Showing posts with label taxation. Show all posts
Showing posts with label taxation. Show all posts

Thursday, March 19, 2015

Economic Efficiency and GST

We’re less than two weeks away from GST going live, so it might be appropriate to look at the economic arguments in favour of it.

On the WCI blog, Frances Woolley reviews the textbook arguments (excerpt):

The case for taxing basic groceries

Economists frequently argue that taxing basic groceries is a good idea - for example, see these papers/posts making the case for taxing food in the US, Canada, and New Zealand.

The equity argument for taxing groceries is straightforward. Suppose everyone spends $500 a month on groceries. If groceries were taxed at 10 percent, everyone would pay about $50 in tax (or slightly less, if people cut back on their food expenditures when the tax is introduced). If part of the revenue raised by taxing groceries was used to give every low income individual a $60 tax credit, the tax on groceries would actually increase the well-being of the worst off members of society. Any additional revenues raised could be used either to decrease other taxes, leading to greater economic efficiency, or to provide needed social or infrastructure programs, further enhancing efficiency and/or equity.

Monday, January 12, 2015

Transfer Pricing and Illicit Money Flows

I wonder how many people caught this, and how many of those understand the significance (excerpt):

Singapore updates corporate tax guidelines to better align with West

SINGAPORE: Singapore is updating guidelines on an accounting practice mired in controversy for helping multinational companies minimize their tax bills, as the city-state moves more in line with a crackdown by Western governments on aggressive tax avoidance.

International taxation has come under scrutiny since a quirk of "transfer pricing" was found to have helped lower the tax bills of a number of multinationals, including Starbucks Corp , Google Inc and Amazon.com Inc.

Such issues prompted the Organisation for Economic Co-operation and Development to call on governments to revise tax treaties, tighten rules and share more information, in a project due for completion by the end of this year.

In transfer pricing, a company sets a price for a good or service to be sold between two of its subsidiaries.

The company can use the price to minimise its tax bill by having a subsidiary in a low-tax jurisdiction such as Singapore sell products to a subsidiary in a higher-tax jurisdiction at a high price. This allows the company to book more of its profit in the low tax location.

From Jan. 6, the Inland Revenue Authority of Singapore (IRAS) will require related parties to keep contemporaneous records to support the pricing of such transactions.

The IRAS also detailed methods by which transactions are benchmarked to show that prices charged would be similar if the transactions had been with a party outside of the company….

Approximately a fifth of the “illicit” capital outflows recorded by GFI from Malaysia due to trade mispricing run through Singapore. If Singapore fixes its transfer pricing rules, that’s one positive step towards fixing the practice, not just for Malaysia, but for the region as a whole.

Note to LHDN and Customs: we should be doing the same.

Monday, January 5, 2015

Tax Irrationality

Ay Caramba! (excerpt):

Cloudy with a chance of money

A NEW year means new resolutions, and maybe for some, a new look and a new home.

But for many, the New Year also ushers in new debts.

Amid the worries about possible tough times ahead – with rising cost of living, falling Ringgit, subsidy cuts and the impending implementation of the Goods and Services Tax (GST) on April 1 – many Malaysians have gone on a buying binge, especially on big-ticket items.

Thursday, October 16, 2014

Talking About Tax Reform: Capital Gains Taxes (Reprint)

[I wrote this article for a mainstream newspaper in August last year. It should be read in conjunction with this post]

It’s almost that time of the year again, when the Federal Government sets about planning its budget for the year ahead. With Malaysia’s sovereign credit rating at risk, it’s also time to take a look at reforming tax policy. One avenue that should be explored but has gotten little public airing is adding a capital gains tax (CGT).

Thursday, June 5, 2014

Tax Compliance: Giving Voice, By Giving Choice

Here’s a tip for Inland Revenue – even giving the illusion of choice will reduce tax avoidance and under-declaration of income (excerpt):

Can giving taxpayers a voice increase tax compliance?
Cait Lamberton, Jan-Emmanuel De Neve, Michael I. Norton

Non-compliance with tax costs governments billions, in part because people really don't like paying taxes. This column reports two experiments designed to see if it's possible to make people hate taxes a little less and raise tax compliance. The results indicate that if people are given the opportunity to express a preference (though not actually make the final decisions) on how their taxes are spent, they are much less likely to cheat….

Friday, May 30, 2014

Growth And Taxation

Growth and taxation – it seems like a contradiction in terms. Taxation tends to create economic distortions, affecting decisions on consumption, investment and savings. This happens because taxes change the incentives facing economic agents – a consumption tax reduces the propensity to consume, an income tax reduces the incentive to work and invest. Subsidies work in the exact opposite way.

But there are forms of taxation that can promote growth – or at the very least, be less distortionary. That’s a point that’s almost totally absent from the debate surrounding the implementation of GST in Malaysia:

  1. As a value-added tax, it’s far less distortionary than the SST system that’s currently in place; and
  2. Because just like in any other country where a VAT has been implemented, exports will be zero-rated. As a result, GST will also actually give a (minor) fillip to growth relative to the SST system

Monday, February 24, 2014

The Meaning Of Zero Rated

I’m still snowed under with work commitments, so the blog will be on temporary hiatus until I can get a handle on my new job responsibilities.

Nevertheless, I can’t resist commenting on this (excerpt, emphasis added):

Putrajaya confusing Malaysians about GST, says NGO

Second Finance Minister Datuk Seri Ahmad Husni Mohamad Hanadzlah’s recent explanation of the goods and services tax (GST) is illogical and only confuses the Malaysians, a civil society group said.

The Oppressed People's Network (Jerit) refuted Husni’s remarks that those earning RM2,000 a month would only pay RM15.06 of tax because of the GST.

“The finance minister appears to try to confuse the people with his statement,” Jerit Coordinator E. Parames said in a statement yesterday....

Wednesday, October 9, 2013

Capital Gains Tax As An Alternative To GST

I’d really like to see a capital gains tax (CGT) in Malaysia. But as much as I support such a tax, CGT is simply not a good alternative for GST.

Here’s why (USD millions):

01_cgt

Friday, September 6, 2013

GST And Tax Evasion

One of the main advantages of a GST/VAT system, at least from the point of view of the tax collector, is that it provides an incentive for businesses to comply. The ability to claim offsets against GST/VAT paid on inputs (which businesses have to pay for anyway), brings them into the tax collection net. That widens the scope of coverage and increases the number of goods and services that are taxed. Higher compliance = higher tax yield, relative to alternatives such as Malaysia’s existing single-stage sales and service taxes (SST).

I’m not going to discuss what this does to consumers and prices.

The other advantage here is that in theory, due to higher compliance, the probability of tax evasion (though not necessarily fraud) should fall. This is especially important for developing countries, as the size of the economy outside the formal sector is much larger and the capability of tax authorities to audit transactions is comparatively poorer.

This NBER working paper outlines an experiment to see if GST/VAT does indeed reduce tax evasion in the real world (abstract):

No Taxation without Information: Deterrence and Self-Enforcement in the Value Added Tax
Dina Pomeranz

Tax evasion generates billions of dollars of losses in government revenue and creates large distortions, especially in developing countries. Claims that the VAT facilitates tax enforcement by generating paper trails on transactions between firms have contributed to widespread VAT adoption worldwide, but there is little empirical evidence about this mechanism. This paper analyzes the role of third party information for VAT enforcement through two randomized experiments among over 400,000 Chilean firms. Announcing additional monitoring has less impact on transactions that are subject to a paper trail, indicating the paper trail's preventive deterrence effect. Tax enforcement leads to strong spillovers up the VAT chain, increasing compliance by firms' suppliers. These findings confirm that when evasion is taken into account, significant differences emerge between otherwise equivalent forms of taxation.

All I can say is:

Technical Notes

Dina Pomeranz, "No Taxation without Information: Deterrence and Self-Enforcement in the Value Added Tax", NBER Working Paper No. 19199, July 2013

Tuesday, September 3, 2013

Waiting For GST

There’s a famous play by Samuel Beckett called “Waiting for Godot”, where two characters hang around, talking and interacting, waiting for someone who never turns up. Malaysia’s GST saga, by turns tragic and comedic, definitely falls into the same mould.

Now it seems that at long last, Godot might actually arrive (excerpt):

GST implementation a must

KUALA LUMPUR: The implementation of a goods and services tax (GST) is a must and not an option.

Secretary-General of Treasury Tan Sri Dr Mohd Irwan Serigar Abdullah said at the half-year Economic Transformation Programme (ETP) update that the Government was trying its best to include it in Budget 2014 if everyone was agreeable to it.

Dr Mohd Irwan added that it would only be in place in 2015 if the Government announced it in the coming budget as it would take 14 months for the GST to be implemented.

Friday, June 14, 2013

How Much Would Car Prices Come Down If Excise Duties Were Abolished?

I’ve made no secret of the fact that I’m leery of the notion that cars in Malaysia should be made cheaper. The negative externalities arising from fossil fuel use, which would be exacerbated by cheaper cars, would be a social and public cost that wouldn’t be accounted for in the retail price of cars.

But leaving that aside for the moment, how much should car prices fall if the currently high rate of excise duty levied on the production and sale of cars be reduced or abolished?

It’s not as much as you think.

Tuesday, May 28, 2013

GST And Inflation Part IV: Some Theory

I wonder how many people have figured this out?

If, as the reports say, GST will yield greater tax revenue than SST, that implies an increase in effective taxation. But all other things equal, greater taxation isn’t inflationary – it’s deflationary. At the very least, it’s dis-inflationary.

Friday, May 10, 2013

The Truth And Nothing But Truth

*Sigh*

16% TAX AFTER BN FORMING FEDERAL GOVERNMENT - RAKYAT BEEN VICTIMISED AGAIN!!!

After taking control of the Federal government after a controversial "fraud" victory , BN/UMNO Federal Government has already started imposing hardship on the poor Malaysian rakyat.

The above shows a tax of 16% being imposed (service tax - 10% and GST of 6%) on the rakyat.

Malaysians don't deserve this!!!! BUT the fault lies on some Malaysian voters who had been carried away by favors and goodies to vote for the "uncaring, corrupt and ineffective" BN/UMNO.

I linked to the site as a matter of course as it’s internet etiquette, but personally I wouldn’t recommend visiting – too many pop-ups and pop-unders.

Monday, May 6, 2013

Singapore: Tax Evasion = Money Laundering

What with all the election news, how many caught this article on Singapore’s crackdown? (excerpt)

Banks in Singapore agonize over rich clients in tax evasion clampdown

The authorities are keen to ensure the city-state is not seen as a tax haven for the wealthy from Europe, China, Indonesia, Malaysia and elsewhere without dulling its allure as an oasis for the rich, replete with casinos, luxury properties and high-end boutiques and restaurants. More than 70 percent of Singapore's S$1.34 trillion ($1.08 trillion) in assets under management at the end of 2011 came from overseas, an MAS survey showed.

Monday, March 11, 2013

Profit-Shifting and Transfer Pricing

Mr Kang is diplomatic in not pointing out Malaysia’s own situation, but this article in today’s paper takes a highly educational look into the mechanics of profit shifting and transfer pricing, and a potential solution to the problem (excerpt; emphasis added):

Reining in cross-border profit shifting

A RECENT statement by George Osborne, the British Chancellor of the Exchequer, was given wide media coverage in the United Kingdom and elsewhere when he said that he wanted to see “international action” taken against multinational companies which engaged in “profit shifting”...

...The case of Amazon highlights how profits are “shifted” and the international tax rules that are in play.

Monday, February 18, 2013

The Economist On Tax Avoidance: Corporate Transfer Pricing Hits The Mainstream

From the Special Report in last week’s issue (excerpt):

The missing $20 trillion
How to stop companies and people dodging tax, in Delaware as well as Grand Cayman

CIVILISATION works only if those who enjoy its benefits are also prepared to pay their share of the costs. People and companies that avoid tax are therefore unpopular at the best of times, so it is not surprising that when governments and individuals everywhere are scrimping to pay their bills, attacks are mounting on tax havens and those that use them.

Wednesday, September 26, 2012

Capital Flows Inside MNCs

A new research paper from the NBER working paper series looks at debt-shifting within MNCs, and finds that – surprise! – tax rates matter a great deal more than previously thought (abstract):

Corporate Taxes and Internal Borrowing within Multinational Firms
Peter Egger, Christian Keuschnigg, Valeria Merlo, Georg Wamser

This paper develops a theoretical model of multinational firms with an internal capital market. Main reasons for the emergence of such a market are tax avoidance through debt shifting and the existence of institutional weaknesses and financial frictions across host countries. The model serves to derive hypotheses regarding the role of local versus foreign characteristics such as profit tax rates, lack of institutional quality, financial underdevelopment, and productivity for internal debt at the level of a given foreign affiliate. The paper assesses hypotheses in a panel data-set covering the universe of German multinational firms and their internal borrowing. Numerous novel insights are gained. For instance, the tax-sensitivity found in this paper is many times higher than previous research suggests. This accrues mainly to three things: the consideration of the boundedness of the internal debt ratio as a dependent variable in comparison to its treatment as an unbounded variable in most of the previous work; the coverage of all (small and large) multinationals here rather than a focus on large units in previous work; and the inclusion of endogenous characteristics in other countries multinationals are invested in (due to endogenous weights) while previous work did not consider such effects at all or assumed them to be exogenous. Moreover, local and foreign (at other locations of a given affiliate) market conditions matter more or less symmetrically and in the opposite direction. There is a nonlinear trade-off between institutional quality or financial development on the one hand and higher profit tax rates on the other hand, and the strength of this trade-off depends on the characteristics of one location relative to the other ones a multinational firm has affiliates (or the headquarters) in.

Monday, September 24, 2012

Tax Avoidance: Intellectual Property Edition

The tech industry is innovative in more ways than one, and has found quite a tax dodge (excerpt):

Microsoft and HP rapped by US Senate over tax havens

The US Senate has criticised Microsoft and Hewlett-Packard for their use of tax avoidance schemes, which it says is rampant in the tech sector.

The Senate's Permanent Subcommittee on Investigations said the companies used places such as the Cayman Islands so they did not have to pay US taxes…

…Microsoft and HP denied any wrongdoing…

Tuesday, July 3, 2012

Inequality, taxes and government debt

More from VoxEU, this time on the relationship between income inequality and fiscal sobriety (excerpt; emphasis added):

Income inequality, tax base, and sovereign spreads
Joshua Aizenman & Yothin Jinjarak

Might income inequality make structural adjustments more difficult? This column presents data from 50 countries in 2007, in 2009, and in 2011, and finds that higher income inequality in the country is associated with a lower tax base, less fiscal space, and higher sovereign spreads.

Friday, March 2, 2012

Giving Credit Where Its Due

I had to snigger when I read this (excerpt):

IRB's 26% increase in collection "extraordinary," says PM

CYBERJAYA: The success of the Inland Revenue Board (IRB) in raising collection by 26.79% last year was an extraordinary achievement, Datuk Seri Najib Tun Razak said.

The Prime Minister said IRB's success in collecting RM109.674bil last year not only enabled the government to provide numerous services to the people, but also a stimulus to the private sector to increase their investments.

He said it would also give confidence to investors in the domestic market after evaluating the methods of managing the national economy, because in the current global era, the global market place factor was most crucial.