast stay is just one example. But if you've travelled abroad, chances are you won't even have noticed all those stealthy extra charges added to the cost of getting about, eating and drinking, or visiting various attractions. Which is probably why governments and local authorities are so fond of them. After all, you're hardly going to pack your bags and storm off home for being asked to pay a few euros or dollars to rent a villa in the Algarve, or a condo on the Gulf coast.

Such taxes, therefore, come across a little bit sneaky. However, there is another party here that I haven't yet mentioned. And they just happen to be the businesses who must collect and remit these taxes on behalf of the authorities, and few people stop to think – not least in office – that this is often a time-consuming and expensive process, often carried out under the threat of administrative punishments. Just ask Airbnb!

 

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

Switzerland reboot

Kitty's Execrations

United States vague

European Union unwilling

Portugal sneaky


Ciao

Kitty


Tags: Euro | Government


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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