Tax Break

Who said tax is boring?

Dead loss

Angry Talk (Comic Style)

Image via Wikipedia

Liu Zhuiheng was executed last Thursday.  Xinhua, the Chinese State News Agency,  reported that the 52 year old from Hunan Province had been convicted of the July 2010 bombing of his local tax office resulting in 4 dead and 17 wounded. The motive for the crime was  frustration over his business losses.

Now, if we are honest with ourselves, most of us – at one time or another – have dreamed about taking a match to the local tax office. But,  in my case, at least, there was always a good reason: because they insisted on reading a treaty upside down; because they were basing their decision on a non-existent law; or simply because they were getting up my nose.

What did not make sense was that Mr Zhuiheng was punishing the tax authorities  for something for which they were not to blame- his business losses. If he felt some need, as he clearly did, to let off steam it would  have been more appropriate to trot off to the local Party Headquarters  and harangue the Party over the absence of any mention of  business losses in  Das Kapital or the Little Red Book.

Then I got to thinking that, while Mr Zhuiheng got it tragically wrong, maybe tax authorities are not as innocent as they look. The basic principle of the carry forward of losses is a tried and tested one. Countries have differing approaches, some allowing carry back, some restricting the period of carry forward. A phenomenon that has been gaining momentum in recent years and, particularly, in 2011 has been the restriction on use of loss carry forwards in a particular year. Following Germany’s earlier lead, in 2011 countries including France, Japan, Spain, Portugal, Austria, Denmark and Hungary either enacted measures, or moved towards,ensuring  that companies that are profitable in a particular year pay a certain amount of tax despite sufficient brought forward losses – by only permitting a certain percentage of taxable income to be relieved.

Although this may appear unfair and will doubtless upset (although I hope without the same consequences as in China) the businessmen of the western world, it must be clearly viewed against the backdrop of the world financial situation, with governments desperately trying to balance their books and facing a multiyear delay in tax revenues as companies pull out of recession and utilize their losses. The OECD estimated in 2011 that in some countries loss carry forwards represent as much as 25% of GDP.

When added to the tightening of change of ownership rules as well as the expected effect of the OECD’s  2011 report “Corporate Loss Utilization through Aggressive Tax Planning”,  which identified key risk areas where governments should  clamp down as; corporate reorganizations; financial instruments; and non-arm’s length transfer pricing – it does not look like companies have a lot to smile about when it comes to their, already  painful, losses.

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