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Not in the Cross-Hairs of Crusading Politicians Such as David Cameron

Kitty Miv, Editor
11 April, 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.

While Egypt seems to be splintering in front of our eyes, the members of the neighbouring Gulf Cooperation Council (GCC), that's Saudi Arabia, Kuwait, the United Arab Emirates, Qatar, Bahrain, and Oman, are hoovering up FDI at a great rate. Some of these countries have their unpleasant aspects, and are emerging from the Arab Spring with tarnished democratic credentials, if they had any in the first place, but economically speaking they are doing well, making good use of their oil wealth and even spreading some of it around their own citizenry.

They are also and not coincidentally mostly free of individual income tax, while corporate taxes are absent or quite low. The GCC has been droning on about creating a VAT for more than five years now, but there are no signs that it is imminent. Between 2003 and 2011, the GCC countries scooped up over 60% of all FDI into the Mid-East, with USD40bn in 2012 alone. Egypt actually saw negative FDI in 2011, although 2012 figures appear to have shown something of a recovery.

The GCC is not itself exactly "offshore," whatever that term means, but some parts of it can definitely be called low-tax, particularly Dubai (part of the United Arab Emirates) and Qatar, and some GCC countries are developing close ties with classic "offshore" jurisdictions such as the Channel Islands, the BVI and Hong Kong. Last week saw a Double Tax Agreement signed between Guernsey and Qatar, which in a way is quite remarkable, and testifies to the amount of business that is flowing between such pairings. A lot of it is in support of FDI, indeed (a very high proportion of the world's FDI flows through "offshore" jurisdictions, such as Mauritius to India, Cyprus to Russia and Hong Kong to the PRC), while in the opposite direction Guernsey's fund regime is attractive to countries such as Qatar which have external investment programs on a massive scale and certainly don't want to put their money directly into high-tax and over-regulated places like London or New York. Guernsey, which has its own stock exchange, is also seen as a good location for special purpose vehicles and property holding companies seeking listing on such bourses as the Alternative Investment Market in London. These financial channels are almost wholly B2B; there is no need and no desire to market such securities to the general public, which would run straight into a forest of regulation. A reputable SPV in Jersey or Guernsey can be sold on the telephone to qualified specialist investors in a matter of hours, although the paperwork is daunting. This is why a small number of highly expert law firms has rapidly grown up to dominate the offshore financing sector, with offices in the BVI, Jersey and Dubai (to pick one example). Although such structures are highly tax-efficient, they are not the intended target of the OECD's BEPS initiative, and they are not in the cross-hairs of crusading politicians such as David Cameron, or Australia's Assistant Treasurer David Bradbury. Actually, the intricate financing channels running between "onshore" and "offshore" countries are vital to trade and international banking, and all finance ministers know this perfectly well; once the current anti-MNC hysteria has died down, attention will shift elsewhere.

One country which definitely isn't suffering from a surfeit of FDI is Pakistan, which is looking more and more like a failed state. The UK's House of Lords is far from the first body to criticize Pakistan's elite for helping themselves at the public trough rather than paying their taxes. Their Lordships were worrying about the aid budget, but Hilary Clinton was on their case constantly while she was at the State Department, and the IMF has been vocal as well. Only two million people out of 190m pay taxes, and they are not the richest. Net FDI in the first eight months of the current year was a pathetic half a billion dollars, and now there is a balance of payments crisis. Successive finance ministers make great play of their efforts to broaden the tax net – but nothing happens. No prizes for guessing why: there is a kleptocracy, and it's not in their interests to change anything. The House of Lords is right to withold aid, which will just be stolen, and you are right not to set up a business in Pakistan. Even the Ukraine might be a better place.

It's not clear whether this week's poor labor statistics in the USA are due in some measure to the "fiscal cliff" deal, although it's hard not to imagine that the 2% pay loss through the payroll tax hike has had its effect. That's a direct hit on the pockets of virtually every working American. But the "fiscal cliff" deal surely is implicated in the 5-day slippage of "Tax Freedom Day." On the margin, which is where new jobs are created, it's a mathematical certainty that higher tax means fewer jobs and fewer entrepreneurs choosing to start up a business. There is no clear evidence that the sequester is having a major impact on the jobs market, although it will have a beneficial effect on the deficit. More important than both these factors, though, is the failure of the Congress, and, I suppose, of the President, to do anything about the corporate tax regime. Trillions of dollars are lying uselessly offshore or are being employed overseas to generate yet more unrepatriatable cash, and again, on the margin, the domestic tax regime dissuades American companies from investing at home. Solutions to the problem are two-a-penny: every Representative and every Senator knows what needs to be done. Please, for the country's sake, get on with it and do it! The President's proposed change to the foreign pension fund investment tax regime seems, on the other hand, to be quite sensible. Let's hope it doesn't get bogged down in the inevitable summer budgetary follies.

Quite rightly, Moody's has censured Bermuda's Finance Minister for his Keynesian disregard of a mounting deficit. It's all about the insurance sector, of course. Premiums are nearly 20% below the peak level they reached before the debt crisis, and have not yet started to recover. This has both direct and indirect effects on government revenues, obviously. The Bermuda Monetary Authority is putting a positive spin on the situation, but the numbers don't lie. The problem is to know whether the changes taking place are temporary or structural. Other insurance-linked jurisdictions such as Guernsey are seeing better figures, and there has to be a real chance that Bermuda's model is going to be less successful in future. It's easy to rehearse the problems that Bermuda faces: a protectionist and anti-"offshore" Congress in Washington; a successful domestic "captives" sector in the US; a European Union that is determined to encourage its own insurance sector at the cost of "offshore;" and rivals in other low-tax jurisdictions, including the BVI, Guernsey, Turks & Caicos and Hong Kong. The government is in denial about this. Bermuda has had it easy for a long time, but is now a very expensive jurisdiction. Instead of proudly ignoring the problem, Bermuda needs to get real and face up to its uncertain future.


Kitty's Encomiums and Execrations

Methodology: each week (this is the 47th) 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 neutral ranking, 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..

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:

Guernsey in the money

Gulf Cooperation Council humming along

And Kitty's Execrations:

Bermuda spends away

Pakistan getting it wrong

USA pays more tax




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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