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A mini-Dubai shimmering on the Caspian Sea

Kitty Miv, Editor
11 September, 2014

Kitty's Kountry Rankings are below, with a description of how they are kompiled. This week, as every week, I give out Encomiums to countries which have done Good Things, and award Execrations for countries which according to my highly personal and partial views have done Bad Things.

Recent tax developments in Azerbaijan are suggestive of a country with a modern outlook, keen to encourage local entrepreneurs to grow their businesses and welcome foreign investors with open arms. Taxes are low – corporate tax stands at 20 percent and the top individual tax rate has fallen to 25 percent – and lately tax reforms have focused on making life easier for companies with the introduction of more electronic services, the creation of a tax ombudsman and other measures designed to streamline tax administration. Tax holidays have also been granted to companies engaged in various non-oil related activities like information technology. According to a senior tax official, Azerbaijan is now working to harmonize its VAT regime with that of the EU. Some might see this is a retrograde step given the complexities of EU VAT law. But it is presumed that this decision has been motivated by the desire to attract more investment from Europe as the Government attempts to diversify an economy which has hitherto been extremely reliant on an abundance of mineral wealth, especially oil and gas. It all sounds very positive, yet I find myself praising a country like Azerbaijan through gritted teeth. Economically, it has come on in leaps and bounds since becoming independent from the USSR in 1991. Per capita income has increased seven-fold in the last decade alone, and its capital, Baku, now resembles a mini-Dubai shimmering on the Caspian Sea. Of course these feats have mostly been achieved on the back of oil and gas exports, leaving the country highly exposed to the roller-coaster nature of world oil prices. And Azerbaijan also has an ugly side. Although it claims to be a democracy, elections have repeatedly been declared illegal by international observers. Increasingly, opposition to the Aliev regime is brutally suppressed, while encountering corrupt public officials is almost a daily hazard for businesses. Azerbaijan also treads a precarious diplomatic tightrope between courting Europe – an important oil client – and pleasing Russia, knowing that its powerful northern neighbor is apt to redraw national boundaries on its sensitive southern flank at a stroke when feeling under threat, and this is a region where ethnic tensions continue to simmer. Let's hope that Russia hasn't caught wind of the EU VAT initiative. Vladimir won't be pleased.

So while Azerbaijan is certainly no angel in the pantheon of nation states, it at least seems to be developing a coherent tax strategy. The same cannot be said of Brazil, which, although a member of the exalted BRICS club, is let down as an investment destination by its tax system. That said, while it has in the recent past been common for the Government to raise a tax one week, and cut another the next as it attempts to micromanage an economy buffeted by a strongly appreciating currency and high inflation, it has been noticeable that in the last few months the direction of taxation has been firmly down, including the extension of tax concessions in the Manaus Free Economic Zone, which, despite its location in the middle of the Amazonian jungle, recently attracted its first pharmaceutical manufacturer. Indeed, since the turn of the year, Brazil has cut individual income tax, cut tax on imported capital goods, made payroll tax breaks permanent, cut tax on foreign loans, extended tax breaks for the automotive and furniture industries, removed tax on most medicines, eased tax on technical fees, extended a tax break for the IT industry, extended tax exemptions for retail computer sales, and championed tariff elimination in South America. Unfortunately, I'm far too cynical these days to conclude that the Government's intentions here are entirely wholesome. There is an election to be fought next month after all, and the Brazilian economy is not in a happy place. President Dilma Rouseff may yet end up clinging on to power, but whoever wins, it will be interesting to see whether taxes start going back up again shortly after the election. Businesses in Brazil must sincerely hope not. Apparently it takes the average company in Brazil 2,600 hours a year to comply with its tax obligations. That's 108-and-a-third days, leaving only two-thirds of the year for companies to actually get any business done. Little wonder the economy isn't where it should be.

Now we return to the issue of mineral wealth. For some countries, the random distribution of the resources that keep the wheels of the global economy turning is just plain unfair. Japan for example, is entirely reliant on oil and gas imports, while an ex-Soviet backwater like Azerbaijan is practically swimming in the stuff. As we have already suggested, however, abundant natural resources are as likely to be dangerous for an economy as they are to be a blessing; there are few doubts (if you live beyond the Kremlin walls that is) that Russia's economic development has been stunted to some degree by an over-reliance on petro dollars. A recent report suggests that Australia, the original lucky country, could go down the same road if it is not careful. This study concluded that the mining industry in Australia paid AUD40.3bn (USD37.7bn) in company tax and royalties in the two years to the end of June 2014. In fact, mining accounts for a quarter of all Australia's company tax revenues, up from just 8 percent a decade ago. And these figures don't even take into account the 22.5 percent Mineral Resources Rent Tax (MRRT) on iron ore and coal miners. The fact that these figures come from the Minerals Council of Australia mean that they are probably open to dispute. Even so, they are indicative of a global trend towards more aggressive taxation of mineral extraction projects. It is understandable why governments lean so heavily on the resources sector – if someone struck oil in your back yard you'd surely want a substantial piece of the action. But there must come a point when it is plain uneconomical to get the stuff out of the ground, no matter how much it may be in demand. In actual fact, the MRRT revenues thus far have grossly undershot the estimates of the previous Labor Government, which introduced the tax. And this is further bad news for Australia because Labor had earmarked these revenues for all sorts of goodies, and the failure of this gusher of new tax receipts to materialize has contributed to a dramatic downturn in the Government's financial position. Prime Minister Tony Abbott therefore deserves praise for sticking to his guns and repealing the MRRT while facing the prospect of a "double dissolution" that would have triggered a re-run of last year's election. His success has come at a price though. Former mining magnate Clive Palmer and his merry band of Senators (all three of them) hold the balance of power in the Senate under the guise of the Palmer United Party. You'd think the ostensibly libertarian PUP, which is probably further to the right than the conservative Liberal/National coalition, would welcome the demise of the MRRT and relish the chance to reduce the Government's bloated spending bill. But they've learned fast. Latching onto popular discontent about the package of spending cuts bundled with the repeal bill, they forced many concessions out of the Government in a bid to appear more soft and cuddly. That's politics!


Kitty's Encomiums and Execrations

Methodology: each week (this is the 121st) one or more countries are given encomiums and one or more 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 is at plus 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, but reverting to neutral territory in the following week, then dropping to minus one in week 50, and back up to plus one in week 51, then to plus two in week 52. Some weeks ago it dropped a place, but then quickly recovered one step. Etc etc and now it's on plus 1 again.

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.

Kitty's Encomiums:

Australia resource rationalism

Azerbaijan business-focused

Brazil cutting taxes




About the Author

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. kitty@lowtax.net


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