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Perhaps the Double Irish just wasn't worth the hassle anymore

Kitty Miv, Editor
23 October, 2014

Kitty's Kountry Rankings are below, with a description of how they are kompiled. 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.

So, in the great stand-off between Ireland and the OECD, Dublin has been the one to blink first, with the Irish Government having announced in the 2015 Budget new corporate residency rules that will put paid to the infamous "Double Irish" international tax planning technique so beloved of American technology and pharmaceutical firms. This is not really surprising, given the amount of pressure Ireland has been under from the international community with regard to its corporate tax regime. What was more unexpected was the speed with which Ireland has acted, especially since it has fought tooth and nail against the likes of the EU and the OECD for years to ensure that Irish tax laws are decided in Ireland. But ultimately, perhaps the Double Irish just wasn't worth the hassle anymore. Physical investment on the other hand, is. Ireland is often maligned for being one of those jurisdictions with a tax regime attracting a lot of corporate profit, but not a lot of corporate substance. This is unfair, and the country's detractors misunderstand (or pretend to misunderstand) what the Government is trying to achieve by having one of the lowest rates of corporate tax outside of the world of offshore: jobs, wealth creation and economic growth. AmCham Ireland, the American Chamber of Commerce's Irish branch, has some quite astounding statistics about the level of FDI pumped into Ireland by American firms in recent years: US companies have USD204bn in FDI in Ireland, more than the total invested in the BRICS economies combined, and during the decade to 2010, US investment in Ireland was triple that of China-bound investment. This has created over 115,000 jobs in more than 700 US firms in the Irish Republic. Pretty impressive for a country with a total population of 4.5m. Certainly, not all that shines in Ireland is gold (or should that be emerald?), and the scale of its banking crisis leaves it vulnerable. But would Ireland be recovering to the same degree it is now, or even recovering at all, if it had put corporate tax up, a move the French and Germans were clamoring for in the bail-out? In fact, it is something of a triumph that Finance Minister Noonan has been able to announce tax cuts this time around given the state Ireland was in just four years ago. And mischievous Ireland hasn't completely caved in by relinquishing the Double Irish. The "Knowledge Development Box" announced in the Budget will almost certainly be considered a "harmful" tax measure by either the OECD or the EU, or both. Let the fun and games begin!

I do, however, feel sorry for Portugal. The decision to cut corporate tax in the Government's latest Budget was praiseworthy, but one gets the awful impression, as ominous economic clouds gather over the rest of the European mainland, that it is akin to whistling into the wind. Who's going to hear, or even be listening to the message, when the rest of the continent is once again fighting fires? Portugal exited its bail-out program earlier this year, but it is by no means out of the woods. The country was praised by the "troika" for some "ambitious" economic reforms during the period of austerity, but they evidently haven't gone far enough because the troika went on to warn that the economy still needs to be more "dynamic, flexible and resilient" and that making it so would be "challenging." One challenge standing between the Government and fiscal stability is the constitutional court, which has routinely blocked austerity measures ranging from public sector pay cuts to new taxes, such as the one proposed for public sector pensions. Without these Portugal is going to struggle to get its deficit down, and the longer this goes on, the more nervous its creditors will get about its ability to pay its debts, with potentially disastrous consequences for the economy. It's sad to say, but Portugal is just one of several European economies that are now reaping what they have sown by refusing to modernize their economies before the storm arrived.

October 14, 2014, was a black day for national self-determination. For this is when Switzerland and the European Union signed a joint statement affirming the Swiss Government's commitment to abolish certain company laws in order to appease Brussels. A bit like the Double Irish, in the era of BEPS, corporate forms like Switzerland's domiciliary, holding and mixed companies, which effectively allow a company to split its profit from its substance, thereby avoiding some of Europe's high taxes, are never going to withstand international scrutiny. But the EU, or more precisely its taxation henchman the European Commission, was chipping away at Switzerland, a neutral and fiercely independent nation, way before anybody had heard of the term "base erosion and profit shifting." To the EU, low-tax Switzerland represents some kind of fiscal sink, down which disappear corporate tax revenues due to the treasuries of Germany, France, the UK and any number of other high-tax states. To make matters worse, Switzerland's strict privacy rules have meant that until recently, the EU and its member states have been able to do very little about the large sums of untaxed cash parked in Swiss banks. In other words, this largely low-tax, privacy-loving country is complete anathema to most of those leading the EU. Although Switzerland has signed a number of agreements with the EU in areas such as trade and immigration, it isn't actually a member of the EU. Although you wouldn't know it given the way that Brussels routinely expects Switzerland to jump on demand, in particular on matters to do with tax. In the past, tenuous arguments made by the Commission that the 1972 free trade agreement meant Swiss tax laws more or less had to fall in line with the EU's were, figuratively-speaking, met with a type of "talk to the hand" gesture from the Swiss, and Brussels knew that there really wasn't anything it could do unless the Swiss consented. But EU persistence has paid off. The world is different now, and most of it appears to be ganging up on Switzerland. Ah, you might say, aren't the Swiss the bad guys, because they allow evil dictators to stash their ill-gotten gains in numbered accounts, no questions asked? Shouldn't they be forced to change? My answer to that is, regardless of one's view of the Swiss, shouldn't they be allowed to govern themselves as they see fit? The fact that the country has been so successful for so long, in contrast to many of its European neighbors, is testament to its way of doing things. It's just another example of the alarming trend among the rich Western countries to meddle piously in the affairs of other nations.

 

Kitty's Encomiums and Execrations

Methodology: each week (this is the 127th) 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 plus 1, 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 and now it's on plus 1 again.

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:

Ireland mischievous

And Kitty's Execrations:

Portugal whistling

Switzerland browbeaten

 

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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