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Another bouquet for Canada to add to its existing florist's shop

Kitty Miv, Editor
21 February, 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.

The Bahamas is to have a VAT, so why am I congratulating it? Because a VAT is a more trade-friendly tax than the excise taxes it replaces. I'm not sure that the Bahamas would necessarily have taken this step if it had been left to its own devices; it's happening because the various regional initiatives such as CARICOM, of which The Bahamas is a member, point towards a tariff-free single market. You could say that VAT merely replaces equivalent tariffs, but that's not really so: if, for instance, imported materials are turned into a product that is eventually exported (zero-rated) then that does support trade; and even domestically a VAT is better than the cumulation of tariffs and sales taxes that can make imported goods so expensive. (By the way, is The Bahamas it? them? her? It's the The that causes the problem, implying that there are multiple Bahamas when it's clearly one country or jurisdiction or whatever it is. The Philippines and The Seychelles are other countries ending in 's' and they have the same issue. Why not The Mauritius, then?)

Staying with trade, there is yet another bouquet for Canada to add to its existing florist's shop of them, as it throws in its lot with the Pacific Alliance. Yes, Canada, like the USA, faces West as well as East. It's no coincidence that the IMF is complimenting Canada on its economic policies this week. We can fairly attribute Canada's recent successes to a longish period of consistent business- and trade-friendly governance, and at least in this respect we may reflect that a parliamentary democracy like Canada may have a better constitutional model than its southern neighbour, in the grip of legislative paralysis because of its presidential model. But that is too glib: France has a presidential model, and it currently doesn't suffer from legislative gridlock. Many French people probably wish it did.

The EU/US FTA completes a trio of trade-related stories this week, not that I believe it will happen. There are too many special interests on both sides of the pond: the US President no longer has power to adopt trade treaties under the TPA (Trade Promotion Authority), unfortunately, so that any treaty is likely to be torn to shreds by the Congress, while in Europe it's just about unimaginable that the French will ever agree to dismantling the Common Agricultural Policy, which stands squarely in the way of open markets. And after that there is the European Parliament, which is just about to demonstrate its wilful, childish, destructive nature by voting against the budget laboriously hacked out by the 27 leaders last week. So the bouquet I am giving to the US is to reward good intentions rather than actual results. If the FTA comes into being, there will be a florist's shop bigger than the Capitol.

I'm sorry to see that New Zealand's finance minister is backing the OECD's push to harmonize, regularize or sanitize, or whatever you want to call it, the international corporate taxation regime. New Zealand has a nominally right-wing government, and indeed it has behaved in a business-friendly way since it came into power. Mind you, when it comes to taxation, just about all finance ministers seem to sing from the same hymn-sheet, whatever their affiliation. Instead, they should drink from a glass labeled "competition" every morning. In these few words I'm not going to try to lay out the pros and cons of the OECD's pogrom against BEPS (base erosion and profit-shifting), but I just want to point out that for all the fine words and lofty intentions being slung around, the only way in which the international community (aka the high-taxing nations) can change matters is by reducing competition, which is against the interests of both business and their own citizens.

Across the Tasman Sea, where there is a left-wing government, another copy of the BEPS hymn-sheet is in use, as the government tries to ensure "fair play" by corporate tax-payers. The words "'fair play" have great resonance in Australia, for historical reasons, so you would expect them to be trundled out by politicians at every opportunity. But this is a misuse of the word "fair", as for example in "fair trade", which cannot be as good as "free trade". Another of my hobby-horses: when I see a product labelled "fair" I move straight on to the next shelf. The particular burden of the Australian minister's speech was aimed at reducing secrecy on the part of MNCs, but that seems peculiar to me. What is secret about companies' tax planning? It may be complicated, but there is very little hidden from shareholders, and if the company is listed, its tax planning is probably explained in grinding detail. Transfer pricing legislation is designed to ensure arm's length pricing, and to elicit details of pricing mechanisms. Where is the secrecy? To conflate transparency with fairness is no more than a populist gimmick aimed at shaming businesses into paying more tax, as happened in the UK with Starbucks.

The Suez Canal Authority isn't Egypt, but the difference might be more academic than real. At all events, one is inclined to blame Egypt for the SCA's pricing peccadilloes; and even without them the government's behaviour over the last few months doesn't engender much confidence in the future business environment in the country. There was to have been a reform package which owed a lot to the IMF's influence, but it was abandoned last December. There wasn't much in it for international businesses to be happy about, but at least it indicated that the government was trying to get a grip on the situation. Now, who knows? The government is in a kind of stasis; surely it's desperate for inward investment, but who would want to go there under current circumstances? If you can't restrain yourself, at least wait for the currency to stop falling, which may not happen before elections in April, and those may hold surprises in themselves. The IMF is waiting, too. What a mess!


Kitty's Encomiums and Execrations

Methodology: each week (this is the 40th) 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.

Kitty's Encomiums:

The Bahamas adds a tax

Canada reaches westwards

United States has good intentions

And Kitty's Execrations:

Australia not being fair

Egypt has the other canal

New Zealand on the wrong side




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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