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These Taxes are Usually Self-Defeating

Kitty Miv, Editor
14 March, 2013

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.

Better late than never, the Philippines has abandoned its Common Carrier Tax, which has been crucifying the country's tourist industry. Airlines will start flying again to the Philippines, and the Government will make much more from visitors' purchases than it does from CCT, which has been reaping less and less as airlines simply crossed Manila off their schedules. Lots of countries tax air travel, under the pretence of saving the environment, and these taxes are usually self-defeating. Island nations calculate that people will have to pay the tax because they can't swim to an adjoining country to catch their planes, but people can and do take short hop flights to a hub which doesn't tax their long-haul flights; or in the case of the UK, they catch the Eurostar to Paris and fly from there.

The European Commission is making rapid use of the permission it received in 2009 to negotiate free trade deals with outside countries, with Thailand being the latest recipient of its favors. Although there are some messy aspects of Thai governance, the country seems to be getting things right in its second Shinawatra period, with significant cuts to both corporate and individual tax, and an open trading policy which has seen ongoing trade talks with the US, Canada and South Korea among others. Growth last year was over 6% and is expected to top 5% this year. Since The King And I put Siam, as it then was, on the world's consciousness map, Thailand and its monarch have received mostly a bad press. Perhaps now things are going to change for the better.

In a week that saw the EU blasting a massive hole in its own foot with the bankers' bonus rules (a big, black mark if it was a country) and the UK admitting that its purchase of Royal Bank of Scotland will end up costing taxpayers gazillions of pounds, Jersey's banking sector seems to have turned the corner on a difficult period, with modest growth in deposit levels. The fund management sector is looking healthier, as well. It's hard to be sure about the consequences of the EU's current regulatory feeding frenzy, but it may mean good news for Jersey. You can argue it both ways: the AIFMD (Alternative Investment Funds Management Directive) will make offshore locations like Jersey less attractive as a base for EU fund management; on the other hand, an existing fund manager with say a base in London or Luxembourg and significant world-wide business may decide to split in two, and put its non-EU business in Jersey (or Guernsey or Bermuda or wherever) in order to escape the strait-jacket of AIFMD. And the same goes for the banking regulations. It was the bonus aspect that got all the attention this week, but actually that's only a minor part of the new regime, which has appallingly onerous requirements in all sorts of directions. As with funds, it may be that non-EU banking will benefit strongly from the new regime. Singapore and Hong Kong beckon, of course, but Jersey (and Andorra and Monaco) have an advantage for EU-based depositors, so we may see expansion of Jersey's banking capacity in the next five years.

It's not exactly fresh news, having been announced a year ago, but Australia is going ahead with scrapping the 50% discount it offers non-residents on their Australian capital gains. The Government thinks it won't deter investment, but surely they must be wrong? I can see that the measure could be part of an attempt to cool the real estate market, but what about business investment? Certainly no-one could describe the Gillard government as being pro-business: its time in office has seen a slew of measures making business operations more difficult and expensive, including the Mineral Resource Rent Tax, the Petroleum Resource Rent Tax and the Carbon Pricing Mechanism among others. Meanwhile the corporate tax rate at 30% is increasingly out of line with international competitors; instead of reducing the rate as it had promised, to compensate for the MMRT, the government changed tack and spent billions on giving douceurs to its electors. No-one's luck lasts for ever, and Australia's is going to run out if it keeps going like this.

If a Communist leader is against a proposal to tax large bank deposits, then something screwy is going on, right? Well, what is screwy is a bill in the Ukrainian parliament which would put a 25% withholding tax on bank interest. It was considered back in 2010 and junked then because the banking sector was struggling to survive during the debt crisis. Now it has surfaced again. If even the head of the Communist party can see that it is a dotty idea, what does that say about the governing party? Ukraine is such a sad case. Wheat production was 22m tons in 2011; France managed 38m tons. World wheat production in 2012 was about 650m tonnes, so Ukraine manages about 3% of that. Of course, wheat is not the whole story, there is corn, other crops, livestock etc. But what you should know is that the Ukraine has the world's most fertile and productive soil for crop growing, called the "black earth", and could produce several times more wheat, corn and other grains if the agricultural sector was not so backward. Interestingly, global warming will only help Ukraine, agriculturally speaking, allowing a more extended growing season and faster growth. Of course what is really holding back the country is its perverse governance, fiscal and land ownership structures.

Surprisingly, the Swiss voted in favor of limits on executive pay, something that the business federation lamented, not surprisingly. Presumably we are still reaping the consequences of the banker bashing that began in 2008. Opponents of the resolution that was voted through say that debate had been very one-sided. In fact, the outcome is not really clear yet, because there will be a long process of drafting before any law as such actually hits the statute book, and it's not inconceivable that sentiment could reverse in the meantime. Even if the law comes into force, you would think it would be a paper tiger, given that it would be easy for Swiss bosses to live and be paid somewhere else. And it won't effect all the wealthy foreign bosses who take advantage of Switzerland's flat tax regime, because it applies to companies rather than individuals. Still, it won't help Switzerland's economy, will it?


Kitty's Encomiums and Execrations

Methodology: each week (this is the 43rd) 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 neutral ranking, 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..

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:

Jersey back on track?

The Philippines sees the light

Thailand a trading nation

And Kitty's Execrations:

Australia against FDI

Switzerland scores own goal

Ukraine topsy-turvy




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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