17 January 2013
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.
Foundation is such a good, solid word; it gets used for charitable bodies, apart from being underneath buildings and having logical structures erected on it. The late and much lamented Isaac Asimov used it for the body which would guard the wellbeing of the human race. But in the world of tax, it is nothing so grand, just another contraption for distancing people from their wealth, or, rather, distancing the tax inspector from their wealth. So it is not surprising that Guernsey, which is good at this game, should add foundations to the list of its better fiscal mousetraps, alongside trusts. Guernsey is trying hard at present to fight back against adverse circumstances, including the European debt crisis, the tide of EU anti-business and anti-offshore regulation, with an uncaring and even actively hostile parent in Whitehall. It is busy opening offices (sales outlets) in places like Dubai and Shanghai. I bet it wishes it could be lifted out of the English Channel and dumped down in the South China Sea where the Japanese could fight over it with Beijing. It would be worth a lot more than the Spratlys, and the climate would be better, as well.
The Heritage Foundation (that word again) does not have very warm words for Thailand, ranking it only 61st in the world on its index of economic freedoms, and criticizing it for endemic corruption and weak rule of law. The country was hit by severe flooding last year, and some of the government's fiscal loosening over recent months can be attributed to that, but still and all it has to be complimented for a sustained series of tax cuts both for individuals and corporates. It is not easy to make out from a distance, and amongst the smog of reportage on the sex industry, the royal family and the Shinawatra dynasty just how friendly the administration might be to incoming foreign investors, but perhaps Thailand is no worse than rivals South Korea and Vietnam in that respect.
Top of the Heritage Foundation's freedoms list is, inevitably, Hong Kong, which definitely has had a good press this week, tweaking its tax system to encourage Islamic finance, strengthening its arbitration system, and cutting into its current deficit as it raced towards the end of 2012. One of Hong Kong's bull points for 2013 and onwards has to be its stock exchange. I will never succeed in remembering the difference between "A" shares, "B" shares and "H" shares and have to look it up every time ("A" shares owned by Chinese in China, "B" shares owned by foreign investors in China, "H" shares Chinese companies traded in Hong Kong) but it looks as if pretty soon I won't have to bother any more because they are all coalescing into regular Hang Sheng issues. That's to say that the Chinese authorities seem to be progressively giving up on attempts to rival Hong Kong on the Mainland. This is kind of collateral damage from the internationalization of the renminbi, which is now unstoppable. The internal markets made sense while Beijing's main preoccupation was the defence of the currency, but now they are pointless. Hong Kong is part of China, after all. Most other countries abandoned regional exchanges in favour of concentrating share trading activity in one liquid pool (London, New York, Paris, Frankfurt).
Rich pickings this week among countries that have got it wrong from my perspective, but the lowest-hanging fruit has to be Cyprus, which has thrown away all its God-given advantages is a spectacular display of ministerial and financial incompetence, led by Comrade Christophias, who is leaving office "with his head held high." The troika (Brussels, ECB and IMF) is going to wait until elections in February deliver the coup de grace, and the current left-wing administration (and that's being polite) is replaced by a more palatable alternative, with whom they hope they can then do business. "The business" will include abandoning the COLA (inflation-linked wages), wholesale privatizations of mis-managed and feather-bedded State monopolies, savage cuts to the number and costs of public sector employees, and, perhaps, more tax increases. Like the Irish, the Cypriots will hope that they can cling on to their low (10%) corporate tax rate, but it will be a struggle. How the Cypriot banks could have managed to lose billions through their Greek bond holdings, when three years ago they were proudly saying they didn't have any, is one of those mysteries of Nature which we may never penetrate. Another one is why the EU clings to its system of rotating Presidencies, which has seen the buffoonish Christophias lording it over the Union's proceedings for the last six months. Just the cost of the traveling EU Presidential circus probably subtracts a tenth of a percent from European GDP; but that's something else they will never tell us. They wouldn't dare!
If Britain's parliamentary Public Accounts Committee, which has lately been slamming HMRC for being too soft on business, was suddenly translated to a modernist setting in Brasilia, it wouldn't want to attack the local tax authority for being too relaxed and chummy with large companies; on the contrary it would probably wail that the highly aggressive attitudes of the Receita Federal were alienating business and creating a relationship of enmity and mistrust which can only have bad results for Brazil's economy and its level of tax receipts. But the truth is more likely to be that both sides are simply reacting to the Byzantine complexity of the tax system. Americans complain that their Tax Code is too long and complicated; just try Brazil! The companies, for their part, know that they are going to have to fight excessive demands, so they make every possible assumption in their own favour; then the tax authority, on the principle that "the more you ask for, the more you get," puts in a demand that is two or three (or ten) times higher than what it hopes to extract. So off they go to court together, hand in hand, surrounded by flocks of lawyers. They're the ones that have the big houses on the hills in Rio.
This not the first time that I have held the Italians' "redditometro" up to ridicule, but now that the offensive and absurd machine is finally going to be put into action, it deserves another bashing. In some parts of Italy they are even starting to talk about independence from the state which has served them so badly. The officials who are now, with no doubt the best of intentions, going to pick out families who are apparently living beyond their declared means, make an assumption that there is a settled bargain between the State and its citizens, and that they are on the trail of a minority of people who perversely want to upset that bargain, to the "unfair" disadvantage of their fellow taxpayers. Well, I've got news for them: in all of my many conversations with Italians of various ranks I have yet to meet one who had anything but contempt for the workings of the State. The new property tax, IMU, illustrates this perfectly: the second instalment was due in early December, but the local administrations that were supposed to set the rate managed not to do so until 24 hours before the due date for payment, resulting in monster queues at town halls just to find out how much to pay. Luckily I have an out-of-work friend who was prepared to do it for me; but is this how to run a country?
Kitty's Encomiums and Execrations
Methodology: each week (this is the 35th) 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.
Guernsey a better mousetrap
Hong Kong on top of things as usual
Thailand may not deserve its bad press
And Kitty's Execrations:
Brazil: attack is the best form of defence
Italy theatre of the absurd
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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. email@example.com