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The Gipper is smiling knowingly from his cloud

Kitty Miv, Editor
06 December, 2012

Kitty's Kountry Rankings are below, with a description of how they are kompiled. This week, as every week, I give out three Encomiums to countries which have done Good Things, and award three Execrations for countries which according to my highly personal and partial views have done Bad Things.

Back on the "less is more" theme, there is another proof of it this week in Austria, which has increased its corporate tax take by 20% after cutting the tax rate by 30%. The Gipper is smiling knowingly at this from his cloud, although his successors on the Hill don't seem to have learnt the lesson, and most governments find it just too counter-intuitive to be possible. Companies are run by people, and many of their shareholders are people too: people are humans and suffer or benefit from human nature, usually both at once, and human nature is to resent being over-taxed. There is starting to be a fair amount of evidence that the cusp is round about 30%: below that level people may moan, but they cough up without feeling robbed; above that level and they spend increasing amounts of time trying to reduce the amount of tax they pay. So it's no surprise that the Austrian corporate tax rate fall was from more than 30% to less than 30%. The US corporate tax rate is around 40%, depending on the state you are in; it needs to come down to 25% maximum, and there is no need to worry about offsetting savings - Uncle Sam will get more money that way.

The OECD and the UK House of Commons Public Accounts Committee are both disbelievers in the "less is more" mantra. Both of them are on the trail of under-paying corporates this week. The PAC says that Google, Apple, Amazon and other techno-giants are "immoral" for arranging their tax affairs to pay less tax in countries like the UK and channel their turnover through countries like Luxembourg or Ireland where the tax rate is lower, while the OECD met in Tokyo to discuss "schemes that illegitimately use corporate vehicles to mitigate tax". This (mostly) European witch-hunt is presumably going nowhere, although they may shame some of the corporates into paying a bit more tax for a time. Brussels will wave the CCCTB around like a magic wand, and there will be much talk of "formulary taxation", ie apportioning turnover on the basis of national sales and taxing accordingly. It didn't work in California when it was tried and it won't work now. Anyway, what makes anyone think that Ireland, Luxembourg, Cyprus and other low-tax member states are going to sign their own collective suicide note? A black mark to the UK for such anti-corporate blather.

Malta does "get it", and has presented a tax-cutting budgetary package for 2013. Little Malta had a bad period of quasi-Marxist post-colonial blues in the 1970s and 1980s, but managed to pull its socks up and join the EU along with Cyprus and the Eastern European ex-Soviet bloc in 2005. The EU's Code of Conduct Committee (a kind of internal high-taxing, big-nation fiscal police force) then had a go at Malta's low-tax regime, and forced some concessions, but mostly Malta fought its corner very well and managed to retain most of its attraction for corporates, and especially betting and gaming companies. What are you to do if you sit on a piece of rock without even a gold mine? Malta saw early on that its salvation lay in e-commerce, and has done everything right, to the point at which it is now going to be attacked by Brussels for being too successful. The EU is so wrapped up in its euro-zone problems that it may not properly focus on the issue for a while; but the recent Green Paper on gaming is full of menace, and should worry the Maltese authorities big-time.

As regards betting and gaming, the behaviour of the Greek government over its state gambling monopoly, OPAP, is a straw in the wind. It's not nice to kick a person when they're down, and Greece is nothing if not down, but this kind of cynical disregard for private business and market principles is what brought Greece down in the first place and is very reprehensible. Betfair is exasperated by the situation and has thrown in the towel. Not that Greece is the only country in Europe which is trying to retain its gambling revenues by fair means or foul. The Commission and the ECJ will probably head off the more overtly protectionist national monopolies; the worry for Malta, Gibraltar, Alderney and other e-commerce front-runners is that the EU's big taxers will then follow the UK by installing anti-competitive gaming tax regimes which fly in the face of single market principles - and it's far less clear that the Commission will spring to the market's defence, as it should.

Popular Western perceptions of Vietnam are so dominated by memories and images such as Kent State, the ride of the Valkyries and My Lai, at least mine are, that it's hard to focus on a more up-to-date vision of the country. Perhaps it's an age thing; younger people may be more aware that Vietnam is an Asia-Pacific success story, joining the WTO five years ago, clocking up a monotonous 7% growth every year, and very prominent in trade treaty negotiations. It is taking a full role in regional development within the Association of Southeast Asian Nations (ASEAN), which is expected to lead to the introduction of the ASEAN Economic Community by 2015. In addition, Vietnam is currently negotiating an extension of the Trans-Pacific Partnership trade treaty with the US and a free trade agreement with the European Union, and has ongoing talks with Russia and Singapore. However it's Vietnam's increase in income tax threshholds, taking 75% of tax-payers out of the tax net that gets it an award this week.

Moving sideways (or up or down - geography is not my strong suit) takes us to South Korea and another blast from the past in the shape of Lone Star. I thought that was done and dusted aeons ago, but apparently not. The South Korean government and Lone Star are still at each other's throats over the profits the company made from its investments in South Korea (Korea, everyone is starting to call it, as if the northern half didn't exist any more). I can't set myself up to judge the rights and wrongs of the matter, but I am clear that, as in the case of Vodaphone and India, a government is very badly advised to turn a major investor into a cause célèbre, with incalculable consequences in terms of reputation. Surely the game is not worth the candle?

Kitty's Encomiums and Execrations

Methodology: each week (this is the 29th) three countries are given encomiums and three 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 has a ranking of – 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, falling back again in week 24 to minus two.

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:

Austria in Reagan territory

Malta v the EU

Vietnam making quiet progress

And Kitty's Execrations:

Greece in the dog-house

South Korea in unwelcome glare of publicity

United Kingdom on its high horse




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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