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Pandora's Box is now wide open

Kitty Miv, Editor
19 September, 2016

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.

It sounds a bit rich of the OECD to lecture countries on the need for tax certainty, when its BEPS project is the root cause of massive uncertainty in the area of international taxation. Having said this, it is the inconsistent application of BEPS at national level that is exacerbating the problem of uncertainty, and to be fair to OECD Secretary General Angel Gurría, this is what he was referring to in his address to the recent informal meeting of European Union finance ministers.

Nevertheless, the current situation was eminently predictable. For it was always unrealistic to expect scores of countries to co-ordinate tax reforms and align their tax regimes in an orderly fashion.

Now when asked about their major concerns and worries for the future, senior company managers are less likely to cite economic uncertainty, and are far more likely to say tax uncertainty. For instance, in its US CEO Outlook 2016 survey, KPMG found that the BEPS project "could prove very disruptive, adding uncertainty, and complicating the tax and business planning process at many organizations." And the International Chambers of Commerce, which represents hundreds of thousands of businesses in 120 countries, has repeatedly called for the coherent and coordinated implementation of new international tax guidelines, warning that anything less could damage global trade and investment. The trouble is, Pandora's Box is now wide open, and for better or for worse, BEPS will have to be seen through to its conclusion. So taxpayers better strap themselves in for a long and potentially bumpy ride.

From corporate, to individual transparency matters. And maybe it's too early to write an obituary to privacy. But if it's not completely dead yet, some recent developments suggest that it is terminal decline, and nearing the end. One of them was the ruling by Israel's Supreme Court against a FATCA injunction imposed just a couple of weeks before. While this didn't come as a complete shock to me, something Justice Meltzer said in justifying his decision sent a shiver or two down my spine. Essentially, he argued that in today's world, the state's need to know what their citizens are up to trumps said citizens' right to privacy. You'd probably expect that sort of statement from a senior figure in the security services. So coming from a court in a nation like Israel, with its proudly independent judiciary, it was quite ominous. Not that I'm suggesting in any way that undue influence has been exerted in this case. But it just goes to show how far attitudes to privacy have changed.

Further evidence that the legal pendulum is swinging in favor of governments came in the form of the Swiss Supreme Court's decision on September 12 to grant a group request to the Dutch tax authorities under the Swiss-Netherlands tax treaty, after a lower court had blocked it on the grounds that it resembled a phishing expedition. And this observer eagerly awaits the decision of the European Court of Human Rights in a case that will determine whether a Finnish newspaper has the right to publish taxpayer information as it would last weekend's soccer results.

You'd think in this new age of transparency, governments would be more accountable for their actions than they used to be. But apparently not. Which is why we have institutions like the Government Accountability Office (GAO) in the United States, to augment the work of Congress in holding the Government to account. And by all accounts, it seems to be doing a fairly good job, including in the area of tax administration. Indeed, barely a month goes by without the GAO calling out the Internal Revenue Service and other agencies for such things as lapses in protecting taxpayer information, ongoing vulnerability of systems to fraud, and various other forms of maladministration and wastage. While the GAO has no legal authority as such, the fact that it is able to expose administrative shortcomings is often enough in itself to bring about changes, and the IRS is known to act on its recommendations.

Still, the GAO is no trifling operation itself with an annual budget of half-a-billion dollars and more than 3,000 full-time equivalent employees. Who's checking how that money is spent, or how all these staff members are performing, I wonder? Maybe it's time for a new watchdog, the GAOAO – the Government Accountability Office Accountability Office.

A lack of openness is not an accusation you can readily throw at Hong Kong. Especially after it won the Fraser Institute's world's freest economy award yet again, with small government, regulatory efficiency, low tax, and judicial independence named as four of its main virtues. This is worth pointing out, because it's certainly no flash in the pan – last February, Hong Kong was named the world's freest economy for the 22nd consecutive year by the Heritage Foundation.

It seems remarkable that next year will see the 20th anniversary of the handover of Hong Kong's sovereignty to China by the United Kingdom, and that the 50-year contract under which the People's Republic guarantees Hong Kong's capitalist status quo is nearing the half-way mark. It's still a long way off, but one wonders what China has planned for Hong Kong in 2047, or even if Beijing knows that itself yet. It seems that, for the foreseeable future at least, Hong Kong is far too useful to China as a conduit for inward and outward investment for the latter to suddenly impose communist rule. In any case, China itself can be described as communist in name only these days, given the extent its recent economic reforms. So the prospect of change looks remote. However – and there's always going to be a however in this mix somewhere – just how Beijing deals with demands for unfettered democracy in Hong Kong remains to be seen. The 2014 protests, and the authorities' reaction to it in both China and the SAR, didn't look good from afar, and a repeat cannot be ruled out. So it seems that Hong Kong is destined to remain blissfully free economically, but not necessarily politically.

 

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

United States accountable

Hong Kong open

Kitty's Execrations

Israel ominous

Finland too much information

 

Ciao

Kitty



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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