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economic forecasting is a hazardous occupation

Kitty Miv, Editor
20 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.

When it comes to economic and tax developments, Ireland doesn't do half measures. Most countries are accustomed to riding the ups and downs of the economic cycle, but Ireland has made the experience something of a rollercoaster, from the roaring Celtic Tiger economy of the 1990s and 2000s, to the country's near-bankruptcy at the nadir of the global financial crisis when, at one point, the Government reported a budget deficit in excess of 30 percent of GDP.

You might have thought that this stomach-churning ride through boom and bust might have tempered ambitions and expectations in Ireland. But not a bit of it. In 2015, GDP was estimated to have grown by a massive 26 percent, although that figure was, it turned out, greatly distorted by a few large assets transfers connected to corporate inversions by US multinationals.

Nevertheless, the economy has still been growing in the ball park of five percent, a level which most developed economies can only dream of. And in another indication of how Ireland doesn't do things by halves, in 2016 it attracted in excess of 12 percent of all US foreign direct investment in Europe, despite representing only one percent of the European economy, says the American Chamber of Commerce in Ireland.

But, could all this be about to change in an equally spectacular way? Corporate tax reform in the United States is likely to be a game-changer for global investment flows, even though nobody is quite sure how things will change, at least not yet. Then there is BEPS – a project designed to neutralize the tax advantages of the Irelands of this world. And while Ireland appears to have suffered no adverse consequences yet at the hands of international BEPS measures, another tax risk has just appeared on the horizon in the form of the very real prospect of new taxes on digital companies, many of which report their income in the Republic. Have I mentioned the proposed EU common consolidated corporate tax base yet? Well you can add that to the list of tax threats then, just for good measure.

It doesn't stop there either. Ireland is also uniquely exposed to Brexit by virtue of its close trading links to the United Kingdom and the presence of a land border with the UK separating the Republic from Northern Ireland. With the expectation that Brexit will be towards the harder end of the exit spectrum, a result which could throw up new barriers to trade between Ireland and the UK, Irish businesses are growing increasingly concerned about future trading conditions, which sooner or later may translate into reduced economic confidence.

Judging by Ireland's recent economic extremes, this is not a good omen. Not that I'm calling the likelihood of another massive recession here; if Brexit has taught the world anything, it is that economic forecasting is a hazardous occupation, especially if you value your reputation.

Indeed, on the face of it, Ireland's economic fundamentals remain sound, propped up by its unwavering commitment to its 12.5 percent corporate tax, and its political stability and legal predictably – favorable characteristics not always shared with Ireland's competitors. And this suggests that investors aren't about to desert Ireland en masse any time soon.

Still, it's hard to escape the conclusion that there are storm clouds on Ireland's economic horizon. And it remains to be seen what the Government can do to navigate through them unscathed.

Yes, never a dull moment where Ireland is concerned. And the same could be said if you use virtual currencies, either for investment purposes or as a medium of payment. Not only because of the thrills and spills of the highly unstable Bitcoin market – price volatility that would make the toughest New York trader's eyes water. But also because of the propensity for the tax man to spring a surprise or two on you – and rarely in a nice way.

The merits of virtual currencies continue to be debated. Some say that they represent the future of money and are a natural extension to an increasingly digitized world. Others argue that virtual currencies – but Bitcoin in particular – are an economic bubble waiting to pop, with dire financial consequences to follow. Not only this, their anonymity means that they are the perfect vehicles for the laundering of dirty money and the funding of terrorism, according to some governments and regulators.

Nevertheless, it appears to be the case that, with a few exceptions, virtual currencies are slowly gaining acceptance as a part of the financial landscape by the authorities, including tax authorities. We can glean this from the volley of tax guidance and reminders that have been issued in recent weeks, from the US to Poland, and from Israel to South Africa.

Indeed, some countries, including Australia and the UK, are keen to promote their use, hoping to become leaders in this new technology. Yet, if virtual currencies do indeed have a future, the inconsistent tax treatment from one territory to the next is unlikely to help them grow. Because at the moment, we've got the US defining virtual currencies as "property" on the one hand, and Australia comparing them to a sort of "barter arrangement" on the other, with various other interpretive shades in between – I particularly like South Africa's description of cryptocurrency as "assets of an intangible nature." No kidding!

It's no joke though if, all of a sudden, in the time it takes a tax official to bang out some vague interpretive guidance and upload it to an obscure part of the finance ministry website, your virtual currency investments are rendered worthless, and you're left with a substantial tax bill into the bargain, as has happened in Poland. Indeed, it has been said that the Polish guidance could, either by accident or by design, tax the virtual currency sector out of existence.

Traders could present an argument that, if virtual currencies aren't defined properly in law, then tax authorities have no legitimate grounds to tax them. What's one man's barter arrangement is another man's asset of an intangible nature, it seems. It'd be a brave person to test this argument out in the courts though, especially when there could be billions-worth of tax at stake, as there supposedly is in the US.

Nevertheless, the global chequerboard of interpretive guidance is a reason, maybe, to take this matter out of the hands of individual jurisdictions and given to the OECD to decide as part of BEPS. That'd be yet another external tax force for Ireland to worry about.

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 Execrations

Ireland eyes not smiling

Poland crypto-tax



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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