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Maybe it's time to raid the piggy bank

Kitty Miv, Editor
17 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.

I like Chile. It's one of those pleasingly unconventional countries. For a start, it must be the most bizarrely shaped nation on the world atlas. Resembling a fully uncoiled snake, it spans almost 2,500km of South America's Pacific coastline, yet is only 170km wide on average. But Chile is far more than just a strip of dry desert wedged between the Andes and the ocean. While countries like Brazil and Colombia bathe in the limelight with their membership of the BRICS and CIVETS clubs of top emerging economies, Chile has quietly got on with the business of growing its trade and economy. The country has been fully democratic for over 20 years, and sound economic and fiscal policies have given it the highest sovereign debt rating in the region. Chile has 22 trade agreements covering 60 countries, and exports now account for one-third of GDP. It also sits at the Trans-Pacific Partnership negotiating table with the US and other key Pacific Rim economies. And I bet you didn't know that Chile was the first South American nation to join the OECD, the club of rich nations? (You can keep your BRICS and CIVETS, Brazil and Colombia!). However, as you might have guessed, having built Chile up, I'm going to give it a little reality check. While most countries have cut corporate taxes over the last decade or so, Chile is going to raise corporate tax. The rationale behind the move is a noble one: President Michelle Bachelet wants to reduce inequality and improve access to education and health care. However, perhaps this isn't the right way to go about it. Chile has already been criticized by the IMF, of all institutions, for confusing companies with its tax reform plans. And like two magnets set to the same polarity, investors tend to be repelled from legislative confusion. The tax reforms are intended to raise additional revenue equivalent to 3 percent of the economy – that's a fair whack of money. I read recently that Chile has more than USD20bn stashed in a sovereign wealth fund, equal to about 5 percent of GDP. Maybe it's time to raid the piggy bank, instead of taxpayers.

Speaking of the CIVETS grouping (which, in case you didn't know, stands for Colombia, Indonesia, Vietnam, Egypt, Turkey, and South Africa), Vietnam made the news recently as a result of recent reforms to tax administration procedures, which business taxpayers really rather like, according to a survey by the Government and the Vietnam Chamber of Commerce. These changes are designed to substantially reduce the amount of time and money that firms spend on filing their tax returns and paying their taxes, which can only be a good thing, can't it? But a quite startling finding was also published as part of the survey result: one-third of the businesses questioned felt the need to give their contacts at the tax department an extra little something for themselves in order to avoid being "discriminated" against. Although it was quite shocking to see this finding as part of an otherwise mundane survey, it's not really all that surprising. According to the Heritage Foundation, corruption is rife at all levels of the Vietnamese Government and judiciary, and "factionalism, bureaucratic rivalries, nepotism, and a lack of accountability" in the ruling Communist Party ensure that many agencies are run as fiefdoms, perpetuating a culture of backhanders. No doubt foreign investors operating in Vietnam and other states where bribery is accepted see the practice as just an extra tax, and perhaps a small price to pay to ensure that everything runs smoothly. Still, thirty years have passed since the Communist Government embarked on its "doi moi" economic liberalization plan, and progress seems slow. I find it hard to see how Vietnam will fulfil the economic potential suggested by its CIVETS accreditation unless there is a drastic change in the culture of government. But before that can happen there probably needs to be a change of government.

One reason given for the speed and scale of the United Kingdom's surprising economic recovery is its flexible labor force. Not only are the UK's employment laws more favorable for employers than those of other western European countries but a vast army of self-employed persons have joined the workforce in recent years, reflecting changing working practices and the prevalence of new communication technologies. HM Revenue and Customs, however, seems to be stuck in another age. At least, that's the only way to explain its obsession with enforcing the "intermediaries" legislation. The legislation, generally referred to as IR35, was introduced in April 2000 and was designed to combat the avoidance of tax and national insurance contributions (NICs) through the use of intermediaries in circumstances where an individual would otherwise, for tax purposes, be regarded as an employee of the client. However, despite taking hundreds of contractors and freelancers to court for being falsely self-employed, HMRC has collected next to nothing in revenue from these enforcement actions. Data disclosed under the Freedom of Information Act shows that IR35 raised just under GBP9.2m (USD14.3m) in six years of operation. In fact, according to the UK Association of Independent Professionals and the Self-Employed, of the over 1,500 IR35 investigations and cases it has been involved with, HMRC has been successful in just 10. How much HMRC spent on administration and litigation in these cases remains a mystery, but it wouldn't be outlandish to suggest that these costs substantially outweighed revenues. When the government changed in 2010, the new coalition pledged to review IR35, leading to hopes that it would be scrapped. But that turned out to be a false dawn, and the freelance community remains as confused as ever over the application of the law, and HMRC's intentions. What really grates here is not just the apparent lack of common sense being displayed within HMRC in pursuing these cases – presumably at not inconsiderable cost to the taxpayer – but that this policy goes against everything the Conservative Party has been preaching, both in the former coalition Government and now as the party in power – that individuals prepared to take the risk of starting a business and going it alone should be empowered rather than encumbered. Go figure!


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

Chile wrong

Vietnam you scratch my back...

United Kingdom illogical



Tags: Euro | Government

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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