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a tendency to lurch towards trade protectionism

Kitty Miv, Editor
06 September, 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.

Brazil has been rather quiet on the tax front recently. This is understandable, given the country has been busy hosting the greatest sporting event on earth, and impeaching its (now former) president. Brazil sneaked back into tax news recently however, and for a rather predictable reason: anti-dumping duties. Yes, it certainly knows how to put on a good show, both in the sporting and the political sense, but Brazil does have a tendency to lurch towards trade protectionism when times are tough.

More generally however, for investors, Brazil must feel like a highly uncertain place at the moment, as would any country undergoing such political ructions. But if there's a silver lining to be found, perhaps it's the fact that its tax system surely can't get much worse. Indeed, Brazil is infamous for the complexity of its tax system, with the PwC Paying Taxes index informing us that it takes a medium-sized firm 2,600 hours a year on average to comply with Brazil's layer cake of taxes.

Unfortunately, improving the tax regime might not be an immediate priority for Brazil. Indeed, if anything, tax hikes are on the cards as Michel Temer, the vice-president under ousted President Dilma Rousseff, and the man chosen to serve the remainder of her term, looks for ways to close the budget deficit, the full extent of which his former boss was accused of concealing.

One thing you can't accuse Brazil of being is boring. And things could begin to liven up on the tax front again fairly soon.

It's quite a feat on the tax front that war-torn Ukraine has a substantially better tax system than Brazil, according to Paying Taxes. But at 107th in the league table, it is an understatement to suggest that there is still ample room for improvement. But, unlike Brazil, Ukraine is at least making an attempt to remedy the problem. The launch of a public consultation on the state of the tax system, intended to supply the Government with ideas on how things can be improved, is the latest in a number of recent initiatives designed to ease the country's tax and regulatory burden. Other examples include the launch of a new customs management system earlier this month, the creation of an expert working group on tax reform in June, and the approval of draft tax administrative reforms in April, aimed at bringing about structural reform in the State Fiscal Service, in line with changes proposed by the International Monetary Fund.

Ukraine may be pulling out all the stops to make its tax regime more friendly for investors. But it certainly doesn't lack for friends in the international community. Ukraine now has preferential access to the EU market thanks to the Deep and Comprehensive Free Trade Area signed in 2014, and a new free trade partner in the form of Canada after the two nations signed a free trade agreement in July that will eliminate the majority of tariffs on bilateral trade. It has also tapped into the technical know-how of United States customs officials, who have provided assistance to the Ukraine Government as it modernizes it customs regime.

You get the sense that the Western powers are heavily invested in the future economic success of Ukraine. And encouragingly, ongoing efforts to improve the tax regime are a signal that the country is not only relying on the good will of others, but is helping itself as well as it attempts to secure more foreign investment. It is a shame, therefore, that tensions with Russia will continue to overshadow the economy, at least as long as Vladimir Putin sticks around.

Another country that has undergone a fairly extensive review of its tax regime is South Africa. But you could argue that it didn't really need to go to the trouble, because its tax regime is viewed quite positively already. According to Paying Taxes 2016, South Africa, where it takes 200 hours to comply with business tax obligations, is 20th overall, with a fairly creditable total tax rate (the combination of corporate, labor and other taxes) of 28.8 percent.

The Government should of course take every opportunity it can to find and correct weaknesses in its tax regime. It's just that I suspect the Davis Tax Committee review was established by the Government more as a guide to where the goose could be plucked with the minimum amount of hissing, given the deteriorating fiscal climate. Problematically, the review, if anything, has merely highlighted the fact that the Government's options are limited. There's little scope for hiking income taxes, the report appeared to suggest, because doing so would likely encourage tax avoidance and damage South Africa's already fragile economy. There seems some mileage in increasing revenue through the VAT system, especially as the rate, at 14 percent, is well below VAT rates seen across Europe. The trouble is, VAT is a regressive tax, and the Government is probably keen to avoid a scenario where it's accused of hiking tax on the poor.

Interestingly, the report concluded that, in comparison to other large emerging economies, South Africa's regime is only "slightly progressive." In a sense, this conclusion might have been music to the Government's ears, for it gives it a great excuse to go and make the tax regime more progressive. This could mean tax hikes for high-earners and the wealthy. Also, the big mining companies, which have been in the Government's sights for a number of years, could be in line for higher taxes. Not that I'm in the profession of forecasting. But if I were a betting woman...

In the end, the Davis tax reports probably contained few things that the Government didn't know already. You could say it was a case of "ask a silly question, get a very predictable answer." But it's not the only Government that's been guilty of this particular crime recently. Next on the stand, the Netherlands.

To be fair to Prime Minister Mark Rutte, it was probably quite sensible of him to ask Silicon Valley's thriving community of tech companies what his country should do to the tax regime to maintain the Netherlands' competitiveness. The reply, though fairly comprehensive in scope, was hardly earth-shattering however. Essentially, it urged the Dutch Government to do nothing. Sure, corporate tax could be a little lower, but all the essential ingredients are in place, he was told.

One gets the feeling that Rutte wanted to ask a different sort of question though. The Netherlands has been saying for about a year now that it intends to prioritize measures to prevent tax avoidance, to fall into line with BEPS, without actually doing a huge amount about it. That's probably because it knows it's in a bit of a dilemma. The Netherlands has created an ideal tax regime for multinational holding and headquarter companies, as well as for companies with large amounts of income derived from intellectual property. Just the sort of tax regime in fact that is generating a lot of criticism internationally for facilitating tax avoidance, and that the OECD is trying to discourage through its BEPS work. Yet, as the Silicon Valley firms pointed out, it is a tax regime which helps support hundreds of thousands of Dutch jobs in US firms alone, and keeps the Netherlands punching above its weight as a business and investment location. So, I suspect that what Rutte really wanted to ask Silicon Valley was, "we're thinking about dismantling a tax framework that you all love. Would you still invest in us if we did?" Now, that really would be a silly question!


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

Ukraine friendly

Netherlands attractive

Kitty's Execrations

Brazil reeling

South Africa predictable




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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