15 November 2012
Kitty's Kountry Rankings are below, with a description of how they are kompiled. This week, as every week, I give out three Encomiums to countries which have done Good Things, and award three Execrations for countries which according to my highly personal and partial views have done Bad Things.
Taiwan is hoping to bring in an extra half a billion dollars (sounds good, but it's only USD17m) by reducing a transaction tax on some obscure type of stock market instrument. Have you heard of risk-hedging warrants? No, nor have I; but what's important is they seem to have cottoned onto the (correct) idea that in taxation less is more, ie that there is a level of tax which people will happily pay rather than going to the trouble of getting out of it through some contrivance or other. In this case perhaps there are untaxed risk-hedging warrants in Singapore, or maybe the tax makes it not worth your while to hedge the risk at all. Evidently the equation of less = more only works up to a point: the step from some to no tax is not successful!
Gosh, it's difficult to find anything nice to say about governments at the moment. I suppose the poor things are desperate for money and think they have no choice other than to brutalize their citizens in order to extract the maximum amount of tax. They are caught in a trap of their own devising, between the Scylla of burgeoning public spending and the Charybdis of rebellious taxpayers. What a relief then to turn to the offshore jurisdictions, where the authorities have massive cash balances and hesitate mightily before asking for even one penny more from their citizens. They have chosen to live on their wits, rather than grinding down the populace in order to finance ornate bureaucracies. One such is Guernsey, which like many other low-tax jurisdictions has got to cope with a series of oppressive EU initiatives designed to squeeze the life out of 'offshore' under the pretence of creating a level playing field on which we can all be poor together. In particular, this week, Guernsey has said it will maintain a lightly regulated regime for alternative investment funds alongside the 'official' EU regime under the AIFMD. It's a matter of survival for Guernsey, which does however have to be careful not to drive the EU into outright opposition, maybe forcing it to quit the UK's protective 'dependent territory' regime and open itself to all the unfriendly winds of international competition. Not that the EU's furry pussy-cat funds regime could compete against anything; but there are a lot of investors in Europe (for now) and a lot of lawyers in Brussels (for ever).
I suppose that I should give a rather grudging accolade to China for increasing its quotas for foreign investment in its securities markets. China has also loosened the entry requirements into the program; but you still have to be a large organization to have any hope of qualifying. Grudging, because even after the increases it only permits a total of USD150bn of such investment, which amounts to a miniscule 1.7% of stock market valuations, compared with a comparable figure in South Korea of 36%. This whole program seems perverse: surely the Chinese are not still somehow defensive about capitalism, when they are currently the world's most successful capitalist economy? Do they really fear that US investment banks (yes, there are still one or two left) are out to get them? Take over their precious assets as if they were Ming vases and carry them off to Wall Street? Business investment is a totally different matter of course, with vastly bigger amounts sloshing around. If I was in charge, I would be far more worried about foreign investment in productive assets than about the Emir of Qatar owning 5% of a local bank.
Pity the Beeb! The UK's state broadcasting authority, the BBC, is having its annus horribilis, and one of the ways in which it is being mortified is over its payroll arrangements. "We know no spectacle so ridiculous as the British public in one of its periodical fits of morality," said Lord Macaulay, and the rest of the media is having a whale of a time biting pieces out of Auntie's helpless carcass. The journalists having all the fun are no doubt mostly self-employed themselves, but that doesn't stop them from criticizing the BBC for paying lots of people through companies or via contracts, instead of employing them. MPs and ministers are leaping on the bandwaggon, forcing the Beeb to agree to transparency in all such arrangements, as if it was somehow a crime to pay someone for a service if the recipient then fails to account for tax on it. The results will presumably be extremely negative for the BBC's ability to attract and keep high-calibre artistes and suppliers. "Now let's see," says the compliance manager in the properties department (all departments will have such officials in future): "You are renting us a zebra for the re-make of Downton Abbey, and I have here an invoice from your Zambian company, yet you live in Regent's Park. We are going to have to ask you to explain." Exit zebra, stage right.
Remember Benelux? No? It's not a kind of 1950's washing machine, actually, it was the catchy name given to the proto European Union when Belgium, the Netherlands and Luxembourg formed a kind of semi-economic union soon after the Second World War. It still exists, amazingly, but of course it has long since been subsumed into the EU to all intents and purposes. Anyway, all that to explain why Luxembourg is one of the most 'communautaire' of member states, and if any EU country 'punches above its weight' (sorry, Mr Cameron) it is surely Luxembourg, and not least at present with Jean-Claude Juncker as president of the EU (Tony Blair having been another casualty of the British absence from Brussels during his time as prime minister; he should have had a bit more foresight). None of which excuses, even if it explains, the tendency of Luxembourg to tax the living daylights out of its citizens, and it is simply incompetent that they got their sums so wrong over their 2013 budget back in October (can you remember that far back?) that they now need to scrape an extra EUR400m out of the long-suffering populace. That's EUR800 per member of the population. But you needn't cry for them: it's the richest country in the world, beating the Cayman Islands by a short head. Actually Andorra is probably richer, but it acts as a kind of information black-hole: plenty goes in, but nothing comes out.
Here is the week's most bizarre statement, and the funniest if it weren't so worrying to investors in India: "(The Court) rejected the argument that the end use of a product ought to be taken into consideration, since this has no bearing on sale price." This is a transfer pricing case, obviously. Thus, manure sold to a pharmaceutical company for its zirconium content should cost the same as manure sold to a farmer, and if your pharmaceutical subsidiary in Singapore pays you more for your manure than your farming subsidiary in Bangladesh then it is not an arm's length price. Which price, pray, is not arm's length? It's too silly. And the same silly tribunal said that the tax authority does not need to demonstrate a tax avoidance motive by an enterprise in order to implement transfer pricing provisions. Silly me, I thought that transfer pricing was about tax. The only saving grace in this case is that the business concerned is Indian rather than foreign, although of course its external subsidiaries are foreign, and Atul has been selling its manure at a higher price than the authorities think is justified. Excuse me: isn't that good for India? Since when was tax more important than trade? I give up on India.
Kitty's Encomiums and Execrations
Methodology: each week (this is the 26th) three countries are given encomiums and three are given execrations. Those are the entries below with descriptive links. In the following week, each encomium counts as 1 for that country, and each execration counts as – 1, being added to that country's existing score. Over time, therefore, a ranking will build up for each country, and further countries will join the listing. Germany has a ranking of – 1, since in the second week it had an execration and in the first week it had an encomium, leaving it at neutral; then it had an execration in week four, thus dropping to – 1, and another one in week six, dropping to – 2; finally in week 13 it got something right, so it went back up to – 1; then in week 16 it gained a further star, so then it was in neutral territory until week 23 when it dropped back to minus one, falling back again in week 24 to minus two.
The rankings are intended to be a proxy for business friendliness; evidently they are highly partisan, but as time goes by they are becoming useful for decision-making. For any country in negative territory, you should think carefully before starting a business there.
China ups its measly investment quotas
Guernsey will go it alone
Taiwan reduces a tax you never heard of
And Kitty's Execrations:
India: one step forward and two steps back
Luxembourg is too rich
United Kingdom on a witch-hunt
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Kitty Miv, Editor
Kitty was born in Argentina in 1960 to a Scottish cattle rancher and his Argentine wife. Educated in Edinburgh and at Princeton, Kitty worked for the World Bank as an economist, where she met and married an emigre Iranian banker. During her time with the Bank, Kitty worked in a number of emerging markets, including a spell in the ex-USSR as a Transition Economies Team Leader. Kitty is now a consultant in Brussels and has free-lance writing relationships with a number of prominent economic publications. firstname.lastname@example.org