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They comprehensively failed to agree on anything at all

Kitty Miv, Editor
27 June, 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.

Goody two-shoes the British Virgin Islands (offshore? moi?) jumped smartly onto the G8 bandwagon, saying that anyway it had been doing all the right things all along. It's pretty easy to say that you agree with everything when nothing was said, which was the case at David Cameron's summer country house party, where they comprehensively failed to agree on anything at all. I'm sure they all had a lovely time doing nothing in the hazy sunshine, and they didn't even have to stay up all night arguing. Shamefully, I don't have any gossip for you; WAGs do get to come along on these affairs, and there is a kind of alternative social program for them, but apart from the anodyne photo shoots outside Harrods you'd need your own spy satellite to have any chance of getting real dope on the goings-on, and you'd end up as a lifelong refugee in a hotel in Hong Kong if you tried. In fact the BVI, along with other ex-Empire specks of rock, had a good week in public perception, with a report from venerable think-tank the Institute of Economic Affairs lauding their contribution to the UK's economy, and calling the Government's attitude "hypocritical," which it certainly is. The usefulness of "tax havens" is exemplified by Labuan – another ex-British speck of rock which once was a bug-infested coaling station, and now plays a symbiotic role in Malaysian financial growth, and is involved more widely in East Asia. Oh, but how we need another word to describe tax havens, shorn of the accumulated political chaff that sticks to them: IOFCs (International Offshore Financial Centers) made a brave try, but it has the "O" word in it, which disqualifies it. Do you like AFTICs? Ancillary Financial Trading and Investment Centers. They do nothing but grow, anyway, both in number and in scale, despite the mounting wall of hysterical anti-AFTIC propaganda, which says more about the desperate straits of Western finance ministers than it says about the AFTICs. Notice that you never hear the Prime Minister of Malaysia, or for that matter China's leaders, attacking Labuan as an unacceptable excrescence.

While Rome burns, Cameron castigates and the G8 goes wool-gathering, in a more business-like part of the world governments continue to reduce corporate taxes, this week specifically in Vietnam, which is heading for a 20 percent rate by 2016. To be fair to Mr Cameron, this will only be the same as in the UK. Vietnam doesn't shine as a beacon of democracy or liberalism, remaining, like China, a one-party state, but it is now relentlessly capitalist. Anyway, that's not why the 20 percent rate is so interesting: 20 percent, which is less than half the individual tax rate for most reasonably well-off individuals in most parts of the world, is getting intruigingly close to zero, and that is where it will end up, in the foreseeable future. Putting the AFTICs out of business? That's a tough call to make. They will have had plenty of time by then to assemble a critical mass of capital and professional competence, and will be much nicer places to live than densely populated capitals such as Beijing, Paris, Sao Paolo or Toronto, and for the most part warmer as well. That's if you are allowed to live there – most of them have fairly high barriers to entry for individuals. And that's an issue for them, since if they want to fight the established centers on equal terms, they will have to attract large numbers of professionals, and they are mostly too small to do that successfully without becoming uncomfortably over-crowded.

I was going to give France two cheers for improving the access process for SMEs for its CICE tax credit, until I realized that they were only doing it because their flagship project is actually not working, with a mere 5,000 firms having applied for the advance credit, to a magnificent total of EUR700m. The scheme is supposed to generate EUR25bn in total savings for businesses. Probably the process is too bureaucratic. The Government claims that a surprisingly large number of small firms are applying, but if that's the case, why change the terms? So I was going to leave France alone, until the Government announced that it was expanding its black-list of AFTICs, meaning that the EU's parent/subsidiary Directive would be suspended for firms with subsidiaries in AFTICs if they didn't immediately consent to automatic information-sharing (not yet the law, by the way), and they would pay a 55 percent withholding tax. Ouch! Clearly the French Government thinks that AFTICs are a blot on the landscape, and indeed it has said it wants to exterminate them. At least Mr Cameron doesn't believe his own propaganda; but the French do!

Hungary continues on its perverse path of increasing taxation, despite recommendations to the contrary by the IMF and the European Commission (on the right side, for a change). In January, the Commission encouraged the government to review its increased reliance on revenue side measures, and, in particular sectoral taxes. These, the Commission warns, are "likely to be harmful for business confidence, economic growth and employment, not just in the short run, but even more so in the medium and longer term." Such sectoral taxes have been used by the Hungarian Government to extract additional revenue from the telecommunications, banking and retail sectors, and it's just these that are now being increased, even. The root of the problem, apart from the absence of belt-tightening measures, which are never mentioned, is the failure of the Financial Transactions Tax to generate anywhere near its intended level of receipts. Hungary, along with France and Italy, rushed to impose an FTT ahead of the EU's 11-country version due to be implemented next year, but now probably deferred at least until 2015. All three countries have seen their FTTs fail to perform as expected, but this doesn't deter the European Parliament, of course, which this week proposed "enhancements" to the tax which would actually worsen it in various ways, including a highly illiberal and probably illegal suggestion that owners of securities would lose title to them if the tax was not paid. We should ship them lock, stock and all 754 smoking barrels to Belarus.

The East African Community member nations, Kenya, Uganda, Tanzania and Rwanda, seem to be firmly wedded to the "tax and spend" model of fiscal governance, using their communal June budget to raise taxes on trade, transport, gaming and minerals. It's not that easy to get reliable figures for government finances in that region, but in Kenya, for instance, the deficit is 7.9 percent of GDP and debt is about 55 percent. Those figures don't look that scary when set alongside European figures; but these are undeveloped countries without substantial indigenous wealth, so they are highly dependent on trade and exports, and those sectors ought to be sacrosanct, instead of which the governments seem to be milking them to support ever-increasing spending. "To fund growing infrastructure and economic development expenditure," says the hand-out, blandly. The perennial problem in Africa is corruption, of course, and many recent reports have emphasized the damage that is being done to development by rent-seeking behaviour, whether official or private (and it's often hard to discern the difference). Just when Africa has started to drag itself out of post-colonial desuetude, it would be a catastrophe if runaway government was allowed to spike progress. The signs are worrying.

Kitty's Encomiums and Execrations

Methodology: each week (this is the 58th) 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 + 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.

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:

BVI top of the class

Labuan refulgent

Vietnam cuts tax

And Kitty's Execrations:

East African Community loves tax

France ices the cake

Hungary still hungry

IFrame

Ciao

Kitty


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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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