David Stewart: Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International. This week: Brexit update. I'm in London this week for the International Fiscal Association Congress and I figured it would be a great opportunity to check in with Jeremy Cape to talk about the latest developments in the ongoing Brexit saga and on his recent column lamenting the state of conservative party tax policy. Now we recorded this episode on September 9th, so additional developments may have happened by the time you hear it. Joining me now is Jeremy Cape, a tax and public policy partner with Squire Patton Boggs here in London and a Tax Notes International columnist. Jeremy, welcome back to the podcast.
Jeremy Cape: Hey and welcome to cloudy, chilly London.
David Stewart: Thank you. So last time we talked, it was about a year ago and can you just bring the listeners up to date on what has been happening with Brexit since then?
Jeremy Cape: What has been happening with Brexit? Well, rather a lot, but I don't think we want to go for a Dan Collins-style podcast, so in summary, we thought the U.K. would be likely to leave the EU at the end of March of this year in accordance with the Article 50 process, which meant that there’s two years between serving notice and then leaving. However, the deal that Theresa May had agreed – the principles level with the EU – she was unable to bring through Parliament to be through the House of Commons, which rejected it on three occasions. Therefore, the U.K. asked for two extensions – one in March and then a subsequent one in April to try and get its act together. And Donald Tusk, the president of the Council said to the U.K., “Do not waste this time that we have given you.” So since April, we've had a leadership contest, which was won by Boris Johnson quite resoundingly. The MPs then went on holiday for the summer and since the return to Parliament in September, quite a lot has occurred.
David Stewart: I think that's an understatement.
Jeremy Cape: Yeah, yeah. What has happened – Boris Johnson stated during the leadership contest that he was very keen that the U.K. should leave the EU at the end of this extension 31st October 2019, deal or no deal. He has continued to stick to this pledge, but in trying to get there, he's managed to lose his majority. He's managed to lose two ministers – one of whom was his brother Jo Johnson and then at the weekend Amber Rudd, a remainer, but one who was brought into the cabinet to provide at least some breadth, but she resigned on the basis that she thought that Boris Johnson was no longer entrusted in negotiating a new deal with the EU that would enable the UK to leave on the 31st of October in an orderly fashion.
David Stewart: Now, I'm anticipating the answer to this, but is it any clear today with Brexit is going to look like than it was a year ago?
Jeremy Cape: No, I would say that it probably isn't. I'd say at the moment, it looks highly unlikely that the U.K. will leave on the 31st of October because Parliament has passed a bill, which at the time of recording I think it received its assent a couple of hours ago, that requires Boris Johnson to ask for an extension to the Article 50 process, so we don't leave 31st of October unless he's able to agree a deal or otherwise leave with the old Theresa May deal. But by that date, it doesn't look like he's going to be able to do that. Now there is some talk that he may not ask for that extension. I suspect it's unlikely ultimately that a prime minister would break the law in that way. They may be trying to find some loopholes around it, but I suspect that's unlikely. It's slightly more possible that the U.K. could ask the EU and it needs to be all the member states to agree for an extension and they say no. Just one of them could say no. Or we may ask – as is required by the legislation – Boris Johnson may ask for an extension to 31st of January and the EU comes back and says, “Well, no. The extension has to be two years,” and that goes back to Parliament and Parliament says that's too long. So, it's possible that the U.K. could leave with a deal, the old deal, new deal, or no deal at the end of October, but I think it's unlikely. So, we're probably looking into 2020. Ultimately, there remain three options. One is to leave without a deal. One is to leave with a deal of some sort, which will probably be like the Theresa May deal or a variation thereon. Or to revoke Article 50 and remain a member of the EU like it was all a bad dream.
David Stewart: Now you mentioned that there were several defections from the government. What is the state of the government at the moment?
Jeremy Cape: Well, I think has a majority of minus 43. This is because following the bill that was introduced by rebel MPs, Labour Conservative MPs, to require Boris Johnson to ask for the extension, 21 largely very distinguished, very reasonable, experienced MPs who supported that bill were expelled from the conservative whip. Now for any purposes, they will still support government. Most of them still regard themselves as conservatives, still members of the Conservative Party, but they are now no longer technically part of government. So, Boris Johnson doesn't command majority of the House and that's one reason that as of this evening – Monday evening – unless something strange happens totally unexpected that Parliament will be prorogued, which would mean that in effect it would go into suspension for five weeks. That means that nothing really is going to happen, nothing can happen in Parliament. There's a question what the government does with that time, whether Johnson tries to negotiate a new deal with the EU or we just do nothing and wait until Parliament comes back.
David Stewart: Would holding a new election fix any of this?
Jeremy Cape: Well, it depends what the results of the election is. If there's an election and Boris Johnson – assuming he's still leader of the Conservative Party – if he can win a majority of 50, maybe 40 MPs, they can come back and then it should be possible, at least in theory should be more possible, for him to deliver on what he wants and that may not be a no-deal Brexit or that may be something else. There is speculation that in fact he might be prepared to go back to a previous iteration of the withdrawal agreement, which would involve a Northern Ireland only backstop, which for many purposes treats Northern Ireland as a special territory part of the U.K. and yet different from the GB rump. If he does that, then it's possible although will annoy the DP, but he won't be relying on them that you could see some resolution. If on the other hand, you come back after a general election with a Jeremy Corbyn majority of 40 or 50, then Corbyn could well be in a position to deliver his vision of Brexit and also his vision of what a modern 21st century state should look like and as this is Tax Notes International, that could be rather different in terms of how the U.K. is taxed compared to how it is now and how it may change if Boris Johnson remains prime minister. So, a lot of that does depend on what happens in the election. My guess – and I'll make a prediction because I suspect none of the listeners today remember what I got right and probably more likely wrong during our chat last October – my prediction is it's more likely that no party ends up with a majority and in fact, the general election doesn't solve anything.
David Stewart: So we're back to square one. We're at a stage where we don't know there may be another extension. We may be waiting till 2020 for some resolution or we may just get extension after extension.
Jeremy Cape: Yeah, I think there is likely to be an extension beyond 31st of October. It's not absolutely certain, but I think it's around 90 percent certain that it goes there. The problem seems to me that it seems likely that after that extension request is made, which will be a few days before 31st of October, we will then get a general election that needs to be five weeks between the calling of the general election and the general election taking place. That takes us into the end of November. We then have three weeks for Christmas, then have three weeks or so in January and then unless things have got resolved in that time, which even with the majority let say 60, 70, is going to be quite hard to get all that legislation through theory if you have a large majority for Johnson that could see things being resolved by 31st of January. But I think is quite possible that we'll be looking for another extension. But at some stage, he is going to get fed up with extension after extension. And whilst I think the EU is concerned about a no deal in the sense that they would much prefer for the U.K. to leave in an orderly manner, that's partly because the Irish border issue is a problem for Ireland and a wider problem for the EU, but they're also the disruptive effects of on the short term of possibly to have the U.K. outside as a tax haven, as a low-reg state. That'd be a lack of keenness I suspect on the EU to see that occur. So, there is a preference, but ultimately extension after extension after extension does put pressure on the EU, which would rather be worrying about other things.
David Stewart: Alright, why don't we turn now to your column? It ran September 9. You wrote a column about the Conservative Party's tax plans. Can you tell me about that?
Jeremy Cape: Yeah, yeah. I love writing my columns for Tax Notes International. This was the most painful one. It took me all summer to put it together, in excess of 40 hours, so I was very pleased to see it published. Usually my columns have come out as something I read on Twitter or a fever dream that I have at night. This one came out of watching the Conservative candidates debate tax policy. Now, most of the debate during the election was about Brexit, but there was discussion of other issues and tax came to the forefront. And I was watching one of the leadership debates and I was reading around what their candidates were saying. Of the final six candidates, they were all coming out with different headline policy proposals on tax and they were quite different. And yes, that's not unusual in elections within a party to see that within the Republicans, within the Democrats, each will have a different emphasis, whether that will be someone who wants to see a wealth tax, someone who wants to increase the rate of income tax. I think Ted Cruz was in favor of VAT. So, you do see these differences between the six candidates, and there were such marked differences. I thought that was worthy of comment. And the other point was just the intellectualization – if that's a word – but the intellectualization of tax policy. And it was the fact – and I think Michael Gove was the worst offender in terms of coming up with the tax proposal – so he was the candidate who said, “I’m not going to talk about income tax, I’m going to talk about corporation tax. I want to replace VAT with a sales tax.”
David Stewart: That's an interesting direction to go in.
Jeremy Cape: It is. Now he's not the only potential leader who's wanted to go that direction. Malaysia has seen a move from VAT to sales tax. Zambia – not sure if they quite got it – they keep saying they're about to and they don't. So, you see a few countries who are rejecting VAT in favor of a sales tax.
David Stewart: Now what is the argument in favor of a sales tax over VAT?
Jeremy Cape: They seemed to have a problem Zambia with the idea that if you are a mining company and you import machinery, you pay import VAT, but then you get it back. If you're a mining company in Zambia and you export what you get out of the ground, you get the VAT back. So, you're not getting any VAT from the mining companies, but you are getting VAT from the consumers.
David Stewart: Right.
Jeremy Cape: It's a design, because it's a consumer-based tax. That's why they don't like it in Zambia. In Malaysia, my understanding is that it was just difficult to comply with because VAT cascades through the supply chain and there was a sense of “this is just a bit too tricky, let's just apply it at the end.” But Gove didn't really make the principle case; he’s a smart guy. I'm sure he knew what that was. I think the argument there, which is the reverse of the argument of why the U.S. hasn't seen a move to VAT. Republicans think it makes it too easy to raise tax revenues, because if I go to Macy's and I buy a jacket for $100, and then I pay for it, it always shocks me that I have to pay $108 or whatever it is. If you go to Selfridges and you buy a jacket – and David, I know you're a man of extreme style, so I suspect you'll be going to Selfridges and buying yourself £1,000 Gucci coat. But that £1,000 is that £1,000 and within that is the VAT element. Of course you're not paying a 78 percent sales tax; you're paying 20% VAT within that price. So, I think the argument is that sales tax necessarily lower and low taxes have got to be good, right?
David Stewart: Some people make that argument.
Jeremy Cape: That would be the argument that Gove would make if he was asked to make that argument or if he thought it was a good idea to make that argument in the first place. So, sales tax is going to be lower, he'd make the argument it's fairer, but again, I struggle to see that. You can say that the base can be narrowed where the sales tax typically it doesn't apply to services as much as it does to goods. You could say within the goods that you can grade the rates in such a way that basics are subject to a lower percentage than luxury goods. But as research has shown, I was at a conference last week in Leeds University and Rita de la Feria, who's written a lot on this stuff and who I quoted in an earlier column about the dangers of knowing the VAT base, has shown from her original research that reducing the base around VAT or sales tax is regressive, that it's not progressive. But you can see how that might fly. You might argue that it's more progressive to have a sales tax with some lower rates. Maybe that's an argument. There's also an argument for localism. I've seen that made. Douglas Carswell, who was a conservative MP who then resigned and joined UKIP, lost his seat and then in I think it was the 2017 election in May of 2015, but anywaym he lost his seat. But he has written on tax policy and he made a case for the sales tax to say: you then don't have a tax that operates on a national basis, but you have it on a local basis and we need more localism in the U.K. But he then takes that argument to another level to say that it would be a good thing if that's a rather than pay the 9 percent sales tax in my original hometown of Dorchester in beautiful Dorset, I might decide rather than getting my Gucci jacket, although I'm not man of such style as you so it probably wouldn't be a Gucci jacket, but I don't get that in Dorchester, where there is a 9 percent sales tax. I'm going to travel across to Poole, 20 miles down the road, to pay a 7 percent tax. So, it's trying to encourage that race to the bottom. But none of this was articulated and none of it was really pressed either by the media or by the other candidates. And that disappointed me as someone who can be sympathetic to at least the making of an argument that says some taxes could be lower and that the sole criteria should not be whether a tax cut can be made because it is progressive. The idea that you can only ever cut taxes for the poor end of the spectrum before you can look somewhere else. And that seems to have permeated the debate even within the conservative party. And that struck me as a strange position for the U.K. Conservative Party to be in; it clearly hasn't concerned Trump. And I'm not coming out of this by saying that we should see Trump as a role model on tax reform, but I think the difference that we've seen in the approach to tax reform and the very narrow scope that the Conservative party has given itself to try and find some space for tax reform was worthy of a 3,300 word column.
David Stewart: Alright, well Jeremy I thank you very much for hosting me. I'm here in your offices and hopefully we can have you back when we know a little bit more about what Brexit is going to be.
Jeremy Cape: Yes, well, I look forward to seeing you in 2032.
David Stewart: Thank you very much.
Jeremy Cape: Thanks, David.
David Stewart: I'll leave you with some of the sounds of the protests that took place in Parliament Square on September 7th. And now: coming attractions. Each week we preview commentary that will be appearing in the Tax Notes magazines. Back in the studio, it's content and acquisitions manager, Fay McCray.
Fay McCray: Thanks, Dave. In Tax Notes Federal, Roger Colinvaux and Ray Madoff examine the policy goals in forming charitable tax incentives and discuss what would undermine those goals. George Gerachis, David Cole, and Juliana Hunter consider how much weight court should give to a government agency's position first raised in litigation in light of two recent Ninth Circuit decisions. In Tax Notes State, Carley Roberts, Robert Merten, and Mike Le evaluate Arizona's judicial objection to the reach of California is tax imposition on out of state companies. Maria Todorova, Chris Lee, and Justin Brown discuss the different requirements by states for reporting federal adjustments and outline strategies for limiting multistate taxpayers compliance burdens. In Tax Notes International, Thomas Horst estimates the actual revenue effects of four international provisions of the TCJA and compares estimates to projections made by the JCT in late 2017. Lewis J. Greenwald and Joseph Myszka review the proposed GILTI regulations and suggest how flaws and the GILTI high-tax exclusion might be addressed. On the Opinions page, Carrie Elliott looks at what game theory can tell us about the dynamics among players and tax systems. And Ben Willis writes about the two questions U.S. Sen. Amy Klobuchar posed to Treasury Secretary Steve Mnuchin about GILTI’s an incentive to offshore assets.
David Stewart: You can read all that and a lot more in the September 16th editions of Tax Notes Federal, State, and International. That's it for this week. You can follow me online at @TaxStew, that's S-T-E-W. If you have any comments, questions, or suggestions for a future episode, you can email us at podcast@taxanalysts.org. And as always, if you like what we're doing here, please leave a rating or review wherever you download this podcast. We'll be back next week with another episode of Tax Notes Talk.
Tax Analysts Inc. does not provide tax advice or tax preparation services. The information you have seen and heard today represents the views of the presenters, which may not be the same as those of Tax Analysts Inc. It may include information obtained from third parties, and Tax Analysts Inc. makes no warranties or representations of any kind, and is not responsible for any inaccuracies. Nothing in the podcast constitutes legal, accounting, or tax advice. The tax laws change frequently, and neither Tax Analysts Inc. nor the presenters, can guarantee that any information seen or heard is accurate. Also, due to changing tax laws, any information broadcast or downloaded after its original air date may no longer represent the current views of the presenters. If you have any specific questions about any legal or tax matter, you should always consult with your attorney or tax professional.
All content in this broadcast is protected under U.S. and international laws. Copyright © 2019 Tax Analysts Inc. Unauthorized recording, downloading, copying, retransmitting, or distributing of any part of the podcast is strictly prohibited. All rights reserved.