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Fudge is What's Going to Happen

Kitty Miv, Editor
23 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.

Dutch Finance Minister Jeroen Dijsselbloem has not had a good press in this column due to his involvement with the Cyprus bail-in, but now he is on the side of the angels, pitching in to the financial transactions tax debate, lining up the Netherlands against it. There is a growing chorus of opposition to the proposed tax, with even outgoing Bank of England Governor Mervyn King, not normally one to stick his neck out, saying that he cannot find anyone in Europe's banking community who believes that the proposed tax is a good idea. You'd expect bankers to be against it, of course, but when the Finance Minister of a core European Union member state raises his voice, that has to be taken seriously. What is going to happen? Too many senior European officials and politicians have invested too much of their credibility in the tax for it to be dropped, cold turkey, yet it is impossible by now to believe that it will be implemented in anything like its currently intended form. Fudge is what's going to happen, glorious, traditional euro-fudge, cooked up in the Brussels kitchen, until everyone is so fed up with the subject that it will go away and we will be able to focus on something more interesting like a bail-in for France or Italy.

Hong Kong has had another good week (all weeks seem to be good ones in the SAR), making sensible proposals to tidy up its investment advisory regime, and working towards an improved IP regime. Tax-efficient IP regimes are all the rage at present, and it is normally possible for a company to shelter its royalty and licensing income streams near completely from corporation tax by using preferential holding company structures and tax treaty networks. It's difficult to choose between Singapore (whose PIC incentive scheme is much used for IP licensing) and Hong Kong from this perspective; but the UK is now a player as well, with its new 10 percent Patent Box rate, and the Netherlands has an equally attractive regime. What is curious about the various competing regimes, which just seem to get better and better, is that they are a major BEPS technique, and some of the countries which are the most vociferous on that subject offer some of the most tempting IP opportunities. The dark arts of IP valuation offer useful techniques for reducing mainstream taxable profit, and those nameless companies which manage to pay just a few million pounds, euros or dollars of CIT while squirreling away billions of profits in low-tax havens have a large component of IP in their magic brew. This dichotomy is totally understood by the Finance Ministers of the G5, 7, 8 or 20 (take your pick) and they therefore know perfectly well that there is nothing they can do about BEPS except to wring out the maximum of political juice from the ongoing charade.

It's budget time in the Antipodes, and the Australian Government has excelled itself, capping a disastrous few years with a budget which has been condemned in all directions. Not only have the treasury's financial predictions turned out to be wildly over-optimistic, but the budget does nothing to help business, which even now the socialists in power seem unable to understand is the source of all wealth. Well, they have understood that's where the money is, because ever since they came into power they have done everything they can to take as much as possible of it, to spread around like Marmite on the voters' toast, or should that be Vegemite in Australia? The Government seems to have learnt nothing from the damage it has inflicted on the country: even as the budget was being readied for delivery, and when they must already have known about the fiscal fiasco, the only thing they know how to do is to raise yet more taxes. There is to be a one third increase in the Medicare levy, the contribution individuals make towards health care costs. That's an enormous hike and it's intended to finance a major expansion of disability care; that's no doubt a worthy goal, but the country can't afford it. In their wisdom, the electors have given Julia Gillard's left-wing party two terms in office; elections are due in the fall (spring for Australia) and it will be interesting to see if the electors can look past the bribes the Government has been handing out so liberally and so ruinously.

The Australian budget contains an assurance that the country will generate a fiscal surplus in 2015/2016 (something that had been promised for the current year) but no-one seems to believe it; across the water in New Zealand a government of a different stripe is confidently predicting a surplus next year, and is cutting taxes. Enough said!

For the second week running, I have to attack the European Commission for its anti-trade behaviour. Last week it was anti-dumping duties on imports of Chinese solar panels; this week it's anti-dumping duties on mobile telecoms network equipment, and the Commission hasn't even waited to be asked by a European manufacturer. There are no big numbers involved here; imports total just EUR1bn – but that's not the point. This is a typical example of the sort of protectionist behaviour which is to the disadvantage of consumers and will achieve nothing other than to discourage EU manufacturers from innovating and competing. It is also a demonstration of why the UK is right to seek major changes to the EU treaties, or, failing that, to leave. Historically the UK was a free-trading manufacturing hub; those days are gone, but the country's instincts are still on the liberal side, while the "dirigiste" beliefs of the continental economies are manifesting themselves in ever more repressive networks of regulation which have a suffocating effect on enterprise and economic growth. Europe's rulers want to believe that their flat-lining economies are simply responding to the debt crisis, and that growth will return of its own accord. Well it won't. The continent has become uncompetitive: industry after industry will shrink as the BRICs and their fellows out-compete them. And the only response that Europe has got is to be protectionist, which will turn into a vicious cycle of trade warfare. The latest industry to receive the Brussels cobwebbing treatment is financial services; this is particularly serious for the UK. Unfortunately it is difficult to see how David Cameron or any other UK leader is going to be able to make the significant changes that are needed, to make a bonfire of the odious regulations that are choking the life out of businesses. It has been left too late, and the choice now is between genteel decay inside the Union or a Brexit, which would give some hope for the future.


Kitty's Encomiums and Execrations

Methodology: each week (this is the 53rd) 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 + 2, 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 last 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:

Hong Kong won't diddle you

The Netherlands against Tobin

Singapore being picky

And Kitty's Execrations:

Australia with a hole in its pocket

European Union being anti-Chinese, again




Tags: Euro

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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