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It's all positively Shakespearian

Kitty Miv, Editor
06 July, 2018

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.

If I was to say "would those who actually think the EU's digital taxation plans are a good idea, please stand up" I'd be willing to bet that most of you would be still sitting comfortably. At least those who have an understanding of these issues. Because, as the catalogue of criticism of the European Commission's digital tax proposals mounts, so too does the list of business associations, economists, and EU member states expressing skepticism and concern about the idea. The way things are going, soon Jean-Claude Juncker and Emmanuel Macron will be only the ones left standing.

One wonders how long the EU will continue to push the digital tax, given that in April reports emerged following an informal meeting of EU finance ministers that France was in a minority of one in fully supporting the proposals. Does this mean even Germany, normally a driving force behind new EU tax initiatives, isn't hugely keen on it either?

More recent developments suggest those reports might have been over-egged somewhat. Italy and Spain are now looking at advancing digital measures possibly mirroring the EU's interim sales tax. Furthermore, France and Germany have just committed to reaching an EU agreement on "fair digital taxation" by the end of 2018, although what that means exactly is anyone's guess at present.

And we've seen how persistent the EU can be in pursuing technically and legally questionable tax measures. The wheels seemingly fell off of the financial transactions tax before the vehicle had even left the forecourt, and the remaining member states have spent the last few years pulling it apart and trying to put it back together again, mostly unsuccessfully. So, it would be premature to write off the EU digital tax just yet.

It's perhaps dangerous to dismiss EU corporate tax harmonization too, even after France and Germany issued, as part of the Meseberg Declaration, a plan for what looks like the EU common corporate tax base on steroids. Too much political capital has been invested in this proposal by its proponents to kick it into the long grass a second time around, even if it might need what would amount to a third relaunch following France and Germany's new contribution to the project. Discussions may well drag on for years, but this is clearly a political investment for the long-term, tied up as it is with the Franco-German push for the next phase of EU integration.

One of the main issues with the CCTB is that there will be winners and losers. When consolidation is eventually added to the mix (making it the CCCTB), small member states fear losing out under its formulary apportionment system, which would replace the arm's length standard underpinning transfer pricing regimes and instead revenues would be distributed among member states based on factors tied to a company's economic substance in each member state.

Under such, the bulk of revenues can be expected to be siphoned off to the larger member states, in which multinational companies make most of their sales. The other factors – the location of a group's assets and its workforce – would be more fluid and allow for competition between member states most notably on the effective corporate tax rate applied to the common base. What that would mean is that although effective corporate income tax rates will matter, there will be less room for competition under the CCCTB, and in particular if tax breaks for research and development activities are excluded (as proposed by Germany and France), much to Ireland's disdain. Perhaps this is why France is such a strong supporter of the measure.

Indeed, it's been something of a mixed week for France, thanks to a single development: the country's release from the EU's excessive deficit procedure. Obviously, this is positive from the point of view that France is moving towards fiscal health, which is good news for the Eurozone and the EU in general. In fact, just one state remains under the procedure: Spain. However, the EU Council's 2018 Stability Programme for France made some quite scathing observations on France's tax regime, notably the existence of more than 190 taxes that yield small amounts of revenue. With tax expenditures set to reach a shade under EUR100bn in 2018, the report also described France's tax system as complex, bureaucratic, and stifling for employers, particularly for small firms.

Much of this complexity is concentrated in France's social security system as much as its corporate tax regime. Perhaps a CCTB would enable the country to easily institute otherwise politically difficult changes to its corporate income tax regime.

Nevertheless, bringing about a slimmer and trimmer French tax system remains a high priority for President Macron. And while he has barely got his feet under the desk in the Élysée, he has made some progress towards this goal. However, the Council's report shows how much more work there is to be done. And when the EU, an institution hardly known for being streamlined itself, criticizes your country for the level of red tape and legal complexity, you know things are bad!

Finally – and we all like a good piece of drama now and again – the Australian Government's efforts to cut incomes taxes have provided several unexpected plot twists and turns recently. The fight over personal income tax looks to have been won by the administration, but, in the mode of a cliff-hanger, the fate of the corporate tax cuts have been left dangling until after the upcoming by-elections. Watch this space.

Indeed, this is almost like theatre. And no doubt the Government would consider itself the hero. It's on the side of the people and hard-pressed small businesses and it just wants to put more of their hard-earned money back in their pockets. In the eyes of the Government, the villainous Labor Party pretends to be the party for the people, but would rather have this money for itself, to fritter away on bread and circuses, because it thinks it knows best how to spend people's money. What's more, like any good villain, Labor's motivations aren't always clear-cut, blocking individual tax cuts one minute, waving them through the next; totally opposing any sort of corporate tax one minute, partially reversing that position the next. But if it is a hero, the Government is a flawed one. It just wants to be loved, hence it's cutting taxes. But it also likes power, hence it's cutting people's taxes, and there are elections to be fought soon. It's all positively Shakespearian.

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 Encomiums

Australia dramatic

Kitty's Execrations

European Union stubborn

France complexity



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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