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a Brexit would surely have some kind of impact on the Crown Dependencies

Kitty Miv, Editor
29 March, 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.

Naturally, a great deal of the debate about the United Kingdom's future in Europe is focusing on how a Brexit would affect the UK economy, and, to a lesser extent, the economy of the European Union. However, it is not just the UK and the EU that are facing highly uncertain futures. There are various other territories dotted around northern and western Europe that anxiously await the result of Britain's EU referendum on June 23, 2016, including the UK's Crown Dependencies, Guernsey, Jersey, and the Isle of Man, and Gibraltar, which is classified for the purposes of international law as a British Overseas Territory.

Largely self-governing, none of these jurisdictions is fully "in" the EU, but they are inextricably tied to Europe through their strong constitutional links with the UK, which looks after their foreign affairs. Guernsey and Jersey, for instance, are part of the EU under the UK's accession treaty, but are not a part of the EU fiscal area. Similarly, the Isle of Man forms part of the EU single market and VAT area but is otherwise not part of the EU fiscal area. By contrast, Gibraltar is not a part of the EU VAT or common external tariff regimes, but has implemented a great deal of EU financial legislation to allow it to market investment funds and other financial products across the EU.

So what happens to these territories if the UK sees through the Brexit? Guernsey, for its part, is confident that it would be business as usual. But, as the island's investment promotion agency recently acknowledged, investors, especially those in the lucrative new markets in the Far East, are beginning to ask questions, and perhaps its recent statement on the matter was designed to sooth these concerns as much as anything, because a Brexit would surely have some kind of impact on the Crown Dependencies.

Gibraltar on the other hand isn't as bullish as Guernsey. Quite the opposite. Gibraltar is in fact quite fearful about a future where its protector, the UK, cuts loose and leaves it to sink or swim in the piranha-infested EU waters. Spain is probably already relishing the prospect of gobbling up this tasty little morsel once London's back is turned.

The reality is that not even the most enlightened and far-sighted economist can fully predict the consequences of a Brexit. And, as a recent survey of senior company managers by KPMG confirmed, uncertainty is investors' enemy number one. For this reason, the UK takes a step back this week. The quicker all this is resolved, the better.

The legal and political uncertainty that is often an unfortunate by-product of democracy is not something that affects China, where the Party is firmly in control, and is likely to remain so well into the future. And with no party politics to get in the way, the Government is free to carry out reforms that – at least, in theory – are in the country's best interest, including in the area of taxation. Indeed, China has made commendable progress towards the modernization of its tax system, a fact recognized by the International Monetary Fund, which is supporting China's tax reform agenda.

However, despite its rock-solid political stability, China is not the easiest country to do business in for a foreign investor. For westerners, there are the obvious cultural and languages difficulties to overcome. And while the Chinese Government likes to think of the country as a market economy, in reality the State continues to dominate in many areas of economic life, and obtaining the necessary licenses and other regulatory approvals can be a maddeningly complex and time-consuming exercise for foreign enterprises. Corruption and cronyism has also been a huge problem. Indeed, I was quite taken aback recently to read that almost 250,000 people, including state officials at various levels, have been detained as part of Communist Party General Secretary Xi Jinping's campaign against corruption.

According to the IMF, China has made "great progress" in creating a modern tax administration since the early 1990s, but China's tax system is hardly a paragon of simplicity either. China is ranked in joint 132nd place in PwC's Paying Taxes Index, with SMEs facing a plethora of taxes and levies, which push the total tax rate up to 67.8 percent. If this is progress, I dread to think what the tax system was like 20 years ago!

Chinese leaders might well look on in bemusement at the western democracies with their endless see-sawing between left wing and right wing governments and conclude that their mode of government is the best. But it could be argued that the single party system is a source of weakness rather than strength. It allows the Government to interfere in the workings of the economy in a way that just isn't possible in the more liberal democracies. And the thought of suddenly being on the wrong side of the Party, having expended resources on a new enterprise, isn't an enticing one.

If Chinese politicians have a hard time conceptualizing democracy and multi-party political systems, what must they think of the European Union, which has 28 different democratic governments, each representing a country with a broad spectrum of political views? Not very much I would think, given the range of problems confronting the EU. After all, the perception of a major democratic deficit in the EU is a major reason why Britain might soon by saying auf Wiedersehen, au revoir, and adiós to it all. But perhaps it's the only way the thing can be run at least half-effectively.

Anyway, I'm digressing somewhat from the topic I wish to highlight, which is far more mundane: value-added tax. Just like China is nominally a market economy, VAT is nominally a harmonized tax in the EU. However, if you happened to mention this to a small business owner who trades across multiple member states - let's call him John, who lives in London, and sells digital training materials - he would probably tell you, not very politely, to go somewhere else. This is because the numerous national derogations and reduced rates permitted under the EU VAT Directive makes VAT compliance something of a nightmare for John, who now has considerably less hair than when he started his business a couple of years ago, especially now that supplies of digital goods and services are taxable at the place where the consumer belongs.

To ensure the correct taxation of these services, John has to determine whether his customer is a taxable or a non-taxable person, and the place where that customer belongs. Oh, and then there's just the simple matter of ensuring that the customer is charged VAT at the right rate. After all, there's only 70 different rates across the 28 member states. Easy, no? No!

However, John will be pleased to hear that the EU is attempting to simplify things for him and thousands of traders like him, such as with the proposed new VAT portal, a central online interface for EU VAT information. It's just that things like this don't tend to move very fast in the EU, so John will probably lose a few more hairs before it is up and running.

Regular readers will know that I'm not the greatest fan of the EU and the way it is run, and measures like the 2015 place of supply rule changes, which have made John's life such a misery, just reinforce my view. However, credit where credit's due. The EU has recognized that there's a huge problem with the VAT system, and it is at least trying to put things right. So it gets an encomium. There's a first time for everything!


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

China progress

EU trying

Kitty's Execrations

United Kingdom question marks




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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