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unintended consequences

Kitty Miv, Editor
28 January, 2019

Can anything good really come from referendums? It's the purest form of democracy, but recent history suggests such plebiscites can be more of a hindrance than a help. Enough said about the UK already. But it's worth remembering how the Irish didn't vote the way they were supposed to on the Lisbon Treaty back in 2007. Rather embarrassingly for all concerned, Ireland had to go back to the polls until it put enough crosses in the right box.

The Swiss of course love a referendum. It's ingrained into their unique system of direct democracy. But where taxation is concerned, this system is causing the government a bit of grief. Switzerland is considered a pariah state by some of the world's anti-avoidance and transparency campaigners. As such, it needs quite urgently to change its corporate tax regime. This is not only to avoid the ignominy of being backlisted, the Swiss Government has warned. It will also to provide companies with much-needed clarity and certainty over their future tax obligations.

These proposed reforms attempt to tread a careful line between respectability and competitiveness. Notably, they will abolish the special arrangements for cantonal status companies, along with the federal practices on tax allocation for principal companies and Swiss finance branches. However, the legislation will also introduce a mandatory patent box regime for all cantons, provide a relief restriction, and reform the taxation of dividends from qualified participations.

Indeed, the current draft of the tax reforms bears many similarities to the proposals rejected in 2017. Rejected? By who? The people. In a referendum. And it emerged last week that the people will be the final arbiters of the reformed reform proposals too. Oh dear.

The Government is confidence that lightening won't strike twice. But the possibility of defeat can't be ruled out. And as if to rub salt in the wounds, it faces the prospect of defeat in three languages too. Non. Nein. And no. Again.

From one country that is struggling to change its tax laws, to another which arguably has seen a lifetime of change in the space of a year – the United States. And its lawmakers aren't done yet. The 166th Congress is barely a month old and already lawmakers have introduced a plethora of new tax bills. Notably, one bipartisan proposal would simplify certain tax obligations for small firms. Then what was that massive tax bill that passed into law last year for then? It evidently hasn't simplified things enough for these members of congress.

Still, none of this is unusual. At any given time there are probably dozens of tax bills pending in Congress, and the vast majority never see the House or Senate floor. A quick search for tax-related bills on govtrack returns 90 results. 37 of these were introduced on the first day of the 116th Congress on January 3, 2019 alone. About a dozen bills would attempt to introduce new, or change existing, tax credits – apparently the answer to most problems in life if you're a member of Congress. At this rate, by the beginning of next year, we could be looking at an entirely different tax code again if all these proposals happened to pass. Thankfully, according to govtrack, the majority of these bills have a less than four percent change of being enacted.

Businesses would probably hope for similar odds against the introduction of national digital taxes. Sadly, for them, there seems to be a grim inevitability about them. January 2019 alone has seen Italy include a digital tax in its national Budget, Austria include a digital tax in its newly-announced tax reform plan, the Spanish Government approve digital and financial transactions taxes, and France moving at breakneck speed to introduce a digital tax with an effective date of January 1.

For businesses, digital tax measures of the type being proposed and legislated for in the European Union represent classic cases of bad taxes. They are based on revenues not profit. They are arbitrary and legally unsound, especially where international obligations like tax treaties are concerned. And they are likely to result in all manner of economic distortions and unintended consequences.

Last week, the Business and Industry Advisory Committee to the OECD (BIAC) echoed the views of the business world in general by effectively calling on the world's governments to come to their senses and wait for the OECD to finish its work in this domain. Above all, it argued that any new tax measures aimed at digital companies should be based on long-standing and well-founded principles of taxation, nexus, permanent establishment, and transfer pricing based on the arm's length standard.

However, when you examine this argument, you can understand why the tax challenges of the digital economy seems to be driving everyone to distraction. As there's something of a contradiction here. The digital economy itself is far from "long-standing" and "well-founded." That's why governments are having such a hard time pinning down digital economy profits and why they're coming up with these weird and whacky tax proposals.

Maybe this problem will never be fully solved. The economy is changing at such a pace that some new development could come along at any time to confound the tax collectors yet again. Who knows what's around the corner? Hopefully not another referendum.

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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