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The WTO is the Obvious Place for Resolution of International Disputes Over Tax

Kitty Miv, Editor
28 November, 2013

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.

It's doom and gloom all around in regard to the Doha Round and even as regards the World Trade Organization itself. But these fears seem overblown. Even if the upcoming WTO summit in Bali in 10 days' time does fail to reach an encompassing deal, something will be saved from the rubble, and nothing prevents the Round from continuing other than the exhaustion of the participants. All existing agreements remain in place; and the WTO's dispute resolution procedures will continue to operate. And by the way, non-WTO trade deals quite often specify that disputes should be dealt with through the WTO. There isn't and can't be any substitute for the WTO. Indeed I'd like to see its quasi-judicial remit extended beyond trade to other fields, say tax treaties and transfer pricing. The OECD is good at constructing sets of rules, which by and large are incorporated in tax treaties; but the mutual agreement procedures they prescribe are unwieldy, long-winded and often ineffective. The final arbiter in cases of dispute for Europe is the EU's Arbitration Convention, which is a dead letter. The WTO is the obvious place for resolution of international disputes over tax; and it could go on from there. But it won't, I suppose. At all events, let's congratulate the Seychelles on its steady progress towards WTO membership, something that should arrive in 2014, making it the 158th WTO member.

It's pleasant for once to be able to reward France for reducing some taxes, although its effort to improve the situation of entrepreneurs and tradespeople is too little, too late. It indicates that some parts of the Government at least have begun to understand the terrible damage that Francois Hollande's misconceived policies have inflicted on the country, both in real terms and in terms of reputation. Unfortunately, trapped by a declining economy and consequently shrinking revenues, the Government now doesn't have the resources to offer more than token assistance to down-trodden businesses. After ignoring repeated calls from the IMF, the OECD, the European Union and a host of economic commentators to stop raising taxes and spending money, French Budget Minister Bernard Cazeneuve had to face reality this week, revealing that there will be a revenue shortfall in France this year of approximately EUR5.5bn (USD7.4bn), compared to the initial budget forecast. He then went on to claim that the Government was controlling its expenditure so tightly that the country would reach its budget target for the year in any event. Quand les poules auront des dents, the French would say (when chickens have teeth). It's more graphic in English: when pigs fly. The most disappointing number is that of the 5.5bn, 80 percent is due to a loss of corporation tax, pointing to the low level of business activity. Indeed it's true that a dramatic reduction in State spending, and consequently in taxation, is the only escape route for France. But it has never been possible before without mayhem on the streets, and this Government definitely doesn't have the spine for that!

At Thanksgiving, plaudits also for US Senate Finance Committee Chairman Max Baucus (D - Montana) who has released a discussion draft setting out options for international tax reform, although he received only grudging praise from his "partner" on the tax reform trail, Dave Camp, (R - Michigan) Chairman of the House Ways and Means Committee. To many commentators it seemed unhelpful that Baucus has released his ideas while the parties are struggling towards an agreement over the budget, plus another fiscal cliff is looming. It's not Baucus's fault however that his draft saw the light of day at the very moment that Democrats in the Senate used the "nuclear option" of denying Republicans the use of the filibuster to contest the President's legal appointments; but if anything was needed to harden Republican attitudes, surely that will have done the trick. Even without the unfortunate timing, the contents of Baucus's draft awoke immediate opposition from business, which sees his ideas as reducing, not enhancing the competitiveness of US international companies. All in all, the draft seems like the deadest of dead ducks. A turkey, in other words.

The EU's ECOFIN (Finance Ministers of the 28 Member States) had another futile discussion on the Savings Tax Directive last week. Futile not because the target of universal information exchange is unachievable - after recent events, most countries have already accepted it, at least at the level of individual taxation - but because the planned expansion of the Directive to cover companies, trusts and other "personnes morales" is something that the EU will be unable to impose on the third party jurisdictions which were browbeaten into operating the original Directive. And imposition on the third parties is something that would be self-defeating even if it were feasible, because it would only cover those jurisdictions such as Jersey and Guernsey over which EU Member States have some control, and there are plenty of options for wealth-owners in other parts of the world, including notably Hong Kong, Singapore and Dubai, which will never in a million years agree to anything resembling the Savings Tax Directive. In fact, those Member States which have thriving "finance centers" such as Luxembourg, Austria, Ireland and the Netherlands will only accept the expansion of the Directive if it applies evenly over the current set of participants, which includes Switzerland, Liechtenstein, the Bahamas, the UK's offshore dependencies, Monaco, Andorra, the Cayman Islands and the British Virgin Islands among others. That is something which is very hard to imagine. Switzerland, for instance, in order to appease the EU, has already gone quite far towards weakening its attractions for the wealthy, but it is unlikely to commit suicide by throwing its corporate citizens and wealthy investors to the EU wolves. For such jurisdictions as Jersey and Guernsey, having to disclose the beneficial ownership of trusts along with information about their disbursements would comprehensively wreck their business models: what wealthy Chinese would put her money in a totally transparent Jersey trust when Hong Kong and Singapore are on her doorstep?

A year ago, we were spellbound by the proposed expatriation to Belgium of would-be French tax exiles Gérard Depardieu (Obelix) and Bernard Arnault (10th richest man in the world). Both changed their minds early in 2013 (Obelix went to Russia and Arnault stayed in France). Now we know why: according to a recent report by PwC and the World Bank Group, Belgium comes 161st of 189 countries ranked by tax burden. Enterprises in Belgium pay 57.5 percent of income in tax, while individuals pay 50.3 percent of their income. And it's not even warm. The Eurocrats based in Brussels don't pay tax, of course, and their wonderful canteens are subsidized; but you can't lay that at Belgium's door. I already wasn't thinking of going to live in Belgium; now I'll definitely stick to Hastings. You can get very passable moules and frittes in the Belgian restaurant opposite our office.

Kitty's Encomiums and Execrations

Methodology: each week (this is the 80th) two or three countries are given encomiums and two or 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 is on + 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.

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:

France's baby steps

The Seychelles opens up

The United States means well

And Kitty's Execrations:

Belgium is costly

European Union flogging a dead 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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