Other Taxes

IMF report and selected issues paper looks at tax issues in China

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On 15 August 2017 the IMF issued a report and selected issues paper following consultations with China under Article IV of the IMF’s articles of agreement.

The report notes that China is continuing its transition to more sustainable growth with 6.7% growth in 2016 and the same level projected for 2017. Progress has been made in rebalancing the economy towards services and consumption. The firmer economic activity gives an opportunity to accelerate reforms in areas such as greater social spending; further reforms of state owned enterprises; and reduction of financial stability risk through further efforts on regulation and supervision. The report suggests that further improvements in policy frameworks are required to maintain medium term growth and stability and local government autonomy could be increased.

Central-local fiscal relations

The selected issues paper notes that China has the largest share of local government spending in the world, but there is limited revenue autonomy at the local level. The paper notes that decentralization of revenues permits a more satisfactory matching of the tax system to the local situation and preferences, as well as encouraging accountability of policy makers. However centralization of taxation has benefits in terms of economies of scale, risk-sharing, and dealing with the mobility of the tax base.

The paper suggests that the provinces could be permitted to impose a surcharge in addition to the national personal income tax (PIT). This would allow the provinces some tax autonomy within a limit specified by the centre, for example an upper limit of 5% or 10%. The revenue contribution of the PIT is currently low by international standards and this would also be a way of increasing that contribution.

In the case of value added tax (VAT) there would be difficulties in implementing any VAT at the provincial level owing to the difficulties in monitoring border flows between local jurisdictions. The national scope of the VAT should therefore be maintained but there could be a review of the revenue-sharing arrangements to reduce compliance costs for taxpayers with multiple business locations. This could be done by introducing simple allocation rules based on factors like population or aggregate consumption.

The paper considers that a recurrent market-value based property tax would be suitable for local governments in China. A property tax would be linked to public service delivery through property values and as it is based on property its base is immobile. The accountability of local officials is helped by the fact that the tax is visible to local residents on a recurring basis. High-income households also generally have higher property wealth and a local property tax could therefore be regarded as progressive. Local governments could set tax rates within bands set by the central government, applicable to a tax base that is defined according to national guidelines.

Reducing inequality

There is increasing income and wealth inequality in China but tax reforms could be used to increase inclusiveness. If the tax system could be restructured to rely more on personal income tax this could also improve redistribution, as the income tax can easily be given a progressive structure. The current personal allowance could be lowered and transformed into a tax credit. Tax brackets could be redesigned to ensure that those with greater ability to pay are contributing more to the national budget. The method of imputed minimum earnings for calculating social security contributions is regressive and should be abolished so that direct taxes would be more equitable and workers could have more incentive to join the formal sector.

 

Malaysia to impose tourism tax from September 2017

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The Malaysian government is going ahead with its tourism tax to be imposed from 1 September at a flat rate of MYR10 (USD2.33). Earlier it had been expected that the levy would apply from either July 1 or August 1; that it would be a progressive levy, ranging between MYR2 (USD0.45) and MYR20, depending on the standard of hotel accommodation; and that it would apply to both locals and tourists.

Malaysians and permanent residents are exempt. Foreign tourists will be charged a flat rate of RM10 per room regardless of the accommodation category.

IMF report comments on economic position of Japan

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The IMF issued a report on Japan’s economic position on 31 July 2017 following the conclusion of discussions under Article IV of the IMF’s articles of association.

The report notes that Japan’s economy is growing above potential with positive private consumption growth and stronger private investment. There are however labor shortages, weak wage growth and persistently low inflation. The IMF expects the growth to continue through 2017 but to fall back in 2018 if the fiscal stimulus support decreases as currently planned.

The IMF directors consider that the current favorable environment provides an opportunity to go ahead with a comprehensive reform package to sustain growth, raise inflation and deal with the medium term challenges including fiscal consolidation and increasing potential growth.

A selected issues paper published at the same time as the report looks at tax policy challenges of an aging and declining population. This notes that the consumption tax should remain the main part of revenue reform but that the timing of rate increases is important. Other potential tax measures should also be examined.

Consumption tax

The consumption tax is an important policy owing to the size of the public debt and the need for more health and social security spending for the ageing population. Although expenditure reform is also required Japan will need additional revenue. The consumption tax rate is currently low relative to other industrialized countries and there is therefore room for raising the tax rate. Also the efficiency of collection of the consumption tax is high so more revenue can be raised with low collection costs. Raising the consumption tax rate is likely to be less detrimental to economic growth than other tax options. A gradual increase each year would reduce any volatility of the impact on growth. The IMF is therefore proposing gradual increases to the consumption tax as part of a broader fiscal adjustment package.

Other potential tax measures

Other taxes such as a tighter personal income tax, property tax, inheritance tax or asset and wealth tax could also be examined to supplement the revenue gains that can be earned from the consumption tax increase.

Personal income tax

Tightening the personal income tax would contribute to revenue growth. The top rate of personal income tax is currently one of the highest in the OECD but reforms could focus on addressing inequality and eliminating disincentives to work. The low collection level of the tax indicates that there are a large number of deductions and these enable the higher earners to obtain benefits. The deductions could be replaced with more progressive measures such as targeted tax credits.

This could be linked to other reforms such as eliminating disincentives to full-time or regular work resulting from the operation of the spousal tax deduction. Exemptions for pension income could be reduced and targeted tax credits for elderly workers could increase incentives for them to remain in the labor market.

Property tax

In Japan only 30% of local tax revenue is raised from recurrent property tax, compared with 100% in the UK and Australia, 90% in Canada and 75% in the US. Raising property taxes would provide a more stable revenue base for local governments and reduce the level of transfers from the center. This could encourage growth and raise revenue as property tax is the most efficient tax.

Asset or wealth tax

Only a few countries currently use wealth taxes and one important motivation for them has been as a temporary measure in a broader fiscal consolidation. Countries that scrapped their wealth taxes cited high administrative costs compared to revenue collected and problems of capital flight as reasons for its discontinuance. Generally a wealth tax is best structured with very few exemptions, a high threshold of liability and a flat marginal rate set at a low level.

 

UK: Changes to non-domiciled rules in Finance Bill (No 2) 2017

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Changes to the UK non-domiciled rules that were excluded from the Finance Bill 2017 are to be included in the Finance Bill (No 2) 2017. The Bill is to be published and considered by parliament in September 2017 following the summer recess. Updated draft legislation and explanations on the changes to rules on deemed domicile were published in July 2017, and when passed they will take effect from 1 April 2017.

The provisions relating to non-domiciled individuals include the following measures:

Deemed domicile

New deemed domicile rules provide that a non-domiciled individual will be treated as domiciled in the UK for all tax purposes in a tax year if that individual has been resident in the UK for at least 15 of the last 20 years.

The new rules will also provide that a non-domiciled individual who was born in the UK with a UK domicile of origin is to be treated as domiciled in the UK for income and capital gains tax purposes in any tax year in which that individual is UK resident; and the individual will also be treated as domiciled in the UK for inheritance tax purposes after one year of UK residence.

Rebasing relief

Individuals who are deemed domiciled from 6 April 2017 because they have been resident in the UK for 15 of the last 20 years can rebase their foreign located capital assets to market value on 5 April 2017 for purposes of capital gains tax. Consequently on a future sale of a foreign asset only the gain from 6 April 2017 to the date of sale would be liable to capital gains tax. This will apply automatically unless the taxpayer elects for the provision not to apply.

Segregation of mixed funds

Any non-domiciled individual who has been taxed under the remittance basis prior to 2017/18 will be able to rearrange mixed funds held in non-UK bank accounts and segregate them into their constituent parts. This is a transitional arrangement for the 2017/18 and 2018.19 tax years and applies only to nominated transfers of money from a mixed account to another account.

This is a useful measure because income and capital gains taxable under the remittance basis are treated by the law as remitted before non-taxable income. So if there is income taxable under the remittance basis and also non-taxable capital in a bank account any remittance from that account will be treated as a remittance of taxable income or gains rather than of the non-taxable element. By separating out the non-taxable element into a separate account the taxpayer can arrange to remit that non-taxable capital without a tax charge.

Inheritance tax on residential property interests

From 6 April 2017 inheritance tax is to apply to UK residential property interests held indirectly by non-UK domiciled individuals, for example through a non-UK company, and any debt used to finance the property will be subject to inheritance tax in the hands of the lender.

This means for example that any shares in non-UK close companies or interests in overseas partnerships the value of which is derived from UK residential property will come within the scope of inheritance tax. This will apply whether the individual is UK resident or non-resident.

Any debt used to finance the purchase, maintenance or repair of UK residential property will be treated as an asset within the scope of inheritance tax in the hands of the lender. If the lender is a non-UK close company or a partnership then look-through provisions will apply. Any security or collateral for the debt will also be within the scope of inheritance tax as part of the estate of the person providing the security.

 

Argentina: Decree No. 593/2017 on incentives published in Official Gazette

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Decree No. 593/2017 regarding capital goods was published on July 28, 2017 in the Official Gazette. The Decree is effective from July 1, 2017. This decree modifies incentives under some articles of both Decree No. 379/2001 and Decree No. 594/2004. It also extends the amended incentives of Decree No. 379/2001 until December 31, 2017 in favor of domestic manufacture of capital goods, agricultural machinery and telecommunications equipment. A 14% incentive as a form of tax credit of the value of the goods produced (with some modification) can be charged against income tax, excise taxes and VAT. To apply for that incentive taxpayers have to file an affidavit within December 31, 2017. In this case taxpayers have to confirm that the figure of registered employees has not reduced from the number of employees registered from December 2011.

IMF issues report on economic position of Vietnam

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On 5 June 2017 the IMF issued a report following the completion of discussions with Vietnam under Article IV of the IMF’s articles of agreement.

The report notes that Vietnam’s economy has been performing well with growth of 6.2% in 2016 and projected growth of 6.3% in 2017, moderating to around 5% in the medium term. The momentum for growth remains strong despite weakness in the oil sector and there has been strong manufacturing activity and foreign direct investment as well as robust domestic demand.

The government is developing a wide reform agenda. Fiscal consolidation is required owing to rising public debt. Bank reforms are progressing but the problem of non-performing loans needs to be resolved. Progress has also been made on the framework for the reform of state owned enterprises although implementation has been slow. The reforms aim to promote sustainable growth led by the private sector.

Downside risks to the economy include high public debt, slow resolution of the problem of non-performing loans, rising protectionism globally and the failure of the Trans Pacific Partnership. However the successful implementation of the reform agenda could increase the potential for economic growth. Implementation of the trade agreement with the European Union and other bilateral agreements could increase the level of exports and foreign direct investment.

In their report the IMF emphasized the importance of measures to enhance revenue such as unifying the VAT rates, increasing the level of excise and environmental protection taxes, and introducing a property tax. The IMF also encouraged Vietnam to reduce tax exemptions and incentives and to strengthen the tax administration.

The IMF directors welcomed the ongoing structural reforms and noted that reform of institutions is necessary to increase potential growth. They emphasized that higher environmental taxes and better pricing of externalities in the energy sector could encourage a more environmentally friendly and resilient economy.

GCC develops VAT and excise tax framework

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The Gulf Cooperation Council (GCC) finance ministers held an extraordinary meeting on 16th June in Jeddah and approved in principle VAT and excise tax treaties. In order to keep pace with the changing economic landscape and through extensive development reforms, the GCC member states signed a framework agreement for the establishment of VAT on the supply of goods and services with a 5% standard in 2018.