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The moral of the story for governments is beware of bandwagons

Kitty Miv, Editor
05 January, 2016

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.

I like to think that at this time of year, Santa Claus retreats to his cosy cabin in Greenland, puts his feet up in front of a roaring log fire, and enjoys a well-earned rest. Perhaps he has a glass of something warming in his hand; I certainly wouldn't begrudge him a winter restorative, for the Christmas season seems to start earlier and earlier with each passing year, and he must make the most of the little R&R he does get.

So with blizzard howling outside, I now picture Santa's eyelids drooping as he is lulled to a gentle sleep by the warmth of the crackling fire. It's an idyllic scene, isn't it? Yes, it is, and it's one I'm now going to shatter. Suddenly, Santa is jolted awake. He remembers that news item he read just before Christmas, the one about Greenland having signed the OECD's Multilateral Competent Authority Agreement confirming the country's commitment to automatically exchange financial account information with other countries' tax authorities – effectively, it's the global FATCA. Feeling a minor panic rising, Santa asks himself if his tax affairs are in order – a tax scandal involving the North Pole's most famous resident simply won't do! Has he declared the cookies and milk he received in Wichita? The sherry and mince pie he consumed in Harrow on the Hill? The ice cold lager he gulped in Adelaide (plus the carrots for Rudolf)? But what with a particularly busy build up to Christmas last year, poor old Santa just hasn't had the time to keep up with it all, and now he needs a rest. That excuse however simply won't wash with the world's tax men. Especially in the current environment of anti-avoidance mania. Back at the fireplace, Santa makes a mental note to himself to reassign his most trusted elf to head up the newly created festive accounts department and promptly falls asleep.

It's a little known fact that Santa traditionally uses his New Year break to catch up on some of his favorite television shows and movies. I'm told that he was particularly looking forward to watching Star Wars: The Force Awakens this year. Unfortunately, it looks as if he'll be filling out tax forms from now until spring time. Nevertheless, in a funny sort of way, if it wasn't for tax, the new Star Wars blockbuster might not have been made at all – or could have looked considerably different.

There is some debate about the cost effectiveness of tax incentive schemes directed at the film and TV industry. However, governments themselves seem convinced of their merits. Movie and TV productions, especially big-budget ones, employ large numbers of skilled technicians, so they are good for jobs. What's more, they buy goods and services from local businesses, so they're good for the economy in general. And films and TV shows often serve as a shop window for a country's tourism industry – just look at New Zealand, which is now synonymous with the dreamlike landscapes of Lord of the Rings and The Hobbit.

The prospect of this economic multiplier effect probably explains why countries have been falling over themselves in recent years to offer tax breaks to producers, no doubt spurred on by the success of such schemes in certain other countries, like the United Kingdom, where film tax relief has supported around GBP8bn (USD12bn) of production expenditure since its introduction, according to the Government. Indeed, a great deal of the new Star Wars movie was produced in the UK, and it can't be entirely a coincidence that other locations used in the movie were places where tax incentives are on offer, including Abu Dhabi, Ireland, and New Mexico. 

However, a recent study by the Tax Foundation suggested that in the United States at least, such schemes have had their day because lawmakers have realized that they "are a windfall for movie studios but provide few benefits to taxpayers." In 2010 alone, eight states eliminated or suspended their programs, namely Arizona, Arkansas, Idaho, Iowa, Kansas, Maine, New Jersey, and Washington. A telling statistic is that in 2002, only four US states offered this type of tax incentive. By 2010 that number had grown to 44. The producers were spoilt for choice. But in the end it can't all be about tax. Producers will gravitate to those locations where the industry is well established, the technical talent is abundant, and taxes are fairly benign – places like Louisiana, the UK, and New Zealand. I guess the moral of the story for governments is beware of bandwagons.

Another little known fact globally (and this is one I haven't made up for effect) is that India's film industry outstrips that of Hollywood itself, in terms of pictures made and bums on seats (if you're interested, Bollywood made 1,602 movies in 2012 compared with Hollywood's 476). However, when it comes to tax reform, the Indian legislature is starting to make the US Congress look positively decisive and dynamic!

Prime Minister Narendra Modi's Government has said all the right things to foreign investors about tax since it has been in power, and has made steady, if unspectacular, progress towards improving the country's notoriously difficult corporate tax environment. However, I said some time ago that the pending goods and services tax legislation, which is widely acknowledged as the most important tax reform since independence, would provide a litmus test of the Government's reformist credentials. And unfortunately, it is a test that it appears to be failing.

To be fair to the Government, it's not for lack of effort. But there's not much it can do when the Opposition (largely made up of the Congress Party), uses its majority in the Rajya Sabha (upper house) to oppose for the sake of opposing, which appears to have been the case during the recently concluded winter session of parliament. All so ironic – and, it has to be said, not a little spiteful – given that the GST reform was the Congress Party's idea in the first place. But I suppose it's just another demonstration of how dysfunctional India's legal framework can be, and how incredibly difficult it is for meaningful change to be brought about.

 

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

United Kingdom the force

Kitty's Execrations

Greenland scrooge

India dysfunctional

Ciao

Kitty



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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