the tax landscape is changing on a daily basis
Kitty Miv, Editor
05 December, 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.
All over the world we are witnessing ambitious reforms being attempted in the area of taxation. In the United States, Congress is on the brink of finalizing the most ambitious tax reform in more than 30 years. More on that later. In the European Union, certain member states and the Commission are pushing hard for harmonization of corporate tax rules and the creation of new tax rules for the digital economy. And globally the tax landscape is changing on a daily basis thanks to BEPS.
Major tax reform efforts are often undertaken with the intention of making life easier for taxpayers. But they can be enormously disruptive for tax planning in the short-term, as taxpayers adjust to life under a new regime. Spare a thought then for taxpayers in India. There, they are still getting used to the idea of the national goods and services tax, often described as one of the most significant economic reforms in India's post-colonial history. Now they could be faced with a shake-up of direct taxation as well.
By putting in place the GST regime this year, the current Government was congratulated for achieving in three years what the previous administration failed to do in ten. Will it be able to pull off a similar achievement with the direct taxes code?
Reforming the outdated direct tax regime in a similarly expedient manner would represent a spectacular success for the Modi Government with regards to tax policy. But viewed in the light of the indirect tax reforms, perhaps it would be easy to underestimate the scale of the task at hand.
This wouldn't be the first time such an undertaking has been attempted. Indeed, direct tax reform has a history stretching back as far as the GST legislation. But this project wasn't nearly as successful. The Modi Government eventually cancelled the Direct Taxes Code, first introduced in 2009, as the proposed legislation was known, because it had hung around Committee Land so long it had become outdated, which was rather ironic given its intent was tax code modernization.
So perhaps taxpayers shouldn't get their hopes up too much. Indeed, the prospect that direct taxation may or may not be subject to reform may merely increase tax uncertainty for taxpayers in India. But at least they are already well used to that.
Nevertheless, on a global scale, taxes are, apparently, getting less taxing, thanks largely to increasing automation and digitalization of tax compliance processes. This was one of the main conclusions of PwC's recently published 2018 Paying Taxes report, which shows that it's getting easier for businesses to calculate their taxes, file their returns, and pay. However, that the average length of time it takes the average-mid sized business to comply with its tax requirement is down to just 240 hours is surely a sign of the times – i.e. tax administration might be a bit easier, but tax rules certainly aren't. After all, 240 hours is 20 solid days (and nights). If you were to spend each eight-hour working day on a project that was to take 240 hours, you'd be at it for a month, give or take.
It should be emphasized, however, that this is very much an average. Just as no two companies are identical, each tax jurisdiction is unique. So the experiences of an individual company, be it small, medium-sized, or large, will vary greatly depending on the activities of that business, and where it is located. But, undeniably, the PwC ranking does give a good indication of the wide disparity in tax requirements across the world for businesses.
In Venezuela – 189th and last in the ranking – it takes 792 hours for a medium-size business to fulfil its tax obligations. But believe it or not, there are places where it takes even longer for a business to comply with tax rules. Businesses wrangling with the infamously complex tax environment of Brazil spend about 1,000 hours more a year on their tax obligations than they would in Venezuela. And it's also saying something about the modern international tax environment that as far as Brazil is concerned this is a considerable improvement on previous years.
Indeed, South America generally retains its reputation as a nightmarish place to comply with tax obligations. Bolivia for instance features in 186th place in the list, with compliance taking an average of 1,025 hours and with a total tax rate – made up of corporate, labor, and other taxes paid by businesses – of 83.7 percent. It makes you wonder if businesses there have time to do any business at all, or if they are simply in the business of paying tax.
It will be interesting to see if tax reform in the United States will improve the country's ranking in the PwC index (currently 36th). It is very likely to be the case that corporations would pay substantially less tax, but whether calculating these taxes, given the US is stuck with its dual federal/state system, would become easier, remains to be seen.
Still, tax reform legislation is now beginning to move through Congress at what feels like light speed compared with the gridlock us observers have grown accustomed to watching over the years, especially after the Senate version scraped through a full vote by the upper chamber last week. Nevertheless, perhaps we shouldn't get too giddy with excitement that generational tax change could be just around the corner. For while there were a few revenue-raisers in the last-minute revisions so that the bill can squeeze under the budget bar set by the Byrd rule, there were also a few eyebrow-raisers as a result.
Controversially, one of America's most disliked tax provisions, the alternative minimum tax, makes a reappearance in the Senate bill to help the sums add up, while the individual income tax cuts expire after 2025 so they don't add to the deficit outside of the 10-year budget window.
There are also other significant differences. Notably, House and Senate lawmakers are going to have to decide what they want in the crucial area of pass-through business taxation – a 25 percent tax cap, or a 23 percent tax deduction? Do they want a slimmer five-bracket income tax schedule, or a reconfigured seven-bracket system with slightly lower rates? Obamacare individual mandate or not? An estate tax or no estate tax?
With events on the Hill often taking unexpected turns, it would be unwise to speculate too much what a final bill might look like, and when it could be finalized. But perhaps one thing's more certain: tax advisers had better not plan too much time off this Christmas.
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.
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