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An Introspective Frenzy of Regulation

Kitty Miv, Editor
01 August, 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.

It's all happening in trade at the moment with the United States gaining its second star in a week after reporting good progress with the Trans-Pacific Partnership negotiations, after a successful opening to the US/EU TTIP talks last week. Japan has now officially joined the process, which also includes Australia, Brunei, Canada, Chile, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam. All eyes are now on Shinzo Abe, Japanese Prime Minister, who has to deliver domestically contentious cuts to agricultural tariffs if Japan is to fulfil its side of the trade bargain. Step one has been achieved with last week's elections which gave him control of both houses of parliament, but there is a long way to go, and he has to avoid the temptations of constitutional tinkering in preference to the grittier tariff reform process.

Meanwhile China has responded in what seems to be a highly practical way to weakness in its growth path, if a 0.2 percent reduction in growth from 7.7 to 7.5 percent can be called weakness. Broadly the measures are aimed at removing barriers to the flow of trade, but they also include some actual tariff cuts. An exemption from VAT and business tax for SMEs with annual turnover below about USD35,000 seems particularly helpful. The new Chinese leadership, whatever their political credentials, certainly seems to be off to a good start in economic terms. They also made progress this week on a trade deal with Australia, which has just been revivified after eight years of stop/go talks. China said that Australia had made constructive proposals, while Australia said it was "committed to reinvigorating FTA negotiations with China and delivering an agreement which offers greater prosperity for both countries."

Even when it tries to reduce taxes, it seems that the French Government can't get things right. It's trying to rearrange the capital gains tax regime allowing increased tax reductions depending on the holding period, with total exemption from real estate capital gains tax granted after a 22-year holding period, instead of 30 years as is currently the case. In addition, there are progressive reductions in matching social levies (the CSG general social contribution and CRDS contribution for the repayment of social debt), and a total exemption from social contributions will be accorded after a 30-year holding period. But the French national real estate federation FNAIM insists that the Government has failed to tackle the root of the problem and to simplify the regime. The federation emphasizes that the Government should have introduced a simpler regime, akin to the system in place in France up until 2004. Under this regime, regular tax reduction increments of 5 percent a year were accorded, starting from the third year of the holding period until total exemption was granted for a 22-year holding term. Air France's unions are up in arms, too, over plans to increase the country's tax imposed on airline tickets next year. Dubbed the "Chirac tax," the charge was introduced in France in 2006 by former French President Jacques Chirac. Levied at a rate of EUR1 on single intra-European flights in economy class, and up to a rate of EUR40 on international business flights, the product of the levy flows to finance the fight against AIDS, tuberculosis, and malaria in developing countries. French President François Hollande has pledged to increase the tax in 2014, perhaps by as much as 10 percent.

Needless to say, the EU's top brass lost no time in clambering aboard the G20's BEPS cavalcade. Messrs Van Rompuy and Barroso, Presidents of the European Council and Commission wrote to all the 28 European Union (EU) heads of state and government (there goes another tree) to "fully support" the work begun by the OECD to develop a multilateral standard of automatic information exchange, something they believe "should build on existing automatic exchange systems in order to maximize efficiency." The Presidents also make clear that they back the OECD's recently released Action Plan on base erosion and profit shifting (BEPS). According to the letter, this is "the right approach to curbing corporate tax avoidance worldwide," and "fully supports our common objective to ensure that everyone pays a fair share of tax…and that taxation reflects where economic activity takes place." Van Rompuy and Barroso are keen to ensure "consistency and coordination between EU and OECD efforts and develop internationally agreed standards for the prevention of BEPS in a constantly changing environment." And of course they take a swipe at what's left of "offshore" while they're at it. The Presidents urge the G20 "to remain committed to ensuring that non-cooperative jurisdictions adhere to [international] standards in the areas of tax, anti-money laundering/combating the financing of terrorism, and prudential standards."

Now there are two (only two?) things wrong with this. One is that as regards corporate tax, they are shooting (like the OECD) at the wrong target. "Fairness" has got really nothing to do with corporate tax. There are laws, treaties and Codes of Conduct, forests of them, which minutely dictate how and where companies should pay tax, and as has been widely observed, if these are operating in a way which their framers (host countries) don't like, they can be changed. Corporates are passive in this. But it's unlikely that countries will want to change them: while the UK has been mounting its BEPS charger, lance at the ready, it has also been burnishing its 10 percent IP regime, to Germany's tartly expressed dismay. How likely is it that the UK will be prepared to abandon its 10 percent regime unless all of the other "patent box" countries in Europe do the same? Then it's a question of transfer pricing, for which plentiful rules exist: if a German company (say Volkswagen or Bayer) locates its IP in the UK, presumably accompanied by a large research department, the licensing price that UK Bayer can charge its operating subsidiary in Poland is dictated by economic realities. That's what the G20 wants, isn't it? If the IP economic activity (research) takes place in the UK, then it is being correctly taxed. It's just impossible to see what changes can be made that won't simply add bureaucracy and reduce European competitivity.

And that's the second thing that's wrong: the EU is doing nothing to enhance the continent's competitivity. On the contrary, it has worked itself into an introspective frenzy of regulation in banking, insurance, fund investment and other sectors which will drive out enterprise. Its efforts to address the very real problem of youth unemployment are simply footling. There are two problems in Europe which the Commission could and should be addressing: debt and cost, with the two interacting in a vicious circle which is destroying economic capacity. Governments owe too much money and they spend too much money, with the result that taxes are too high and choke off "animal spirits." Even in the UK, which almost alone among EU governments has made an effort to reduce costs, debt is continuing to rise. The conventional wisdom is that, oh it's OK because once the economic cycle turns the money will come flooding back in. But what if it doesn't turn? The EU is in total denial on this score; there is a serious failure of leadership. People like Van Rompuy and Barroso should be leading the charge against excessive government cost, instead of which they spend their time tormenting business.

Kitty's Encomiums and Execrations

Methodology: each week (this is the 63rd) 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 on + 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. Last week it dropped a place, though.

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 gets something right

China being pragmatic

France makes an effort

United States trading first

And Kitty's Execrations:

European Union adrift without a compass




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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