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A well-armed and vindictive set of bandits

Kitty Miv, Editor
10 April, 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.

China announced a further package of tax cuts to benefit SMEs, extending previous reductions in income tax and VAT exemptions. That's presumably good news for would-be businesspeople, although it's difficult to tell from a distance how far Chinese entrepreneurs are tormented by bureaucrats, as is the case for small businesses in Europe and America. All governments make great play of their support for SMEs, but in most countries the reality is very different from the hype, at all levels of existence. The average Western small business would definitely regard its central government, its local government and the tax authority as being a well-armed and vindictive set of bandits determined to prevent it from succeeding in the market-place.

The panoply of difficulties confronting a would-be start-up in most countries includes at least the following:

  • a raft of administrative requirements (register your business, comply with health and safety and environmental rules and licensing regimes depending on the sector);
  • a fight with the tax authority, which will try to prevent you from being self-employed and deducting legitimate expenses from your turnover;
  • disadvantages of a VAT regime which prohibits you from reclaiming "input tax" until you have already a significant turnover;
  • obligation to pay property taxes, income taxes and other state imposts before being able to generate profitable turnover;
  • restrictive labor legislation preventing you from hiring and firing staff according to circumstances and which gives significant advantages to workers as against bosses.

Not surprisingly, faced with such difficulties, many entrepreneurs turn to the black and operate their businesses in a cash-driven space outwith the conventional business arena. This leads the authorities to regard business-people as proto-criminals, and cranks up a vicious circle of repression against start-ups that ends by totally defeating the avowed purpose of government. It takes a brave and clever politician to understand the need to step back and allow entrepreneurial creativity to flourish; and few make the grade. If the Chinese are really doing so, then congratulations to them. In Europe you will look in vain for a country which is even 10 percent of the way towards such an enlightened position.

How good to see someone challenging the current OECD-inspired tax gospel with a comprehensive dissing of the BEPS heresy. The tax boss of the UK's ACCA must have swallowed hard before accepting the report they had commissioned, but he has bitten the bullet. I'm not going to drown you in statistics, just one will do: Germany's revenue from corporate income tax was 15 percent higher in 2013 than in 2012. Now how are you (well, I don't mean you, I mean "they") going to square that figure with the prevailing consensus, at least among politicians and tax collectors, that MNEs are getting away with blue murder? It's just a bundle of politically-inspired, or maybe I mean debt-inspired balderdash. Everyone needs to remember at all times that, whatever usefulness it may have had in the past, the OECD is nowadays simply and only a rich-country pressure group whose goal is the destruction of tax competition.

The whole BEPS farrago is giving a lot of innocent amusement to governments, accountants, journalists and legislators; but in terms of adding to the wealth of nations, it is a waste of space. In fact it is counter-productive, because it distracts attention from the need to develop a coherent set of principles to apply to transfer pricing. Pending the abolition of corporation tax, which as my regular readers will know is both desirable and inevitable, there is an existential need to apportion income between corporate locations on a basis which will be accepted as fair, and the OECD has indeed done some moderately useful work in this regard when it sticks to its knitting. I wonder indeed if there is not a dichotomy within the OECD between the sensible economists who are trying to craft reasonable international agreements, and a more militant tendency which represents in a loose sense the regiment of barking, cash-strapped finance ministers of the Western world? And I wonder which lot drinks more of all that claret they have stored in the cellars beneath their palatial Parisian mansion? No prizes for guessing what I think.

Ha, ha! The Indian Government has produced another rescension of the Direct Tax Code, just in advance of the general election, whose timing either demonstrates a fine disregard of political reality on the part of the Finance Ministry, or more probably is just accidental. Either way, we shouldn't pay too much attention to it, since it is 100 percent a hostage to political fortune, and is sure to be changed again several times before being enacted, if it ever is. But we can at least notice the quite hilarious change to the "indirect transfers" wording, which underlines the great chasm of unreality that exists between the Indian tax authorities and the rest of the world.

Under the Government's original DTC proposals, indirect transfers would have been taxed in India if the companies involved had at least 50 percent of their assets in the country. The Government has since concluded that this threshold is too high. According to a document available on the Income Tax Department's website: "There could be a situation [where] a company has 33.33 percent assets in three countries but it will not get taxed anywhere." The revised code accordingly provides for a 20 percent threshold.

Where do I start? Perhaps with the arithmetical consequences of a 20 percent rule. What does "assets" mean? Who is to value them? Especially in the case of a private company. And in the case of a non-private company with interlocked international shareholdings spread across half a dozen financial centers, there never will be an answer. And at what level would be 20 percent (or for that matter 33 percent or 50 percent) be judged?

But just to be fair, let's take it at face value, and suppose that these two corporations, Japanese and American, each with 20 percent of their assets in India, conduct a sale between themselves of a Cayman Islands subsidiary which has a proportion of its business activities in India (forming part of the 20 percent, by all means, but amounting to much less than 20 percent). Can you see what a minefield it would be? And if the companies have a majority of their assets in the USA and Japan respectively, how will the respective taxing rights of these various countries be adjudged? The original wording, difficult enough already, at least clung to the principle that a company should be taxed where it was mostly based.

The whole thing is just puerile.

It's almost a relief to turn to the comedy of Comrade Hollande's reshuffle. That he had to do one is beyond question, but in what weird universe can the President of a major economy seriously give a ministerial job to one of his ex-mistresses, having just dumped another of them, and promote a known Marxist firebrand to be Economy Minister as a part of a slate of pro-business reforms? He talks about tax cuts, but he hasn't got any money. He talks about "savings" but there aren't any. Debt, the deficit and spending are all higher than he has promised, and his masters in Brussels are at their wits' end. What are they going to do with him? At least in the comparable case of Comrade Christophias in Cyprus he was due to leave office within a year; but this apology for a leader has a full three years to run!


Kitty's Encomiums and Execrations

Methodology: each week (this is the 99th) two or three countries are given encomiums and two or 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 is at neutral, 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:

China helps small traders

India dreams on

United Kingdom dares to cross the OECD

And Kitty's Execrations:

France The End Is Nigh




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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