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voters do the funniest things

Kitty Miv, Editor
23 May, 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.

What's this? A political party called Five Star? Founded by who? A comedian? What? In Power?! With who? You mean Silvio's back? And a flat tax? On corporate income too? In Italy?!

Yes, it can only be the latest edition of "voters do the funniest things."

We've seen some unusual coalitions formed and attempted recently, unholy alliances between populist anti-establishment and mainstream parties. But Italy must top the lot. It's difficult to pin down exactly where the Five Star Movement stands on the political spectrum, but it's safe to assume, I think, that they are a long way from the nationalist overtones of the Lega Nord.

So what does all this mean for taxpayers? It's difficult to say. One thing that the parties do have in common is their euroskepticism. But, given Lega Nord's previous calls for a referendum on Italy's membership of the European Union aren't included in the coalition agreement, it's highly unlikely that taxpayers will have to contend with an Italian withdrawal from the EU, which, as we're seeing with the UK, is wreaking havoc on company tax planning.

Besides, Italy can't leave the EU because there's not a catchy-enough portmanteau for it. Brexit works. As would Grexit and Frexit in the unlikely event these ever came to pass. Itexit just doesn't have the same ring to it. Exitaly? Better. But ideally you need just two syllables. Anything more is a bit of a mouthful in the age of the soundbite. Anyway, it's probably a moot point now.

But what about this flat tax proposal? Obviously, this would represent a radical change to Italy's sclerotic and much-criticized tax system. But, by all accounts, it's too radical. There's no way the European Union's fiscal police are going to allow for a tax measure that could add considerably to Italy's budget deficit. The suggestion is that the coalition might just ignore the EU. But can they ignore the markets? Suddenly the outlook's cloudier than it was before, and for taxpayers instability is no joke.

Brexit isn't exactly a barrel of laughs either at the moment. Michel Barnier wears the expression of a man who could do with being told a good rib-tickler. And, with the clock rapidly ticking down towards March 2019, the UK has now got itself in a tangle over its position on the customs union. It doesn't bode well for a timely agreement.

Nevertheless, as alluded to above, if there was one country facing the prospect of huge legal and economic instability, you would have thought it would be the UK. Yet the conclusions of a recent survey of business leaders in the UK and around the world paint a different picture of corporate attitudes to the UK. This suggested that there is unlikely to be an exodus of multinational companies from the UK in the run-up to, and after Brexit, with 76 percent of UK-based respondents reporting that they have no plans to switch their tax residence. Although it's not clear what the remaining 24 percent are planning to do, which is a slight worry for the UK, it would be interesting to see the survey repeated under the same tax settings, but in a world where Brexit wasn't happening.

A key conclusion that can be drawn from the survey is that, unlike Italy, say, the UK has a relatively stable and favorable tax regime to fall back on, and this seems to be offsetting some of the uncertainty attached to Brexit.

One other thing we can take from the survey is that companies must be confident that the UK won't abolish value-added tax once it has left the Union, replacing it with some hitherto unknown sales tax. Indeed, the rule of thumb in world taxation is that taxes, once introduced, are seldom abolished. As the old maxim goes, there's no such thing as a temporary tax.

You probably know the road I'm going down here! Yes, as ever, there are exceptions to the rule. Which brings me on to another major tax development from the last couple of weeks – Malaysia's decision to repeal its goods and services tax regime.

This announcement was not a massive shock. The introduction of GST was a hugely unpopular move by the former Government, and, as in India, the proposal was delayed year after year before it was implemented in 2015. So there was always the risk that an opposition party would seek to gain political capital by promising to abolish it.

Nevertheless, it is difficult to downplay the significance of this measure. Businesses would have spent a lot of time (and, doubtless, money) adjusting to the GST when it replaced the former Sales and Services Tax. Now, just three years later, they are being required to adjust back to an as-yet-unknown version of the former levy.

What's more, this may be viewed by investors as a somewhat retrograde step. GSTs and VATs are now widespread, and taxpayers operating across multiple jurisdictions have consequently got used to interacting with such regimes. Furthermore, they are often seen as more efficient than the taxes they replaced. So a popular move? Certainly. But a smart one? We'll have to wait and see.

Can you imagine India turning its back on GST now, after all the Government's (and taxpayer's) hard work, and going back to the old patchwork quilt of indirect taxes? Or the UK repealing the VAT Act on March 30, 2019? One imagines that that way, chaos awaits. And for taxpayers that's no laughing matter.



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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