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should new business models adapt to the tax system or vice versa?

Kitty Miv, Editor
21 February, 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.

If I was asked to sum up the history of sub-Saharan Africa's post-decolonization in one word, I would probably choose the adjective "tragic." For it is difficult to find many positives in an era wracked by war and famine, and marked by despots, corruption, failed states ,and opportunities squandered.

There is though, one ray of sunshine: Botswana. Peaceful, stable, and moderately wealthy, Botswana is arguably one the most successful new nations to emerge from colonization. Not all is perfect by any means. But its transformation has been remarkable nevertheless. Fifty years ago, it was one of the poorest countries on earth with GDP per head a mere USD200. Today this nation of 3m souls is classified as a middle-income country, with GDP per head of USD17,000 – higher than any of the exalted members of the BRICS club of leading emerging nations.

What's been the secret of its success? Well, since this is a tax publication, it's worth noting the role that low rates of tax have played. Corporate tax is currently 22 percent, and generally government interference in the economy is said to be low. But on a more fundamental level, stable democratic governments, wise political leadership, and sound fiscal management have been key. So too, it has to be said, has the discovery of diamonds. This industry now accounts for about 25 percent of GDP and 85 percent of export earnings. The Government recognizes that it's not wise to put all of one's eggs in a single basket, and unlike other African nations dependent on natural resources, has resolved to do something about it. Therefore, it was encouraging to note that Finance Minister Kenneth Matambo saw tax base diversification as an urgent matter in his recent Budget address. I hope they succeed.

However, arguably the most interesting development on the interest tax front in the past week or so was the rejection by Swiss voters of the country's corporate tax reforms. And I must confess that I didn't see this coming. Late polling seemed to suggest that just under half of voters were in favor of the reforms, but considerably fewer were intending to vote against them, with a substantial number of "don't knows" in between. There must have been some very effective lobbying from the "no" campaign in the days ahead of the vote. Or perhaps, as they approached the voting booth, most of the undecided thought, as a friend of mine originating from the north of England would say, "if in doubt, do nowt."

I am somewhat torn by this development. I'm a firm admirer of Switzerland's long-standing tradition of "direct democracy." And it could be argued that these tax reforms were foisted on Switzerland by the European Union from the start. But perhaps this system can be too obstructive. Did most of the people really know what they were voting for (or against)? Not that I'm being patronizing, or suggesting that Nanny knows best. But if people everywhere voted on such things, we probably wouldn't have seen any major changes to corporate tax laws since about 1970.

Perhaps fears over falling investment and redundancies played a significant part in the outcome of the referendum, and if it did this is entirely understandable – the Government, which backs the reforms, has itself said that around 40,000 people are employed by companies befitting from special cantonal tax statuses. The flip side is that this casts a long shadow over the Swiss tax regime. The Government will have to go back and tinker with the legislation, but Switzerland's legislative process can be drawn out, and there's no guarantee the tinkerings will be accepted by lawmakers. It's a recipe for prolonged uncertainty, which can often turn out to be worse than the changes.

Now, should innovative new business models adapt to the tax system, or should governments and tax authorities adapt to innovative new business models? I rather think, for the sake of human progress, that, for the most part, the latter should apply. But perhaps we are at risk of allowing the former to happen more and more. This especially seems to be the case in the so-called "sharing economy."

Take Airbnb for example. It recently announced that by the spring of 2017 it will have the systems in place to remit and collect France's various local hotel and occupancy taxes in 50 cities. In other words, the company has spent considerable time and effort on a project that is nothing to do with its core business activities, and all to do the French tax authorities' jobs for them. Of course, the traditional hotel and hospitality industry would soon be up in arms if this uneven playing field were to persist, and I'm not suggesting taxes shouldn't be paid when they are due. But I posit that avoiding local tourist taxes is not the first thing on most people's minds when they hire or rent out accommodation in this way. It almost feels as if the authorities think you're cheating if you spend a few days in someone's apartment, rather than in a city center hotel at exorbitant rates.

It is perhaps unfair of me to single out France here. Airbnb is doing this worldwide, and intends to have arrangements in place in 700 locations. That's going to be some feat, but It's also going to be a necessary one. For Airbnb Chief Executive Brian Chesky revealed in an interview with the Financial Times last year that wherever it has a tax agreement in place, an "existential" threat is removed. My word: it's coming to something when paying tourist taxes is seen as a matter of life or death!

And on such a sombre note, we arrive at the final curtain. And many of us are well aware that our tax obligations are unlikely to stop even after we've met our maker. Indeed, the seemingly unending layers of tax we face, often on the same source of income, is one of the most frequent complaints about life in the modern world. If you're unlucky enough, you could be taxed on your earnings, taxed on your savings, taxed on your investments, taxed as a shareholder, taxed as a company, taxed in your retirement, and, finally, taxed on the inheritances and gifts you bequeath to your loved ones. So a small encomium goes Great Britain's way, where HM Revenue and Customs has waived tax on deceased taxpayers' individual savings account investments. True, it's a small gesture in the grand scheme of things. But when it comes to tax, we should be thankful for small mercies.

 

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

Botswana shines

United Kingdom merciful

Kitty's Execrations

Switzerland uncertain

France threatening


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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