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bolt-holes for over-taxed, diamond-encrusted individuals

Kitty Miv, Editor
19 September, 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.

The UK's crown dependencies have been falling over themselves this last week, culminating with a panegyric from the the Isle of Man, to welcome David Cameron's declaration in the House of Commons that they are no longer to be regarded as "tax havens." Cameron's statement also applied to Bermuda and the Caribbean jurisdictions. The fact of the matter however is that the British "ex-offshore" pearl necklace of the one-time disregarded rocky oceanic outcrops which make up the majority of the world's low-tax jurisdictions are no more but also no less tax havens than they ever were. They still for the most part offer absence of taxation to incoming corporations and prefer to give jobs to their local inhabitants. Most of them also overcharge for places to live and other expat necessities. What has changed is that whereas twenty years ago they were seen as bolt-holes for over-taxed, diamond-encrusted individuals (Lady Docker, anyone?), they have come to be essential cross-border financial tunnels for over-taxed companies, and an indispensable support for FDI. Among contemporary acronyms, BEPS would surely be the winner of any competition in terms of sheer frequency; but FDI would top any Finance Minister's list of national essentials. Just as Mauritius is crucial to India's FDI, accounting for the strange reluctance of the Indian Government to renege on the two countries' tax treaty while continuing to moan bitterly and incessantly about its workings, so also the British Government now depends too much upon the constantly dredged offshore channels of Jersey, Guernsey and the IOM to do more than offer ritual opposition to their existence while privately (and now even, publicly) extolling their virtues.

Although many of the "ex-offshore" territories seem to have saved themselves by switching horses, so to speak, from individual tax optimization, which has become harder and less acceptable with the advent of information exchange and the sudden death of banking secrecy, to the corporate variety, which is still seen as being permissible in most cases, they may in the end turn out to have made a strategic error, if the high-tax countries continue to out-compete each other in a race to the bottom of the corporate tax scale. We are not there yet, and things may change, but in the last fifteen years the average corporate tax rate among leading nations has fallen by ten percentage points from the low thirties to the low twenties, and the drift downwards continues apace. This week we saw Japan and Portugal preparing for further company tax cuts.

In Japan's case, Abenomics seems to be succeeding, and Prime Minister Shinzo Abe has the political space to proceed with the consumption tax hike due in April next year. He has to decide on October 1, and appears likely to bite the bullet, although accompanying it with a fiscal stimulus for business to replace some of the lost consumer purchasing power, which may either take the form of a rate cut (Japan's rate hovers around 38 percent, putting it up there with the USA at the top of the table) or equivalent incentives.

In Portugal, which is struggling through a vicious fiscal squeeze imposed by the death-dealing Troika, Economy Minister Antonio Pires de Lima came out as a tax-reducer this week, saying that any economic recovery will be unsustainable if taxation in Portugal remains so "aggressive." He wants the state to reduce its cost structure, within what is "acceptable and reasonable," so that it is in a position to give "more positive fiscal signals" to both companies and families in Portugal. Three cheers for him; let's hope the IMF doesn't drive a stake through his heart. In truth, he was merely echoing Prime Minister Pedro Passos Coelho, who has been promising to lower corporation tax, to 17 percent by 2018, or even lower, clearly highlighting the corporate tax rate as the most important factor in encouraging FDI.

But the low-tax jurisdictions don't have to worry just yet: as long as rates stay high in the main consuming countries (including the US, India, Germany, Brazil and indeed Japan), they are safe enough. It's when the magic average falls to 15 percent (2020, perhaps?) that they should start looking for alternative employment.

I have been uncertain over the budget presented last week by Mexico's President Peña Nieto, but have finally decided to be negative about it, partly because it has done little for business, other than the removal of the IETU (alternative minimum tax for companies), and partly because of the miasma surrounding the reform of PEMEX. What is clear about the budget is that it is a political compromise, putting social spending and redistribution ahead of supply-side reforms. That's understandable, if you will, given that Nieto doesn't have a parliamentary majority, but he seems to have given too much away without demanding enough in return. He ought to have made the PEMEX reforms an integral part of the budget, instead of presenting them in a separate bill which can be and has been attacked separately by the opposition. He may get the budget through Parliament, but it's far from clear that the PEMEX legislation will survive without a fearsome mauling, and how many outside investors will want to swim with a government whose writ does not run, in such shark-infested waters? The jury had very much been out as regards Peña Nieto, but the verdict is now becoming clearer: "Could do better." And I also have to point out that withdrawing tax concessions is not "savings," except in the twisted arithmetic of a national treasury: it is a tax increase.

The French are particularly guilty of this sleight-of-hand, and on a massive scale, talking about making savings by reducing tax breaks by as much as EUR20bn a year over the course of this year and next. Let's be clear: that's a tax increase of EUR20bn, however you decorate it. French economic ministers have been on a charm offensive in the last few days, ahead of the unveiling of the 2014 finance bill, trying to convince people of the patently untrue proposition that taxes aren't going up. The truth is there for all to see in figures published this week showing a tax take up 8.7 percent in the first seven months of the year. And those "savings"? Well, state spending reached EUR235.5bn as at the end of July, 2013, compared to EUR226bn the year before; that's up 4 percent. Inflation this year is running at 0.94 percent so far, so that's a real spending increase of 3 percent. Actually they haven't saved a dime. The only piece of good news out of France this week has been a warning from the French Digital Council (CNN) against the imposition of a specific national digital tax, something the Government is known to be considering, although in this case the motivation is not so much to raise money as it is to drive Google and Apple out of the country.


Kitty's Encomiums and Execrations

Methodology: each week (this is the 70th) 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 + 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, though.

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:

Japan to cut tax?

Portugal talks the talk

United Kingdom loves offshore

And Kitty's Execrations:

France rakes in the dosh

Mexico moving sideways




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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