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Just Like a Set of Dominoes Falling Over

Kitty Miv, Editor
20 June, 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.

If we applaud Mexico for joining the G5 in their post-FATCA attempt to create a seamless information-sharing international community, it's not because the oncoming Big Brother world order is a Good Thing, it's because Mexico needs to drag itself out of the mire. Phew; where to start? Information-sharing is a done deal, I suppose, unless you are running PRISM, but that doesn't make it beneficial. Why not? Why should it matter if your aunt's Bahamas trust is known to belong to her? Known to whom? is the first question. Let's assume that your aunt is Canadian and has correctly declared her offshore interests to the Canadian Revenue. That's a private matter between her and the Revenue and probably the trust administrator in the Bahamas, and as such is probably reasonably secure. But if there is information-sharing between the Bahamas and Canada, including such niceties as total asset value and amount of annual distributions, then that justifiably private information is suddenly in the public sector. Oh, they will say, it is confidential and can only be utilized in the event of prima facie evidence of wrongdoing. That is footling: there has been ample evidence lately of what is self-evidently true, being that information supplied by one government to another is vulnerable to theft, misunderstanding and "public interest" disclosure. So the Gadarene rush to sign up to "automatic information exchange," inevitable as it is becoming, has a severe downside, and there is no international Devil's Advocate to fight back: it's just like a set of dominoes falling over.

FTSE's arrival in the DIFC (Dubai International Free Zone) is just the latest in a string of announcements paving Dubai's onward road to regional financial hegemony. Also this week there was the launch of Dubai Design District, the ninth free zone created by the Emirate. According to a recent Economist Intelligence Unit report, Dubai is expected to jump six rankings to become the most competitive city in the Middle East and North Africa by 2025. The report said that "Middle Eastern cities will be bolstered by their growing economic strength, including sizable city GDP growth rates and increased integration into global trade regimes, investment in education and physical capital, and enhanced global appeal (including increased flight connectivity and conference development) particularly Dubai, Doha, Abu Dhabi and Muscat." New York will remain in first place, followed by London, Singapore, Hong Kong and Tokyo, with Dubai at no. 23. I wouldn't want to contradict the far-seeing EIU, but when one looks at comparative growth rates, and given that 2025 is 12 years away, 23 seems a surprisingly low estimate. An example: after just seven years, the Dubai Gold and Commodities Exchange reached cumulative trading volume of USD1 trillion in value; April volumes were 140% up, year-on-year.

Malta shares many characteristics with Cyprus: both are sun-soaked ex-British colonies, English-speaking, low-taxing international financial hubs, and both had troublesome transitions into independence before both joining the European Union in 2005 and adopting the euro. But whether by bad luck or bad judgment (actually, a bit of both) Cyprus now finds itself in a parlous situation, while Malta, it seems, can do no wrong. It's latest wheeze is to expand its HINWI (High Net-Worth Individual) scheme offering residence to people who contribute quite a bit to the national exchequer; actually that "quite a bit" now falls to really quite a low level, allowing even a humble scribe like me to qualify. Given Maltese tax rates, the newly-reduced minimum tax contribution of EUR15,000 equates to income of about EUR60,000, and you don't even have to buy a house. Malta is quite crowded, but a flood of incoming semi-wealthy people would do wonders for the construction industry, apart from generating significant tax income. Malta's regime is now much more welcoming than equivalent schemes in other sun-traps. It deserves to succeed.

Cyprus, on the other hand, is now sinking under the weight of the Troika's ill-advised bail-in. It's not that it was a bad idea to let a bankrupt bank (Laiki or Popular Bank) collapse, or even to break it into "good" and "bad" halves, as the Irish did; what was foolish was to saddle the still-just-about solvent Bank of Cyprus with the EUR9bn of ELA (Emergency Liquidity Assistance) stupidly provided to Laiki by the European Central Bank, with the result that BoC's remaining depositors don't trust it to remain afloat, and can't wait to get their money out, so that the Government doesn't dare to lift capital controls. The President has been reduced to writing begging letters to the Troika and even publishing them, in the hope that the Troika will be shamed into re-writing the bail-in deal. Meanwhile Cyprus Airways is insolvent and can't afford to pay the redundancy packages forced on it by the Troika; and the Government, amazingly, has reassured the trade unions that there will be no compulsory redundancies among civil servants, which is the exact opposite of what the Troika wants and the country needs. Cyprus still has all its basic advantages, like Malta, but at the moment it seems to be systematically destroying itself.

It is a pity to have to introduce a new country to our analysis on a negative note, especially when that country is making some sort of effort to join the modern world, but it's impossible to approve of Myanmar's trading tax, masquerading as advance income tax. Like a lot of other emerging market economies in the region (and in other regions, for that matter) Myanmar has an inefficient tax collection apparatus, collects tax from a very small proportion of individuals and businesses, and finds it easy to attack instead the physical reality of goods entering or leaving the country. It's what you might expect from a bunch of economically illiterate generals; but everything is wrong about this tax. It will add bureaucracy, encourage corruption and smuggling, and depress trade levels. And does anyone seriously believe the tax authority when it says it will refund overpaid tax? How will anyone know until years after the event whether a refund is due or not? What about a trading company that pays the tax but is owned by a person who pays income tax? It will just be a God-awful mess.

Moving westwards a bit on the map we come to the next basket-case, being India, where the Government is continuing (after more years than I can even remember) to talk uselessly about the proposed GST, but has stopped mentioning the equally venerable "new" Direct Tax Code. The Finance Minister has set up a competitiveness review: I'm not quite sure what to make of this - the Standing Committee (it won't stand at its meetings, you can be sure, although it would probably achieve more if it did) will meet "at least once every two months," which doesn't sound as if it is going to lead to rapid results. But even if it did, nothing would happen, partly because the Government is supine, and partly because nothing will now happen before next year's April election. And nothing will happen after that, because whatever may be the result, one gerontocracy will merely replace another. The President (a failed Finance Minister) is 77; the Prime Minister is 80; the leader of the opposition is 85, although it is true that he is being challenged by a 62-year-old. There are even older politicians than that, including a 94-year-old. The current government has achieved little during its time in office and politicians are widely perceived to be corrupt as well as ineffective. Ernst & Young made recommendations to the Government for changes to the tax system last week, but I don't suppose anyone is listening.


Kitty's Encomiums and Execrations

Methodology: each week (this is the 57th) 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 in week 52.

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:

Dubai powers on

Malta opens its doors

Mexico trying to grow up

And Kitty's Execrations:

Cyprus sinking

India talks on

Myanmar doesn't understand




Tags: Dubai

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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