The Tax Foundation has published the International Tax Competitiveness Index 2020 which assesses the relative competitiveness and neutrality of OECD nations’ tax system by looking at 40 tax policy variables across five categories. In the overall ranking, the top spot is taken by Estonia for the seventh year in a row, Luxembourg and Switzerland remain in the top ten, the United States have kept their ranking (place 21) and the UK has moved up three ranks (from 25 to 22), topping the International Tax Rules category.

Some interesting observations can be made, although it would be prudent to take the rankings with a pinch of salt as some of the scoring may not always fully reflect certain commercial considerations or experience. For instance, the Netherlands continues to be ranked higher than the UK in respect of withholding taxes, a point which Sara Luder noted in the context of the 2019 results seems to disregard the fact that Dutch withholding tax on dividends can be a major hurdle for structuring under a Dutch holding company (when compared with structuring under a holding company in a jurisdiction, like the UK, that does not impose a dividend withholding tax).

Importance of tax treaty networks

The UK’s jump from tenth to first place in the International Tax Rules category (and its improvement in the overall ranking) reflect a methodological change. Recognising that the reach of a country’s tax treaty network is a crucial factors in its competitiveness, withholding tax and treaty networks have been split into separate subcategories.

The UK unquestioningly tops the treaty network category: “The United Kingdom has the broadest network of tax treaties (130 countries) and thus receives the best score.”

The UK also received a perfect score in the Territoriality category, given that dividends received from foreign subsidiaries are generally exempt and gains on the sale of shares in foreign subsidiaries are exempt, provided the conditions for the substantial shareholding exemption are met.

Taxing land, not capital

Yet again, the UK is among the countries marked down for complicated property tax regimes – with two important messages to take away which could inform tax reforms currently under consideration.

The authors note that “[c]ountries that tax the value of capital as well as land receive the worst scores”. This is what happens if recurring property taxes take into account the value of structures and buildings on the land as well as the value of the land itself – and this is exactly what UK business rates do: “business rates are a tax on the open market rental value of property, more tax is due on more valuable properties. Similarly, if a property is changed so as to become more valuable, its [rateable value] and tax liability are likely to increase.”

In its Business Rates Review, the UK government has invited views on the impact of this features of the business rates system on investment. Exempting some currently rateable plant and machinery from business rates or providing temporary relief or exemptions for new investments are muted as potential options for change. In my view, either of these should make the UK’s property tax system more competitive.

Financial transaction taxes

The authors mark down countries that impose levies on the sale or transfer of financial assets because they impede the efficient functioning of financial markets.

Whilst this has not deterred a number of EU countries from introducing financial transaction taxes over recent years (indeed, the work programme for Germany’s Presidency of the Council of the European Union from 1 July to 31 December 2020 reaffirmed its commitment “to the introduction of a financial transaction tax at European level”), it can only be hoped that HMRC will take this as further evidence in favour of at least a modernisation of the UK’s system of transfer taxes on shares the consultation on which closed on 13 October 2020.

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