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ever-increasing demands for transparency

Kitty Miv, Editor
16 January, 2017

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.

To give Rudyard Kipling's immortal words a 21st century spin, if you can keep your head while all about you are losing theirs and blaming it on you, you have something in common with Theresa May, the British Prime Minister.

For sure, if reports are to be believed, there is some bungling afoot surrounding how the British Government appears to be handling Brexit – if there is a plan, it sure is keeping its cards squeezed tightly to its chest. I suppose May does deserve some credit for keeping her cool while tasked with arguably the UK's biggest challenge since de-colonization.

But maybe May has been keeping abreast of recent tax developments and seen the recent news that, despite the UK's decision to leave the European Union, Snapchat has chosen to establish its non-US base in London. The announcement comes hot on the heels of McDonald's decision to transplant much of its non-US financing activity from Luxembourg to the UK. Both moves are being perceived as ringing endorsements of the UK corporate tax environment.

Perhaps there's even more to it: perhaps businesses are not as concerned about the outcome of the Brexit negotiations as first thought. Reports of companies leaving the UK in the wake of the EU referendum are few and far between.

Businesses appear to be saying that, fundamentally, the UK remains a good place for business, irrespective of whether the UK goes for a soft Brexit, a hard Brexit, or merely a slightly wobbly Brexit.

Things aren't exactly plain sailing for Hong Kong at present either. Yes, the Special Administrative Region retains the status of the world's freest economy, and is the go-to territory for Asia-focused businesses looking for a minimum of government interference. But it is exactly this type of low-tax investment conduit that is under threat as a result of the BEPS project.

Given the near-global consensus on BEPS, places like Hong Kong have little choice but to tow the line with regards to international tax standards, with the prospect of being blacklisted by the international community always lurking in the background. And these days reputation is almost as valuable a currency as stable and easy tax laws for investors. Hence, we have seen Hong Kong getting up to speed with the basic BEPS requirements over the last few weeks, and the Government is even considering new laws to increase the transparency surrounding the beneficial ownership of legal entities.

But won't these measures merely deter new investors, and send existing ones into the arms of Hong Kong's rivals, like Singapore? In theory, no – not if other jurisdictions adopt the same, or very similar, measures.

It's likely they will, despite the fact that the OECD's recommendations are being implemented around the world at various speeds. One could point to a small dip in recent incorporation figures as a sign that investors are being slightly turned off. For the Government and the financial center, these figures are probably nothing to worry about. Nevertheless, it will be interesting to watch how jurisdictions like Hong Kong adapt to ever-increasing demands for transparency.

Another country attempting to reposition itself in a post-BEPS world is the Netherlands. Judging by Finance Minister Jerome Dijsselbloem's apparent backpedaling on the matter of corporate tax, the Dutch Government is struggling to decide exactly where it should stand.

Tax-wise, the Netherlands looks much alike any other high-tax Western European country. It has a tax-to-GDP ratio of 40 percent and at 25 percent corporate income tax isn't especially attractive. But the country has something going for it (otherwise half of the fortune 500 wouldn't be there), and foreign direct investment would not have averaged almost EUR45bn (USD47.8bn) from 2003 to 2016. An attractive set of withholding tax exemptions, a large and favorable tax treaty network, low taxation of income associated with intellectual property, and other tax deductions have a lot to do with its standing as a hugely popular domicile for holding companies and European HQs.

Dutch policies have earned the country a bad reputation internationally, among those campaigning for tax justice at least. Even President Obama labelled the Netherlands a tax haven in the early stages of his presidency. And certain tax arrangements have of course landed it on the radar of the OECD and the European Commission's new state aid police.

The Netherlands' commitment to BEPS could spell the end of tax privileges for some multinationals. While it wants the Fortune 500 companies to remain, like any other country, it also wants to be seen as a respectable global citizen, and not as a tax haven. So, does it risk respectability and cut corporate tax to maintain competitiveness, as the conservative People's Party proposes? Or risk competitiveness to regain respectability by raising corporate tax, as Dijsselbloem, of the Labor Party, suggests? With any luck, this will be settled by the upcoming election. And investors will be hoping that the result isn't as indecisive Dijsselbloem appears to be on the subject.


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

United Kingdom endorsed

Hong Kong compliant

Kitty's Execrations

Netherlands indecisive



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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