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Three legs are steadier than two left feet

Kitty Miv, Editor
10 April, 2018

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.

The Isle of Man's coat of arms, as seen on its flag, features a curious three-legged symbol clad in medieval armor, known as a triskelion. The accompanying motto, in Latin of course, roughly translates to "whichever way you throw me, I shall stand" – quite appropriate for an offshore jurisdiction. For whatever the world seems to throw at IOFCs, or tax havens – whatever you prefer to call them – seems to just bounce off.

From reputational and economic hurricanes, including the OECD's 20-year campaign against harmful offshore tax regimes, domestic political and fiscal strife, tax avoidance scandal after tax avoidance scandal, and the deepest financial crisis since the 1930s, to actual hurricanes, some of which have devastated many a Caribbean offshore territory in recent years, IOFCs have survived something of an onslaught, yet they remain thorns in the sides of the world's standard-setters.

Maybe that's because most IOFCs actually meet, or in some cases even exceed, said standards. This must mean one of two things: either tax havens are cleaner and more respectable than most people think, or the standards simply aren't strong enough. The fact that barely any traditional tax havens featured on the EU's new tax blacklist of non-cooperative territories, the criteria for which was based on internationally-agreed standards, has the European Parliament, to name one prominent critic of the blacklist, thinking the latter must be true. However, it could be argued that if the standards were made any more stringent then you might as well name just about every country and territory you can think of on the blacklist.

But perhaps the other reason for the enduring appeal of IOFCs among international investors is that, by and large, they have stuck to what they do best. That is, they have found their own particular sectoral niche, and become a world leading expert in providing services for it. Just think Bermuda and reinsurance, the Cayman Islands (said recently to be the world's leading IOFC) and funds, the the British Virgin Islands and corporate services.

But just as importantly, they are prepared, in these ultra-competitive and economically uncertain times to carve out new niches. The UK Crown Dependencies (the Isle of Man, Guernsey, and Jersey) have been particularly good at this, as they attempt to appeal to a growing class of wealthy people in the emerging economies in Asia and the Middle East, and cater for new and innovative business models, such as in the Fintech sector, and green finance in the case of Guernsey.

You'd think that after the combined forces of the OECD transparency and fairness campaign, the financial crisis, and international scandals like the Panama Papers affair, the world of offshore would be on its last legs. But if the Isle of Man is anything to go by, it's still got three legs left.

Legislatively, unlike some large countries, IOFCs, love them or loathe them, tend not to take two steps forward only then to take a step back when it comes to tax matters. India, on the other hand, has become something of an exponent of this three-step tax shuffle in recent times.

Having confounded expectations (in a good way) by introducing a nationwide goods and services tax system last year, in the process clearing out a collection of economically counter-productive indirect levies, the supposedly pro-business Indian Government then confounded expectations again (and not in a good way) in the 2018 Budget by reintroducing a tax on long-term capital gains, as well as raising the educational "cess" (or surtax) on income. Both measures have since been legislated for in a densely worded 2018 Finance Act which, judging by recent experience, won't be without an alarming flaw or two either.

Another tax reform with plenty of loose ends and assorted anomalies is the United States Tax Cuts and Jobs Act (TCJA). The Internal Revenue Services has gone some way towards tying these up having released the third tranche of guidance on the temporary transition tax last week. But many taxpayers' and tax professionals' questions remain unanswered, especially with regards to the deduction for businesses organized as pass-through entities.

Putting these well-documented concerns aside though, as far as corporations are concerned, the TCJA will have a positive impact on earnings, employment, and investment, and has been warmly welcomed, according to recent surveys of chief financial officers and tax executives in the US. And the much-reduced rate of corporate tax and measures introducing territoriality to the international corporate tax system are emerging as corporations' favorite features.

However, is the United States about to do an India and take a step backwards after taking a big stride or two forwards with the corporate tax cuts?

By introducing tariffs on a range of Chinese products, some fear that the Government has already begun to undermine tax reform. This is because, as has been widely predicted, China has merely responded in kind, and the danger is that any savings that companies make as a result of lower US taxes could be offset by higher import tariffs on their inputs. As the Tax Foundation's Erica York wrote in a Tax Foundation blog: "These escalations could potentially claw back many of the benefits that businesses and households expected to see from the Tax Cuts and Jobs Act." And as the Business Roundtable concurred in a warning to the administration last week, this policy "will only hurt America's businesses, workers, and families."

This is a politically divisive and very complex issue. And many countries have for years pointed the finger at China for undercutting world trade rules with its unique blend of command economy and capitalism. But it would be an awful shame if the US partly nullifies the beneficial effects of the tax reform and trips up economically as a result of this policy.

As strange as it looks, perhaps it's time more countries drew inspiration from the Isle of Man's motif. Three legs are steadier than two left feet.

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

Guernsey green



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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