room for improvement
Kitty Miv, Editor
21 March, 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.
Okay, imagine this scenario if you will: it's November 2018, and finally you've got all your tax planning ducks in a row now that Congress has fixed the broken bits of the tax reform legislation, and the Internal Revenue Service has issued most of the necessary guidance to help taxpayers comprehend the more novel parts of the Tax Cuts and Jobs Act. You've got your deductions lined up, your QBI sorted, you've avoided a BEAT, and you're sure you're not GILTI. Now you can breathe a sigh of relief.
But what's this? You've been so engrossed in tax planning that you've forgotten about the elections. "Didn't we just have one of those," you think to yourself? Yes, but that was the Presidential election, and that was two years ago. This is the mid-terms, and the Democrats have won Congress back. And their first legislative move is the Repeal Unfair Corporate Taxes United States bill (or RUCUS for short), introduced by House Ways and Means Chairman Richard Neal (D – Massachusetts). And a ruckus this will surely create.
Remember all that planning you just did? It's been your life's work for the past 10 months! But don't tear it up just yet. The Democrats' Senate majority is as wafer thin as the Republicans' was after 2016. Surely, they'll never get the RUCUS past a GOP filibuster? Well, the Republicans managed to push the TCJA through without the Democrats. And surely the Democrats will now try every procedural trick in the book to achieve their main goal.
You wake up – this nightmare scenario was just a dream. It's March 7, 2018, and you read in the morning news about the Democrats' proposed infrastructure plan. "I wonder how they will pay for that?" you ponder. After a quick glance down the screen, you break into a cold sweat...
Granted, this might sound like a rather fanciful scenario. But it's not beyond the realms of possibility, such are the vagaries of democratic systems of government. Indeed, electoral cycles can play havoc with tax planning. We're seeing this in Italy right now, where a somewhat unexpected turn of political events has left the country's tax policy in a state of uncertainty. Then again, given the recent chain of events worldwide, that a G7 economy could be led by a professional comedian isn't all that surprising. But perhaps it's also no joke.
But sometimes, it is the case that when one political party has a particularly convincing win at the polls they set about dismantling the predecessor administration's policies almost the minute they obtain the keys to the presidential palace. Hence, in some countries, tax laws are in a virtually constant state of flux. In Chile, for example, the new center-right Government has replaced former President Michelle Bachelet's corporate tax reforms with tax reforms of their own. And the Bachelet reforms were only fully implemented in 2017 – although most companies would probably agree that there is much room for improvement in Chile's corporate tax regime after Bachelet's complex changes.
Rapid shifts in the political power base are one thing. Indecisive election results are quite another. And such outcomes can lead to the perception that change is coming when all the time it feels just out of reach. Just look at how taxpayers in Germany were left on tenterhooks for almost six months until a new coalition government could be formed. And after all the excitement about the Free Democrat Party's demands for radical tax cuts, taxpayers were soon brought down to earth by a new Grand Coalition to be led by "Mutti" – Angela Merkel – the ultimate deficit hawk.
Having said all of this, has anyone noticed how unelected bodies are having a growing influence on domestic and international tax policies lately? Certainly, the International Monetary Fund likes to have its say on taxation in its country Article IV reviews. But it hasn't got much teeth, unless it's lending you money, that is. The OECD, on the other hand, has, and in the last two or three years, it has helped to change the face of international taxation.
But, since I'm on the subject of teeth, perhaps it has bitten off more than it can chew as far as its digital tax project is concerned. As the OECD has said itself during the BEPS project, the digital economy is, after all, increasingly becoming the economy itself.
Which conveniently leads me to arguably the most significant development of last week, the release of the OECD's interim report on taxation and the digital economy. This was highly anticipated, but in reality, it felt like a bit of let-down. The report, much like Action 1 of the BEPS project, is more a set of observations, plus a commitment to achieve a consensus on the matter by 2020, rather than proposals for concrete solutions.
OECD Secretary General Angel Gurria nevertheless described the report as an important step towards resolving the tax challenges posed by the digital economy. But that, of course, depends on which way we are stepping here, and how difficult the ground will be. Indeed, this could quite easily become a quagmire, and somehow I can't see that this is going to be particularly easy territory for the OECD to traverse. For starters, a behemoth in the form of the European Union could stand in the way of a global consensus, and when the EU gets the bit between its teeth, it tends to become something of an immovable object. Just ask David Davies, the UK's Brexit negotiator.
But then the OECD was always likely to run into trouble while attempting to police the world of taxation. For while it surely has influence, it's certainly no irresistible force.
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.
Italy no joke
European Union irresistible
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