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Cack-Handed Attempts to Influence Ukrainian Affairs

Kitty Miv, Editor
06 February, 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.

It's easy to have a go at Russia this week, and almost everyone is doing it, between its cack-handed attempts to influence Ukrainian affairs and the giant, gilded hostage to fortune represented by the Sochi games which are close to turning Vladimir Putin into a laughing stock. So here is a rare bouquet for the Economic Development Ministry, which has sensibly proposed to reduce the rate of tax imposed on people who rent out their apartments. Well, perhaps it is sensible, and perhaps not. It sounds good, but if as they say 95 percent of private landlords are evading the 13 percent income tax that should apply right now, why would a reduction to 12 percent or 11 percent make any difference? Even if the rate was reduced to 5 percent, no-one will pay it, because paying it involves declaring the income and its source, and presumably all these shadow tenants pay in cash, and won't be at all happy to have their names revealed to the tax authority. Because where did they get the cash? There is plenty of multiple apartment ownership in Moscow, not least because during privatization anyone could privatize their flat for peanuts, so if your parents then died you got their flat as well, and now you have at least those two flats (without mortgages). This is why governments almost always resort to withholding taxes in order to fix on individual income streams, and why they try to minimize the use of cash. Property tax is more effective, because every property has to be registered in someone's name; but in Russia tax on individual property is minimal, and regional into the bargain, so central government doesn't get to see anything from it. Hence the proposed attempt at catching tenancy income. Anyway, it's only a proposal, from the Economic Development Ministry, the descendant of the old Gosplan Ministry, which is way down the pecking order, and it will probably be ignored. So, bouquet rather faded.

Another faint cheer, or faded bouquet, as you prefer, for India, whose very incoherence sometimes delivers unexpectedly sensible results for businesses, and on this occasion for arch-enemy-of-the-people Vodafone, with a court decision to stay a contested tax demand. I won't even try to list or explain the panoply of business/government spats currently in play in India, which would take two weeks' worth of this column; but the keyword, and the wrong word here is "retrospection." If you are an international business in India, it doesn't seem to matter whether you have made a tax declaration, had it accepted, and paid the tax; the tax department is at liberty to come along and tear everything up as far back as it chooses, and indeed is doing so with great abandon. For help, businesses can only look to the courts, which by and large are staffed by well-educated, dispassionate officials (often trained in London, indeed). But the courts are at the mercy of the government: all they can do is to apply the law as it stands. And how wobbly that is – there is no coherent steer from the government, and the tax department seems to be making the law up as it goes along. Hilariously, the Finance Minister, who is admittedly less incompetent than the previous one, said last week that India "offers a stable and non-adversarial tax regime besides a fair and just dispute redressal mechanism." In your dreams, my friend!

"Fog On The River Plate: Argentina Cut Off!" That's how it must seem to tormented Argentine consumers, who are gradually being incarcerated behind an impenetrable wall of fiscal constraints which effectively prevent them from dealing with the outside world. The rules governing e-commerce importations are so strict and bureaucratic that such imports will cease, to all intents and purposes. Argentinians are used to getting around their government's pettifogging restrictions, yet even so, this is a Draconian and illiberal measure, which the government has been driven to by its own profligate incompetence. No doubt digital imports, which cannot be taxed at all, will substitute in some respects: no-one will buy a CD from the outside world any more; instead they will download the digital version of the album direct from i-Tunes or wherever, using a tablet bought duty-free on a trip to Hong Kong. There might be some import substitution, I suppose, but that presupposes that Argentine firms have suitable products to substitute. The tragedy is that every one of these peso-supporting devices to which the government is resorting will have the effect of driving people away from the currency. It's too late now, anyway: Argentina is heading for another default. Two in 13 years will surely be a record?

Madness for madness, though, the Italians have beaten the Argentines this week by a country mile with their completely insane EUR30 cash transaction restriction, under which all businesses will be prevented from accepting any payment greater than this amount other than through an electronic transaction, i.e. debit card or credit card or similar. Well, the word "prevented" is capable of some nuance. I remember that a couple of years ago, the government banned the use of plastic bags in supermarkets: that law didn't just fall into disuse; it was completely ignored from the beginning. The same may happen this time; but if it doesn't, then I am looking forward to watching when the customer in front of me arrives at the supermarket check-out with two trolleys, each containing EUR29 worth of goods. Or it could be done slightly more elegantly by having your son push one trolley, your husband another, and yourself the third. And so on. But of course, elegant abuse aside, the main result will be to drive more trade underground, not less, achieving exactly the opposite of what was intended. Until now, the dentist to whom I paid EUR200 for a filling, being an honorable man, declared this income on his tax return. In future, he won't be allowed to do so: if he accepts the cash from me, he will be forced to hide it, unless he invests in an "officially authorized payments terminal," which being Italian is the last thing he wants to do. And the farmer who sells me six vast jars of primitivo at ten euros a jar: thinking of him and an "officially authorized payments terminal" in the same breath is just risible. No, the law will be ignored, just like all the other maniacal prescriptions coming out of Rome. Thank goodness for Italy! There's only one prescription that will work: sack 50 percent of the bureaucrats and halve taxes. There, I've said it again, and I promised I never would.

Kitty's Encomiums and Execrations

Methodology: each week (this is the 90th) 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 neutral 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:

India not always in the wrong

Russia good thinking but it won't work

And Kitty's Execrations:

Argentina: adios

 

Ciao

Kitty



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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