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Islands, anyone?

Kitty Miv, Editor
30 August, 2012

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.

It's not quite a Damascene conversion, but it's not far off, and it's especially remarkable that Max Baucus (Dem. - Montana) should go to New Zealand to talk about trade this close to an election. Perhaps I'm being naive; maybe his real motive was to tell the New Zealanders to get their hands off the US automotive industry. But I'll take him at face value, and award him a star for at least pretending to be a friend of free trade quite convincingly.

Here's another improbable thing: the UK Treasury is considering a tax-free mini-jobs scheme. It's the silly season, so perhaps they are making these stories up in Fleet Street, not that it exists any more. El Vino's is still there, however. The principle of a tax-free mini-job would be that if a worker is going to earn less than the personal allowance (ie wouldn't pay any tax anyway) then they (and perhaps more importantly, their employer) shouldn't be subject to the PAYE withholding tax regimen, and, even better, wouldn't pay national insurance. But that's difficult because they would lose pension entitlement, so perhaps that aspect would only apply to the employer's contribution. You can imagine what the unions will have to say about such a scheme: 'All out, bruvvers!'

To complete this week's silly season trio of implausibilities or hoaxes, we'll have to give Greece an encomium for suggesting that it might sell islands in order to raise cash. Of course it would be political suicide, given how attached the Greeks are to their land, but it makes a good sound-bite in Brussels, being presumably the intended audience. Just in case they're serious (they aren't), here are a few suggestions: don't ask for payment in euros or drachmas, use Swiss francs or dollars, or possibly renminbi; appoint Goldman Sachs to hold the auction; give 30-year leases with a full tax holiday, guaranteed planning permission and unlimited work permits for non-EU citizens; allow casinos. You see how impossible it all is: the EU wouldn't allow a single one of those. The best thing for Greece is the Grexit and by now you have to be really perverse not to recognize it.

South Africa has its own particular blend of problems, mostly due to its awful history, but the government is not helping by enjoying a banquet of scrumptious tax money being generated by more efficient tax collection, along with some nice new taxes. The problem is that public spending is leaping along, fed by the new vein of gold, and the resulting transfer of resources from the private sector to the public sector will act as a damper on business. South Africa in this respect is typical of a type of mid-level developing country where tax-paying, if not optional, is far from the norm. Only a small proportion of businesses are known to the tax authority, which is itself often highly inefficient if not actually corrupt. Other such countries include notably the Philippines, Pakistan and Indonesia. Relatively minor improvements in collection techniques yield a bonanza of new tax money, but governments are typically very bad at using it productively. For the IMF to encourage this type of government to add even more taxes is pernicious.

Who would be a Spanish energy company? The government's long-term subsidization of the renewables sector, done ostensibly to encourage alternative energy sources, but presumably also with an eye to electoral benefit, has now put its unfortunate clients between the devil and the deep blue sea. Not sure which way round it is, but maybe the deep blue sea is the prospect of a swingeing new tax on energy supplies, while the devil will be Brussels's refusal to allow direct sectoral aid to the blighted industry the incentives have created. It's difficult to understand how Brussels has allowed the game to go on as long as it has. Surely such blatant assistance to the renewables sector, however fashionable it is, constitutes state aid on a monster scale?

President Hollande's anti-business campaign continues with a significant tightening-up of CFC (controlled foreign company) rules. The changes are complex, and much may depend on how the tax authority and the courts interpret them, but there doesn't seem much doubt that in future, any business with a subsidiary in a low-tax jurisdiction, even one within the EU, will have to prove that the subsidiary exists for genuine business reasons rather than in order to lower the tax bill. Since the barrier is a corporate tax rate which is less than 50% of the French one, this certainly captures Cyprus, Ireland, Malta and several ex-Soviet Eastern European member states. How can this be consistent with EU single market rules? If I want to establish a holding company in Cyprus to service the MENA region, at first blush it would seem that all of its turnover could be deemed to be taxable in France, at 33%. Surely this is directly discriminatory against the interests of Cyprus? Because it's obvious that I won't do any such thing. And I can't go to Dubai (even worse!). It will be interesting to see whether either Brussels or the ECJ has the balls to stand up to France. Definitely Cyprus and the other threatened countries should march in on the French immediately, writs flying in all possible directions.

Kitty's Encomiums and Execrations

Methodology: each week (this is the 17th) 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 last week it gained a further star, so it's now in neutral territory.

The rankings are intended to be a proxy for business friendliness; evidently they are highly partisan, but hopefully one day they will become useful for decision-making, even if for the moment it is all just an amusing game. For any country in negative territory, you should think carefully before starting a business there.

Kitty's Encomiums:

Greece would you buy an island from this man?

United Kingdom the Treasury flatters to deceive

United States a Democrat talks up trade - what's going on?

And Kitty's Execrations:

South Africa egged on to tax by the IMF

France holds up two fingers to the single market

Spain hoist by its own petard





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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