A relaxed chat with a UK tax professor Rita de la Feria on the current tax system globally, looking into a crystal ball, offshores, VAT exemptions, disallowing 0% VAT for Intra-community sales, and much more.
After thinking if I could invite anyone in the world for an interview, Rita de la Feria was on the top of the list. She is among Top50 of the most influential tax people in the world by the International Tax Review magazine. So, I did not believe my eyes after I saw her reply: „To be completely honest with you, I have been refusing all similar requests.. Having said this, I would like to do this for you.“ And the hour chat with Rita turned out to be not only educating, pleasant and sometimes even fun (did you know that Star Wars Episode I opens by saying that there is a dispute on taxation of trade routes), but one of the most interesting hours spent in my professional career. We spoke about the Minority Report movie as well, BTW.
On the current system
If one push personal income tax too high, people will stop working. If you push too much on corporate tax, companies will invest in another country. Rita beautifully explains here why VAT is the best tax, if well designed – it should not intervene in the business. In reality VAT systems are often messed up, also in the EU, but it is still the best tax we’ll have also in the future. Special taxes on digital economy most likely are going nowhere. BEPS and other anti-avoidance rules have a short life span, because very good tax lawyers find a way, are always a step ahead of policy makers. Of course, actions that were ok 7-10 years ago are not ok anymore, but mainly for reputation purposes. Companies still have incentives to move in order to pay less taxes, so one has to eliminate the incentives, instead of the anti-avoidance rules.
On the future
So, where the tax systems will go? Most likely after the pandemic the desperation of countries for investments will be even bigger, so tax competition will increase. So, the digital unilateral taxes are unfortunately here to stay. Ritas’ vision of a corporate system is to tax profits based on where the customer is, like it is applied for VAT. It would prevent tax competition as well – for companies it then would not make sense to move themselves or their IP to a another country, as it would not impact their tax base. In that sense OECD Pillars 1 & 2 are going in the right direction, but they should not change it just for digital economy, cause everything now is becoming a digital economy. This consumer country profit taxation model would basically kill the need of offshores for tax reasons – let’s see how many of the billions will stay there for non-tax reasons then.
She sees the way of fighting the tax evasion in pooling administrative resources and the new technologies, like already used in Portugal (the only in the EU), Russia and Israel, e.g. to track transactions as they are happening. When this was introduced in Portugal hospitality industry during its downturn, the revenues in the industry increased by more than 40%! So, administrations have to invest in IT.
On playing God
A problem with the current system is maintaining and with small fixes of everything that we used to have, instead of a constant questioning of the system, trying from scratch.
On VAT exemptions
Rita believes that that the latest research across many countries and industries shows that the exemptions mainly benefit the retailers and the rich, as the VAT reduction is often not passed on to prices. As the rich would buy the items anyway the state is not collecting the money it could. Whereas the full VAT rate would end up in the state that could grant distribution to the poorest. Thus she does not support a wider use of the exemptions. Moreover, there are many disputes on what is subject to the exemptions.
On disallowing 0% VAT for Intra-community sales
The tax authorities penalize the seller for the crime that may happen in the future, committed by someone else in another country, totally outside the control of the seller. It just does not make sense, especially considering that tax penalties have certain features of criminal penalties under the European Convention of Human Rights and the court practice! Surreal from the criminal law perspective, but happening in the daily practice!