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An SEZ in the Waterlogged Fens Outside Cambridge

Kitty Miv, Editor
09 May, 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.

One swallow doesn't make a summer, and we can't herald an outbreak of competition in the European Union just because the UK has announced an expansion of its fiscal support for film-making. But coming on the heels of the announcement of the Patent Box, and further reductions in the rate of corporation tax, it does show that there are ways for a country to compete even within the strait-jacket of the EU's State Aid rules. It seems illogical and even perverse that Brussels allows a range of national corporation tax rates from 10 percent to 33 percent, yet will not allow say an SEZ in the waterlogged fens outside Cambridge with an incentive rate of 10% for technology start-ups. Of course that situation is not the Commission's choice – they would prefer a harmonized tax rate across the Union. Let's hope they never get their wish: it would be like entering a boxing match with your hands tied behind your back. One obvious case where a lower rate would pay dividends is Northern Ireland: at present they have to compete against a 12.5% rate in the rest of Ireland with the UK's 20% rate. With freedom of movement across the border for workers, who would start up a new company in the North?

With Austria's apparent capitulation on the banking secrecy dossier, and the news that a number of the UK's offshore dependencies are going to join the G5's anti-evasion initiative, it certainly looks as if the last shreds of financial privacy are being torn away, at least for individuals. But the picture is a lot more nuanced than that: first of all, Austria will not give up secrecy for its own citizens (so next time you get divorced, make sure you pick a Merry Widow from Vienna for your third wife) and secondly, Austria is making conditions which may prove hard to fulfil, especially in regard to the Savings Tax Directive. And it's worth noting that the offshore dependencies in question already conform to that Directive, so there is nothing much new in that respect for individuals. The Directive really is a paper tiger for anyone with a good lawyer, and even the Commission's "improvements" to it, which they have been struggling to implement now for eight years, won't make much difference, with the biggest loophole being of course that major wealth destinations such as Singapore, Hong Kong and Panama simply refuse to have anything to do with it. Something I do wonder about in respect of the encroaching tide of automatic information exchange is the sheer volume of data that is being exchanged and the cost of the process; HMRC, for instance, in London is going to receive data on bank accounts in forty or so other countries, including, if the reverse FATCA goes into effect, the USA. That's hundreds of millions of bank account details, every year. There are things called computers, of course, but there is no harmonized international identification system and there are ever so many people called John Doe. How will they set about storing, sifting and analyzing the data? Perhaps, in that haystack of information, the needle of your bank account will even harder to find than if it had stayed behind in cloistered secrecy in Wichita?

We shouldn't perhaps be congratulating Hong Kong for collecting a record amount of tax, but it represents the SAR's business success, while the amount of personal tax fell, not least because for yet another year the Government is giving back a slab of tax to individuals. Companies and regional headquarters continue to flood in, both from Mainland China itself, and from outside, as Hong Kong remains the most convenient and important gateway into the Middle Kingdom. Hong Kong feels its hegemony threatened by Singapore and Shanghai, in different ways, but this is a virtuous circle of competition: a game which all three locations are going to win.

The party has come to a juddering end for Australia's socialist government after four years of spendthrift populism and anti-business tax rises, with a USD15bn hole in its budget. Last year's 3 percent deficit was to have been turned into a budget surplus this year, but there is now no chance of that. The Government says it won't increase taxes, and it's true that debt is fairly comfortably within the Maastricht guideline of 60%, so a deficit is not the end of the world, but you have to wonder just how much damage has been done to the all-important resource sector by the successive waves of taxation. The problem is not the dented performance of existing mining giants, it's the investments that are being made in Brazil, Indonesia or South Africa instead of in Australia because of the inimical economic climate, and there is no way of measuring those. And, by the way, it's not true that taxes are being held down: in the very same week as it announced the fall in revenues, the Government hiked social insurance contributions by a whopping AUD20bn over the next five years in yet another redistributive measure. This is money you haven't got, Mrs Gillard, and you shouldn't be spending it!

I find it really shocking that after five years of pressure and complaints, the Netherlands' Government is still refusing to level the playing field for its state-owned businesses when they compete against private sector equivalents. Of course this was the norm in pre-Thatcher days, when the finances of state-owned corporations were utterly obscure, and notions such as profit and loss were alien to the bureaucrats who had carte blanche to favour themselves over private competitors. Silly me, I thought that had all gone, but evidently not. I was writing about Fannie Mae and Fannie Mac last week, and that's unfair competition as well, although not quite so blatant. Then this week we also had the spectacle of the French government grandly announcing a rapprochement with business, while out of the other side of its mouth it was denying Yahoo's attempt to take over website Dailymotion – something the company itself and its other shareholders wanted – because it didn't suit part-owner France Telecom. France is altogether in a defensive posture as regards the Internet, as President Hollande made very clear back in January when he threatened Google with legislation if it didn't pay through the nose for linking to French content. The truth unfortunately is that the wave of privatization, or to give it a more accurate name, marketization, which bubbled up in the UK in the 1980s, and which had a major impact in many countries around the world, has largely passed by countries such as France and Italy. Even in a place like Cyprus, where you might have thought that the "Anglo-Saxon" influence would have been stronger, the state clings on to the telephone, electricity and water utilities: last month when the Troika tried to insist on privatization of the electricity company, the feather-bedded bureaucrats who run it as a kind of family retirement home offered to find the EUR1.5bn themselves if they could be spared! That would be funny if it weren't sick. We have a long way to go.


Kitty's Encomiums and Execrations

Methodology: each week (this is the 51st) 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 neutral ranking, 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.

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:

Austria throws in the towel

Hong Kong in the money

United Kingdom rolls the credits

And Kitty's Execrations:

Australia in a bind

France defends its digital territory

The Netherlands being unfair





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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