I thought about who I would invite for an interview if I could invite anyone in the world, and Rita de la Feria was at the top of the list. She has been listed in the Top 50 of the most influential tax people in the world by the International Tax Review magazine. So I could not believe my eyes when I saw her reply: “To be completely honest with you, I have recently been refusing all similar requests. Having said that, I would like to do this for you.” And the hour chat with Rita turned out to be not only educational, pleasant and sometimes even fun (did you know that Star Wars Episode I opens by talking about a dispute over taxation of trade routes?), but also one of the most interesting hours spent in my professional career. We spoke about the movie Minority Report as well.

On the current system

If you 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 it’s well designed – it should not intervene in business. In reality VAT systems are often messed up, including in the EU, it’s still the best tax we have, and this will still be true in the future. Plans for special taxes on the digital economy are most likely going nowhere. BEPS and other anti-avoidance rules have a short lifespan, because very good tax lawyers can find a way and are always a step ahead of policymakers. Of course, actions that were OK for companies un vin7-10 years ago are not OK anymore, but this is mainly mostly for reasons of reputation. Companies still have incentives to move to another country in order to pay less tax, so governments have to eliminate the incentives, instead of introducing anti-avoidance rules.

On the future

So what will happen with tax systems? Most likely after the pandemic the desperation of countries for investments will be even bigger, so tax competition will increase. So unilateral digital taxes are unfortunately here to stay. Rita’s vision for the corporate system is taxing profits based on where the customer is, in the same way that VAT is applied. This would prevent tax competition as well – as for companies it would then not make sense to move themselves or their IP to another country, as doing so 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 because of the digital economy, because the digital economy is increasingly expanding to include everything. This profit taxation model would basically kill the need for offshores for tax reasons – let’s see how many of those billions then will remain there for non-tax reasons.

On offshores

She sees the way of fighting tax evasion as pooling administrative resources and the new technologies, as is already used in Portugal (the only country in the EU to do this), Russia and Israel – e.g. to track transactions as they are happening. When this was introduced by the Portugese hospitality industry during a downturn, 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 a tendency to maintain and carry out small fixes of everything that we used to have, instead constantly questioning the system and starting from scratch.

On VAT exemptions

Rita believes that the latest research across many countries and industries shows that exemptions mainly benefit retailers and the rich, as VAT reductions are often not passed on to prices. As the rich would buy the same items anyway, the state is not collecting the money it could; by contrast, if the full VAT rate was applied, the proceeds would end up with the state, which could distribute them to the poorest. For this reason, she does not support wider use of exemptions. Moreover, there are many disputes over exactly what is subject to exemptions.

On disallowing 0% VAT for intra-community sales

The tax authorities penalise sellers for crimes that may happen in the future, committed by someone else in another country, and which are totally outside the control of the seller. This just does not make sense, especially considering that tax penalties under the European Convention of Human Rights and the legal practice have certain features shared by criminal penalties. This is surreal from the perspective of criminal law, but happens in everyday practice.

You can access the second Tax Stories podcast – HERE.