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Some say that digital currency is the future

Kitty Miv, Editor
10 May, 2017

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.

Whether one agrees with the idea that tax competition is economically beneficial or not, it is clear that certain countries and organizations are attempting to suppress it, notably the OECD and the European Union, and key member countries within these groupings.

True, these efforts are focused mainly on preventing "harmful" tax regimes, which essentially are those offering very low or no taxes, and often "ringfenced" from the regular tax system. In other words, they are focused at tax havens, and tax regimes in large economies that have tax haven-like characteristics.

But you only have to look at the consternation caused in Europe when the UK was considering slashing corporate tax to 15 percent or lower in the wake of the referendum on EU membership, and the periodic pressure applied on Ireland to raise its 12.5 percent corporate tax from the influential corners of the EU, to see that many countries are very uncomfortable with the idea of tax competition, period.

But corporate tax rates continue to fall, and tax competition appears to be as vigorous as ever. Why? Of all things, BEPS seems to be at the root of it. As a recent survey by EY shows, implementation of the BEPS recommendations and anti-avoidance legislation introduced by the European Commission are now compelling governments to seek alternative means of tax change to drive competition. And this has put the emphasis back on tax rates, and non-harmful tax incentives.

It could be argued that, for the BEPS project to succeed, it has to be mutually exclusive from tax competition. Because if a country lowers taxes and foreign investment increases, that foreign investment will have come from somewhere else, and that somewhere else would have experienced shrinkage in its tax base.

Then again, is the competition for foreign investors really such a zero-sum game? Does an increase in foreign investment in one country lead to a commensurate decrease in another? The world of economics, investment, and finance seems a great deal more complicated than that. For starters, some foreign investment actually originates from domestic companies, and is routed through one or more intermediary jurisdictions, such as, in the case of China, Hong Kong.

Indeed, there are those that contend that tax competition has no influence on base erosion and profit shifting, and that wider economic factors are likely to be more responsible for trends in corporate tax revenues. This was the conclusion of a report published in 2014 by the Association of Chartered Certified Accountants and authored by Sinclair Davidson, a Senior Fellow at the Institute of Public Affairs, Australia, which found that: "Surprisingly, there is little evidence to support the notion that tax competition has reduced actual corporate income tax revenues."

Tackling base erosion and profit shifting along the lines recommended by the OECD is still the prevailing thinking among policy makers in the most influential countries, and many would write-off Davidson's conclusions. Still, they are food for thought.

Gambling is big business the world over. But it is an ethically challenging one. It is perhaps human nature to gamble at least to a certain degree: many of us take risks at some point in our lives hoping that the gamble will pay off in the form of a wealthier or happier life. But gambling can also be a compulsive activity for some, leading to undesirable outcomes, such as addiction, financial ruin, and corruption in sport. And these days, one only has to turn on one's computer to be able to gamble on all manner of events, from horse races, to elections and the existence of extra-terrestrials, 24/7, 365 days of the year.

In the knowledge that it is virtually impossible now for the tide of online gambling and gaming to be turned back, many governments have decided that the best approach is to regulate the industry, rather than block it. In some countries, this process is termed "liberalization" rather than regulation, for what is actually happening is that state-owned gambling monopolies are being broken up, and online providers permitted to enter the market – legitimately – for the first time.

However, it seems to be the case that with regulation and liberalization comes taxation. And some governments appear to be getting the balance very wrong.

One might argue that given the need for consumers to be given extra regulatory protection, there is a case that providers of gambling services should make an extra contribution in taxation. The industry as a whole seems to accept this – but only up to a point, and there comes a time when it's simply not worth their while participating in a newly regulated market if the fiscal conditions are all wrong.

A case in point is Poland, where there has been a mass exodus of online bookmakers, including most recently the iPoker network, from its newly "liberalized" gambling market, which features a 12 percent turnover tax. Now 12 percent doesn't sound a great deal, but when it is applied to gross revenue, rather than the difference between bets paid in and winnings paid out, it's quite a significant whack.

One hopes that other countries undergoing similar gambling reforms will take heed of the Polish example. But based on the preference for turnover taxes in this sector, I'm not at all confident. Poland itself was warned this would happen by the Remote Gambling Association well before the new gambling legislation was introduced.

Sticking with the sporting world, I now turn to the often-murky world of soccer. It is the planet's most-watched sport, but it's never far from controversy, as the FIFA corruption scandal demonstrated. It also has its fair share of run-ins with the taxman too, with the recent raids of two prominent English soccer clubs the latest such development.

However, this is an issue of wider significance, rather than one confined to the tax controversies at the top end of sport. And, appropriately enough, it also touches on the subject of tax competition too.

Some governments are more than willing to offer tax concessions to attract highly skilled – and highly remunerated – workers and investors to their shores. But, to my knowledge, such concessions rarely seem to be extended to professional sports people, including in the soccer world.

The issue of executive pay, the king's ransom that some soccer players receive every week, and taxation is highly divisive. Some people are very comfortable with the idea that those on mind-boggling salaries should pay half of their income in tax. Others argue that, in principle, rates of income tax approaching 50 percent or more are wrong, even confiscatory. The reality remains, however, that businesses and top-league soccer clubs (mostly those in Europe) can struggle to recruit top talent when high rates of tax are in place.

Maybe harsh realities call for pragmatic solutions. Spain, for example, came up with the "Beckham Law," (named after the famous soccer player when he moved to Madrid) whereby individuals can choose to be taxed as a non-resident for a temporary period. Italy deals with these issues in a somewhat less adversarial way, through the agreement of an annual tax protocol between the revenue agency and professional clubs. So perhaps other professional leagues would also benefit from similar measures and codes of conduct.

And from activities of the physical kind, we move to those of the virtual type, and the seemingly unsolved mystery of how countries should regulate and tax virtual currencies.

There has been a mix of responses from regulators around the world as to what to do with virtual currencies, of which Bitcoin is the most talked-about example. Some jurisdictions have run a mile, others seem to be just ignoring them, hoping that they will be a geeky fad that soon goes away, while others are deciding to embrace them.

What I have noticed though, is that the territories falling into the latter of those three categories tend to be what you would call "offshore." For instance, in 2014, the Isle of Man enabled the formation of the first company with Bitcoin capital and, in October last year, Jersey extended its anti-money laundering and countering the financing of terrorism laws to cover virtual currencies.

In July 2016, the first European regulated financial product listed on the Gibraltar Stock Exchange in the form of BitcoinETI, an asset-backed exchange-traded instrument and, last month, the Rock's financial regulator announced that it would soon release proposals for firms engaging in "distributed ledger activities," also known as Blockchain, which is seen as a secure way of recording Bitcoin transactions, among other things.

Anti-secrecy campaigners might point out that the anonymity inherent in transacting in virtual currencies makes them a perfect fit for tax havens, and perhaps offshore financial centers are doing themselves no reputational favors by associating themselves with this relatively unknown financial phenomena so readily. But perhaps these IOFCs are just better at spotting emerging trends in business and finance. Many of them saw the e-commerce revolution coming in the late 1990s and legislated early for it, although, ultimately, most failed to deliver on their "e-commerce hub" ambitions. This time, it could be the growth in the nascent Fintech industry they have spotted, hence their willingness to provide accommodating regulatory regimes for virtual currencies.

Some say that digital currency is the future. If it is, its future may well be offshore.


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

Gibraltar visionary

Italy non-adversarial

Kitty's Execrations

Poland bust



Tags: Euro | Gambling | Law

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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