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Clever Those Greeks

Kitty Miv, Editor
07 March, 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.

Nice to see the Greeks getting something right, for a change, giving a tax concession on import VAT to Hewlett Packard at Piraeus. They wouldn't be allowed to give it only to HP of course, since that would be state aid and the Commission would be down on them like a ton of bricks within seconds. So any firm can qualify if its imports are over a threshold which has been set so high as to exclude everyone else. Clever those Greeks. Even so the Commission is probably scratching its collective head over the scheme: there have been previous tax breaks for operators at Piraeus which got pretty close to the line, and the Commission is still investigating some of them. Of course this is exactly the kind of thing that Greece needs to do in order to pick itself up from the floor, and to me it's crazy that in the face of Continent-wide recession and lack of competitiveness, Brussels bans the very types of competition that actually might make a difference. In US terms, it would be as if Nevada was forced to levy a 5% corporate income tax because other states did so.

Another nifty scheme which sails beneath the Commission's state aid radar is the French CICE tax credit. It's complicated, but in a nutshell it means that if a small firm is profitable it can get back about a third of its payroll taxes in the form of an advance from a state-sponsored bank, and the amount will act as a credit against corporation tax in the following year. It's all very circular, because this scheme was offered by the Government in return for swingeing tax increases which hit larger firms particularly hard. So it's re-distributive. And it's not peanuts, adding up supposedly to EUR20bn, which you would think is going to add that much to public debt on a permanent basis? It's not yet clear what interest rate will be charged on the advances, but various analyses have suggested that the long-term effect of the CICE will be to create 150,000 jobs. Let's hope that not too many of them are in local tax authority offices.

Congratulations to Cyprus for having booted out the Communists in favor of a right-wing party for their next five-year presidential term. The system in Cyprus potentially allows for strong government, with the President appointing a cabinet and a single parliamentary body making the laws. For the last five years the socialist administration has made one catastrophic blunder after another, only held back by an antipathetic legislature. Now the new President will have control of the administration and the parliament, so some of the obvious steps can be taken to return Cyprus to health, including privatizing crony-ridden state organizations such as the telecommunications authority, the airline and the electricity utility. First of course there is the small matter of the EUR17bn rescue package being put together by the troika. The new government insists it will not permit a hair-cut for bank depositors, but will be able to use the threat of that as a lever to prise open the state enterprises, which would otherwise probably go on strike for ever. Then there is the 10% corporation tax rate, which the Government is desperately keen to retain; the quid pro quo for that may be to allow the troika to get its hands on part of the offshore gas bonanza that seems to be developing in the Mediterranean. So it's all to play for!

Much was hoped for from the new Indian Finance Minister, who replaced his inept predecessor (booted upstairs to be President) half way through the fiscal year, but much has not been delivered. There are some "temporary" surcharges on corporate tax, some tinkering with transaction taxes, and a resounding nothing on the dossiers that really matter, the Direct Tax Code and the Goods and Services Tax. They have both grown whiskers while successive ministers have failed to force them through against resistance from backsliders and entrenched regional interests. I have lost count of how many times each of them has been announced and then put off. Now the Minister wants to re-draft the DTC all over again (the third time) and is muttering vaguely about new laws being needed for the GST. Worst of all, nothing has been done to reassure foreign investors after the various public relations disasters of the Vodafone affair, the retrospective change to the Income Tax Act and the introduction and withdrawal of the GAAR. The country seems incapable of creating a coherent framework for FDI under this administration. Time for a change.

One quickly runs out of superlatives when describing Bermuda, which has the highest per capita income in the world on some measures, the most expensive houses, the richest gardeners etc etc. Also it seems to have one of the most spendthrift governments in the world, spoiled by good times which seemed set to last for ever, but are coming to a juddering halt. A new government has just produced its first budget, which should have taken an axe to public spending, but has instead increased it! Debt will rise to more than USD2bn in the next financial year, which, to be fair, represents "only" about 50% of GDP. But Bermuda should run surpluses and have cash in the bank, given the astronomical amounts of insurance business it hosts and the hordes of wealthy tourists it attracts. Putting off the evil day, which is explicitly what the government is doing, is the wrong policy. It's very lucky for Bermuda that neither of the two giants that face it across the Atlantic has attacked its lifeblood, insurance. In the case of the US, it is preserved only by the hung Congress; in the case of the EU, they just haven't gotten around to it yet. If I was in charge of Bermuda, I would be afraid, very afraid of the European Parliament. Look what it is doing to the banks!

Italy. I don't know what to say! Amidst all its other worries, a financial transactions tax went into effect on March 1, at 0.1% or 0.2% of dealings in the shares of larger companies, and at various lower rates on derivatives trading. Italy is one of the eleven "variable geometry" countries forging ahead with a eurozone FTT, of course, but like France has chosen to impose its own local tax as part of Mr Monti's "Save Italy" package. Heaven knows what will save Italy now. Strong government is needed to take an axe to the bloated bureaucratic State, and that's the last thing the election will deliver. I read last week, but don't know where the figures came from, that there are 70,000 official chauffered cars in Italy, as against 500 or so in the UK. Actually, taking a long term view, the election of the "grillini" is a good sign that the people are turning against their nepotistic, corrupt bosses. Perhaps a leader will emerge among the 150 or so young tiros in parliament, and perhaps, if we are lucky, it will be a Margaret Thatcher and not a Benito Mussolini. Keep your fingers crossed.

Kitty's Encomiums and Execrations

Methodology: each week (this is the 42nd) 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..

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:

Cyprus gets another chance

France helps business, really

Greece lands a big fish

And Kitty's Execrations:

Bermuda on the road to ruin

India disappoints

Italy at the crossroads





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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