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HM Revenue and Customs has been handed some sweeping powers to collect back taxes

Kitty Miv, Editor
10 August, 2015

Kitty's Country Rankings are below, with a description of how they are compiled. 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 was so often the case, under the UK coalition Government, that Britain took one step forwards, and then one step back. Nothing seems to have changed now that the Conservative Party is governing outright. The UK has won plaudits from investors for the scale of the corporate tax cuts that have taken place since 2010, and there will be more to come over the course of the current parliament with the rate due to fall below 20 percent, which seems to be something of a psychological marker these days, separating the mainstream economies from the "tax havens." Yet the Exchequer needs tax revenues, and needs them badly if the budget deficit is to be eliminated, and public debt, which has risen to 80 percent of gross domestic product, at last put on a downward track. Consequently, HM Revenue and Customs has been handed some sweeping powers to collect back taxes. As I always say in this column, tax evaders deserve to feel the full force of the law. However, there has to be checks and balances in the system, and those accused of a crime should – if a country claims to be civilized – be entitled to a fair hearing. This no longer seems to be the case if HMRC suspects you might be playing fast and loose with the UK's tax laws. Now, HMRC takes the money it thinks it is owed first and asks questions later, as with the Accelerated Payments Notice regime, which was upheld by the High Court last week following a judicial review. Now HMRC is consulting taxpayers on a proposed new law that will create a new criminal offence for facilitating tax evasion. This is designed to ensure that corporations can be held accountable under the criminal law for failing to prevent their agents from facilitating tax evasion, which, on the surface, sounds reasonable enough. However, the proposed legislation is extremely broad geographically, with foreign corporations, as well as UK ones, falling within its scope. It is unclear how HMRC will enforce the law, but companies are probably going to wonder whether it is worth the additional administrative hassle and risk to their reputation to do business in the UK, low taxes or not.

While the UK seems at last to be getting to grips with its budget deficit, South Korea seems to be travelling in the opposite direction. The unfortunate outbreak of Middle East Respiratory Syndrome (MERS) earlier this year certainly didn't help matters, with the Government forced to divert resources to contain the disease. However, the fact is that the South Korean economy, and the Government's finances, were already beginning to wobble well before MERS struck. In a sense, South Korea is not that much different to many other major emerging economies in the Asia-Pacific region, which are struggling to match the stellar rates of economic growth seen before the global financial crisis. However, most countries are still seeking opportunities to reduce corporate taxes to improve the look of their shop window, and to let indirect taxation take more of the strain to fund all the things that governments pay for these days. In this respect, Korea could see itself swimming against the current. The supplementary budget bill approved recently allocates an additional USD4.6bn to offset falling tax revenues, and another USD3.4bn to increase public spending. Presumably, the Government will have to borrow this money. Indeed, the Government has conceded that the budget deficit will be 1 percent higher this year than anticipated just a few months ago. The shortfall in tax revenues has led to suggestions that the Government should raise the corporate tax rate, which is currently at a headline 22 percent for companies with a turnover of over KRW20bn to 25 percent. Deputy Prime Minister and Minister of Strategy and Finance Choi Kyung-hwan has rejected this, particularly as the global trend is for rate reductions, not increases. However, the damage may have already been done by the mere suggestion that the Government is considering a corporate tax hike, and investors might now be more inclined to sit on the sidelines and see how things pan out, rather than commit resources to South Korea.

If there are any taxpayers in Ireland who think that their corporate tax rate is too high, they must be in a very small minority. Indeed, generally speaking, investors seem to be satisfied with the Government's economic and tax policies. However, there are growing murmurs of discontent among business representatives regarding Ireland's relatively high personal tax burden. It is certainly true that the income threshold at which Ireland's 40 percent higher rate of personal income tax starts is relatively low, at EUR33,800 (USD36,750). But the business association Ibec has been particularly strident on this issue, and actually argues that Ireland's low-tax credentials are being overstated. According to Ibec, since 2010, Ireland has experienced a sharp jump in taxation of personal incomes as a percentage of national income, rising from 8.7 percent to 11.6 percent, well above the EU average of 9.5 percent. This means that Ireland is the 5th highest tax jurisdiction for personal incomes in the EU. Ibec says that the high marginal tax rate at modest wage levels introduces a disincentive to work for both Irish people and skilled employees from abroad. It has calculated that a skilled graduate moving from gross pay of EUR20,000 to gross pay of EUR60,000 over the first ten years of their career will see an increase of annual net pay of just EUR22,888 in Ireland, while the same person in the UK would see an equivalent increase of EUR30,287. AS a result, skilled graduates in the UK would be more than EUR5,000 a year better off. "Despite regular claims to the contrary, Ireland is not by any measure a low income tax country," says Ibec. That's certainly food for thought.


Kitty's Encomiums and Execrations

Methodology: each week (this is the 147th) one or more countries are given encomiums and one or more 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 minus 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 in week 52. Some weeks ago it dropped a place, but then quickly recovered one step. Etc etc.

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 Execrations

UK summary justice

South Korea wobbling

Ireland not smiling



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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