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Renzi though might have to move heaven and earth to accomplish his goals

Kitty Miv, Editor
04 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.

Quote of the week probably should go to Italian Prime Minister Matteo Renzi, who has called for a "Copernican Revolution" for the Italian tax system. In case you're not up to speed with your renaissance geniuses, he was the early 16th century mathematician and astronomer who shook the very foundations of the religious orthodoxy by concluding that the earth and the other planets of the system orbited around the sun, rather than the other way around. Just how Copernican theory relates to taxation I'm not sure. But I do get Renzi's drift. Italy's tax system has become so uncompetitive and unattractive that a paradigm shift in thinking is needed to turn things around. To kick off the revolution, Renzi has proposed a fairly deep corporate tax cut, which would reduce Italy's total tax rate from the low 30s to the mid-20s, and thus closer to the world average. His claim that this would make Italy one of the most competitive nations in Europe in tax terms is stretching things a bit however. The UK, for example, has given its competitors food for thought with its recent announcement that the country will have a corporate tax rate of 18 percent by 2020. There are also a number of other EU member states with corporate tax rates well below 20 percent, including Ireland, Cyprus, Bulgaria, and Latvia. Surely the revolution shouldn't just stop at cutting corporate tax. If PwC's Paying Taxes Index is a reliable indicator of a national tax system's user-friendliness, this would have to be just the start: Italy has the 144th-best business tax system in the world; in comparison, the UK is 16th, Ireland is 6th, Cyprus is 50th, and Latvia is 24th. Copernicus helped to change humanity's thinking about the earth's place in the heavens. Renzi though might have to move heaven and earth to accomplish his goals.

Speaking of antediluvian things, I now turn my attention to the US corporate tax code. Ok, it's not quite the ancient relic that this adjective implies, but it's probably fair to say that the US corporate tax system is at least 30 years out of date (the last major reform of the US tax code took place in the mid-1980s under President Ronald Reagan). It's certainly not fit for purpose for the intangibles-based digital economy of the 21st century. Frankly, most tax codes probably aren't either. But at least some governments noticed which way the wind was blowing some years ago and have tried to adapt their antiquated tax systems to new realities by inventing special tax regimes to encourage the development of intellectual property. Ironically, given that Europe is often seen as one of the least competitive places in tax terms, a number of EU countries have led the way in this area. Belgium, Ireland, Italy, Hungary, Luxembourg, the Netherlands, Spain, and the United Kingdom have put in place or are considering the introduction of innovation or patent "box" regimes, under which IP-related income is subject to a deduction for tax purposes, or a special, usually much lower, rate of corporate tax. Interestingly – yet at the same time somewhat unsurprisingly – Ireland, the Netherlands, and Luxembourg were among the handful of "low-tax" territories where US corporations shifted USD600bn in income in 2012, according to a recent analysis by the Congressional Research Service. Now the US – or at least some members of Congress – is trying to turn the tables, with a legislative proposal for a United States "innovation box." Given that comprehensive tax reform is impossible at the moment, and probably will be for at least another 18 months, this could represent the next-best solution and certainly might be a more effective means at unlocking some of the estimated USD2 trillion in income held abroad by US multinationals than special repatriation taxes. It's quite refreshing to see that the innovation box proposal has bipartisan support too. It probably won't get the OECD's support, however, given that patent boxes by their very nature encourage corporations to shift profits from one jurisdiction to another. However, if the Republicans manage to achieve a clean sweep at next year's elections, it's hard to see the US kowtowing to the OECD, the EU, or anybody else on international tax policy anyway.

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

Italy revolutionary

USA innovative




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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