unsurprising teething problems
Kitty Miv, Editor
15 August, 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.
As corporate tax rates have tumbled, value-added tax rates have tended to climb, as countries shift more of their tax burdens from income to indirect taxation. In the latest example, Russian President Vladimir Putin has signed into law legislation to hike Russia's VAT rate to 20 percent from January 1, 2019.
Furthermore, VAT is now a very familiar tax globally, with around 160 jurisdictions having adopted some form of this tax. India is probably one of the more notable recent entrants into the VAT and GST club. The United States is certainly the most visible absentee, given that state sales taxes do not operate in the same way as a VAT. And, a few unlikely legislative proposals aside, the US has shown little inclination in joining.
However, just as there are some anomalies in corporate tax trends, with a few jurisdictions having raised rates recently, there are also some notable exceptions to the rules in the world of VAT and GST. Romania, for example, had a standard rate of VAT of 24 percent as recently as 2015. Now it stands at 19 percent, and the Government wants to reduce the rate further, to 18 percent next year, although this may be delayed until 2020. Malaysia, meanwhile, has gone against the grain even harder as the Government sets about fulfilling its pre-election pledge to repeal the GST regime and replace it with a sales and service tax in September.
Governments like VATs because they usually raise a lot of money relatively painlessly – administratively time-consuming VAT compliance may be for businesses, but taxpayers tend not to notice them as much as the bite taken out of their paychecks by income and other direct taxes. Indeed, the idea of a national VAT hasn't been completely dismissed in the US. Far from it. Over the years various bills have been submitted to Congress for a VAT or national sales tax, often as a replacement for the federal income tax. It's just that such proposals are rarely taken seriously and are really just symbolic efforts designed to draw attention to the shortcomings of the US tax code.
However, a recent development challenges the assumption that VATs are the great tax revenue motherlode, because, according to the IMF, India's GST has depressed revenues rather than elevated them. However, this is likely due to not entirely unsurprising teething problems with the system rather than the beginning of a long-term structural problem.
Not that there's likely to be a sudden shift in recent VAT trends just because Romania is slashing its standard rate, Malaysia is abolishing its GST, India's GST isn't working as expected, and the US will likely remain VAT-less for years to come. But it does go to show that not everything can be taken for granted in the world of taxation.
Indeed, since I'm here, perhaps it's time to challenge some conventional wisdom from the international tax standard-setters about the state of play of the BEPS project. Because the overseers of the OECD's BEPS project were doubtless heartened to hear that every G20 member country received a positive report card in a recent interim progress report on the implementation of various G20 commitments. But on closer inspection of the conclusions, it would appear as if the examiners have been quite generous in awarding top grades in certain cases.
Indonesia, for example, like every other G20 country, was adjudged to have "shown progress in introducing BEPS measures" and "has taken steps towards implementing BEPS package during the compliance period." Except, of course, for the trifling matter that it hasn't indicated any progress towards implementing the recommendations in Action 1 (VAT and the digital economy). And Action 2 (hybrid mismatch arrangements). Oh, and Actions 5 (harmful tax practices), 7 (permanent establishment status), 11 (measuring and monitoring BEPS), and 12 (disclosure of aggressive tax planning). And Action 14 (dispute resolution).
In Turkey's case, sufficient progress has been deemed to have been made towards implementing BEPS despite the insignificance of shortcomings with regard to Actions 1, 2, 3, 4 and 5. And 8 to 10. And 13 and 14. Turkey also hasn't joined the Multilateral Competent Authority Agreement for the automatic exchange of country-by-country reports. If this represents progress, I'd hate to see what a lack of it might look like.
On the matter of harmful tax regimes, I wonder if anybody at the OECD has noticed what's been happening in Hungary recently. For with a corporate tax of nine percent and a tax-slashing 2018 Budget announced last month, Hungary must be straying dangerously close to harmful tax territory as the OECD sees such matters. A nine percent corporate tax surely can't be designed to attract investment by domestic businesses alone.
Recent measures in Hungary even forced the International Monetary Fund to depart from its usual Article IV "widen the tax base and lower the labor tax wedge" line, as it cautioned the Government against further tax cuts, at least without commensurate spending reductions. Although it did still recommend that Hungary widen its tax base and continue to reduce the labor tax wedge. Some habits die hard, I suppose.
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