an alarming rise in recent years of economic nationalism
Kitty Miv, Editor
07 August, 2014
Kitty's Kountry Rankings are below, with a description of how they are kompiled. 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.
News that Singapore has issued a guide on the taxation of start-up costs isn't in itself the most sensational of scoops, yet it's worth mentioning as it is indicative of Singapore's overall attitude to entrepreneurship and investment, which is more friendly than most. New businesses need all the tax clarity they can get when attempting to get off the ground, and Singapore's Government seems only too happy to oblige, with the Inland Revenue having launched a series of e-guides over the past few months. Some recent reports attest to Singapore's growing influence in the region, and indeed the world, as a business, trade and investment hub. There was a 16 percent rise in business formations in the city-state in the second quarter of 2014 compared with the same period last year, and 30 percent of the companies formed in Q2 had foreign shareholders. Singapore is now the world's fourth-best financial center behind New York, London and Hong Kong according to Z/Yen's index and recently overtook Mauritius as the jurisdiction of choice for routing investment into India. Singapore's corporate tax, at 17 percent, doesn't actually feel that low anymore (although it probably does in the United States!) with corporate tax rates on a firm downtrend. But as most multinational business executives will tell you, it isn't always about tax rates. So much more goes into the decision-making mix these days when looking for the optimal place to position a regional HQ, a production or distribution center, holding company etc, and stability and certainty are probably prized by investors above all. And Singapore tends to deliver on these fronts.
Which leads me on to my first execration of the week. Perhaps the cardinal sin that a government can commit in the eyes of foreign investors is breaking legally-binding contracts that set rates of tax and other conditions over fairly long time horizons. They are usually applied in the mineral industry within which companies commit considerable resources in terms of money over time to a particular project. But there has been an alarming rise in recent years of economic nationalism, particularly among the up-and-coming emerging economies, with many governments deciding to move the goalposts halfway through contracts, usually to provide them with a bigger share of the spoils. Yes, the big mining and oil companies aren't the most loved creatures on the planet, and governments claim only to be doing what's right for the people, but such moves set a bad precedent. Indonesia is one such country, and although it recently revised regulations that led to a ban on raw mineral exports allowing one foreign mining firm to resume operations, the damage has already been done in terms of international perceptions of the country among foreign investors. The idea behind the new regulations is to encourage more domestic processing of the minerals unearthed in Indonesia. But surely there must be better ways to do this than the heavy-handed approach applied thus far.
New Zealand usually ranks highly in various indexes measuring economic competitiveness. For example, the Heritage Foundation consistently ranks New Zealand in the top five or six countries in its annual Index of Economic Freedom. The Conservative Government of Prime Minister John Key has generally been doing some good work in the area of tax and regulation under a pro-business agenda and the country is well plugged-in to a network of regional free trade agreements. So I find it somewhat grating that New Zealand is continuing to bang the drum for BEPS when many of the G20 (of which New Zealand isn't a member) seemed to have gone eerily quiet, no doubt realizing the implausibility of the project's aims. The overwhelming majority of New Zealand's business leaders are convinced that the OECD's BEPS Action Plan is going to fail if the results of a recent survey by Grant Thornton are to be believed, yet the Kiwi Government has been one of the most visible in publicly backing it. Perhaps they naïvely believe that there will be a level playing field, but even the OECD's head of tax policy, Pascal Saint-Amans, said recently that a multi-speed response could make matters worse, and it's hard to see at this stage any other result. Sometimes it's better just to stay silent.
Ireland must be beginning to feel victimized, harassed even, by the global community of nations. It seems to have taken the blame for rise in base erosion and profit shifting, and now it is seemingly carrying the can for corporate inversions by US multinationals. You have to take your hat off to successive Irish Governments though, after standing up to criticism from the European Commission, the "troika," the OECD and now the US, about its 12.5 percent corporate tax rate. Following President Obama's latest barb, the role of Irish corporate tax rate defender-in-chief fell to Minister for Jobs Richard Bruton, who said that Ireland is much more than just a "brass plate" type of jurisdiction, and is much more interested in physical investment. And the figures do tend to back him up on this. Over 115,000 people are employed by over 700 US firms in Ireland (and it's worth noting that the total population is only just over 4.5m) and collectively US firms have over USD200bn in foreign direct investment there. This equals more than the total invested in the much-hyped BRIC economies, or the whole of South America. President Obama's recent speech on the matter, which singled out Ireland, shows a worrying lack of understanding of the US/Ireland investment relationship. But then again, there is an election coming up, so it's time to start wheeling out the same old tired phrases like "economic patriotism" and "shipping jobs overseas." Yes, we know, it's the economy, stupid! Here's a novel idea for the President and Congress though: if you're truly fed up with US Corp shipping jobs overseas, then cut corporate tax. It might actually help the economy too. Stupid idea!
Kitty's Encomiums and Execrations
Methodology: each week (this is the 116th) 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 plus 1, 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 and now it's on plus 1 again.
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.
Ireland righteously defiant
Singapore every little helps
And Kitty's Execrations:
Indonesia moves the goal posts
New Zealand butters up BEPS
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