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tax competition is far from dead

Kitty Miv, Editor
26 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.

The Australia Institute recently urged the Government to resist partaking in the "race to the bottom" on corporate tax rates. Instead, it recommended that Australia tackle tax loopholes and avoidance schemes, arguing that the priority is to ensure enough revenue is raised to fund public services and infrastructure. But if you look around the world, you'll find that parliaments are voting through tax reforms that do both – cut corporate tax while shoring up the corporate tax base.

It's no coincidence that in recent times a succession of governments have announced, are legislating for, or have completed, tax reforms which reduce the rate of corporate tax while restricting interest deductions and strengthening controlled foreign company regimes, among other anti-avoidance measures. These moves are largely a response to base erosion and profit shifting (BEPS), but they also show that tax competition is far from dead.

Nevertheless, it is wrong to assert that most governments are doing nothing, or very little, to tackle tax avoidance. On balance, anti-avoidance and other revenue-raising measures have considerably outnumbered tax cuts over the course of time. And the gap has likely widened since the BEPS project came about. Perhaps it is the case that on the relatively rare occasions that corporate tax cuts are made, they can be quite spectacular in magnitude, as in the UK (30 to 19 percent and falling), and the United States (35 to 21 percent), so perceptions are being skewed.

Where Australia is concerned, it is arguable that the Government is doing more than most in attempting to reduce tax avoidance, particularly by multinational companies. The Government expects the Multinational Anti-Avoidance Law (MAAL), in place since January 2016, to raise an additional AUD7bn (USD5.4bn) in tax each year, and in March, it introduced legislation to increase the MAAL's scope. Indeed, the Turnbull administration seems to me to be quite tough on tax avoidance, having established a tax avoidance task force with four-year funding of AUD679m and 1,300 ATO staff.

For Australian businesses though, it is the other side of the bargain that the Government isn't fulfilling – the corporate tax rate cut bit. To be fair, this isn't a bargain that it is unwilling to fulfil. Because tax cuts on the scale seen all over the developed world recently are simply not possible in Australia for largely fiscal and political reasons, at least for the foreseeable future. The problem is, this legislative stasis is making Australia look more and more like a corporate tax outlier.

It can be argued that a favorable corporate tax rate isn't the be all and end all for international investors. Even Ireland acknowledges that non-tax factors have contributed to its phenomenal success at attracting FDI from the United States. Investors look at a host of factors when deciding where to put their money, such as workforce quality, the state of the country's infrastructure, and its wider regulatory environment, to name but a few. But it's true that "the Lucky Country" could do with a dose of fiscal good fortune to give it a break in a highly competitive tax environment.

From one side of planet to the other now, and I wrote recently on how the process of devolving fiscal powers in the United Kingdom was leading to complexity in, and fragmentation of, the UK's once unitary tax system. So, I won't dwell on this point too long again this week. But I had to mention the fact that the devolution of value-added tax powers to the Scottish Government has now been made, at a time when yet another report, this time by the Chartered Institute for Taxation, has concluded that Scottish taxpayers now face more complexity than ever before. As if the implications of Brexit on UK VAT weren't mind-boggling enough for UK businesses! Oh, for a VAT MOSS scheme. The way Brexit is shaping up though, the only moss to be found in substantial quantities will be on Hadrian's Wall.

And here we go again. This is another point I don't wish to belabor, but one that bears repeating, albeit briefly – India's propensity to shoot itself in the foot.

It was reported last week that the Government has established a new board for the granting of tax breaks to small and start-up businesses. This sounds like a good idea, although we await the inevitable devil in the detail. Then it came to light that the tax authorities have seized Cairn Energy's INR4.4bn (USD66m) dividend, based on the notorious retrospective amendment to the Income Tax Act passed under the former administration. Which sounds like a very bad idea!

Again, this would appear very much at odds with one of the Government's key policies, which is improve the stability and predictability of the tax regime, while improving the tax and regulatory environment. Nevertheless, in India, it doesn't seem to matter too much what the Government does, as the tax authorities seem to be a law unto themselves.

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 Execrations

Australia out of luck



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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