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Rubber-stamping international corporate tax planning arrangements

Kitty Miv, Editor
20 November, 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.

European politicians must often undergo some kind of mental transmogrification in order to turn from being national freedom-fighters into members of the European Commission, and this is the only way I can explain Jean-Claude Juncker's position on the legitimacy or otherwise of advance tax rulings dished out to certain companies by certain EU tax authorities, including a certain Luxembourg. Either that or the poor fellow is suffering an attack of amnesia. Everyone knew when Juncker was nominated to lead the European Commission that he was an arch-federalist, and that while he is driving the Brussels machinery the odds against reform of the EU's broken system of governance are on a similar level to that of witnessing a blizzard in Alice Springs, much to the chagrin of the Euro-skeptic British. So it's not really a surprise that Juncker has picked up where the previous lot in Brussels left off. But let's not forget that he was in charge of Luxembourg for almost two decades, combining the role of Prime Minister and Finance Minister for a good stretch of it, during which time the national tax authority that he oversaw issued hundreds of "comfort letters," rubber stamping the sort of international corporate tax planning arrangements that he is now railing against. According to him though, Luxembourg was fully compliant with international tax rules when he was in charge, a period during which the country resisted all attempts to dilute banking secrecy laws. Well, even by its own shocking standards of Janus face-ism, the EU has really excelled itself this time. The hypocrisy of it all frankly beggars belief. It will be interesting to see if the UK's Lord Hill, the former Conservative leader of the House of Lords and surprising choice for the Financial Services Commissioner post, undergoes a similar transformation. A good indicator would be if he suddenly starts talking up the EU financial transactions tax or the CCCTB. I wouldn't bet my house against it.

If foreign direct investment figures are anything to go by as an indicator of a country's competitiveness, or an economy's potential, then Japan looks to be in pretty poor shape at the moment. According to one official estimate, Japan lies 25th in the table of received Foreign Direct Investment stock, the level of accumulated FDI in a country, with USD231.2bn invested there by the end of 2013. This is less than Poland, which is positioned in 23rd place, and which has been playing two decades of catch-up after suffering years of stagnation under Communist rule. Japan, famously, entered a long period of economic deflation in the 1990s, and successive Governments, shying away from unpopular, but potentially effective, measures have struggled to find the right formula to turn this particular economic tanker around. Even so, for one of the richest and most advanced nations on earth, this figure is quite striking, and is indicative of a country that remains mistrustful of foreign participation in its economy. Perhaps this has to change. And to a certain extent it is under the premiership of Shinzo Abe and his brand of growth-orientated economic policies dubbed Abenomics. He has taken Japan into the Trans-Pacific Partnership trade talks, and a trilateral free trade agreement with China and South Korea is inching ahead. Just how serious Japan is about opening up highly protected and nationally-sensitive parts of its economy is open to debate, however. The country is at long last taking action on the tax front though. For a long time, legislators in the United States, unable to pass much needed tax cuts, could at least look to Japan and thank them for having the highest rate of corporate tax in the OECD. But after cutting the tax a couple of years ago, this unwanted baton was eventually passed to the US. Now Japan's Minister of Economy, Trade, and Industry wants to cut corporate tax again next year. A 2.5 percent reduction doesn't sound like much, and it probably won't have a great deal of effect considering that less than a third of companies in Japan pay the tax anyway because of previous losses, but it's a positive signal, and at the very least shows investors the Government's preferred direction of travel. Investors don't look solely at corporate tax rates when deciding where to risk their money; there are other considerations too numerous to mention here influencing such a decision. But corporate tax rates are in effect a country's shop window, and the more attractive the display, the more like the customer will enter.

Although Hong Kong's liberal economic system is regularly praised here, this Special Administrative Region of China, as it is officially known, has not been shown in the best of lights on the world's television screens over recent weeks as the authorities, both in the SAR and in Beijing, struggle to square China's One Party mode of government with the democratic demands of Hong Kong's citizens. Another worrying, but little-reported development came in the form of figures from the Inland Revenue Department last week, which showed tax revenue growth slowing to a virtual standstill thanks to lacklustre economic growth in 2013/14. So, Hong Kong could do with a timely boost, and perhaps it has just got two: the launch of the Shanghai-Hong Kong Stock Connect scheme, which will allow eligible Mainland investors to trade stocks listed on the Stock Exchange of Hong Kong (SEHK) directly through the Shanghai Stock Exchange (SSE) while also allowing Hong Kong and overseas investors to trade stocks listed on the SSE directly through the SEHK; and the removal of the daily limit for conversions by Hong Kong residents of currency into and out of the Chinese renminbi. Hong Kong's standing as China's "offshore" financial centre gives it a natural head start in the race to become the preferred place for RMB trading as China slowly liberalizes its currency. But it's not without its rivals. As the world's largest foreign exchange centre, London is inevitably playing its part, and the UK Government has launched initiatives to facilitate growth in RMB trade. But earlier this year, Singapore, with its strong cultural ties to China, overtook the Square Mile to become the largest offshore RMB exchange platform outside of the SAR. As Hong Kong's Financial Secretary, John C Tsang, observed, the Stock Connect scheme should help to propel the development of offshore RMB business in Hong Kong, adding another string to the finance centre's bow and cementing its place as the premier offshore RMB centre. He also likened Hong Kong to a "laboratory" for new Chinese reform measures. However, this was not an entirely flattering description of Hong Kong's role in the world, hinting at its subservience to China. And experiments can also go wrong of course. The One Country, Two Systems experiment has probably exceeded expectations so far, but it is to be hoped that Beijing doesn't allow the democracy issue to become incendiary.

Kitty's Encomiums and Execrations

Methodology: each week (this is the 131st) 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: 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:

Hong Kong China's catalyst

Japan all the right noises

And Kitty's Execrations:

European Union Janus-faced





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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