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following a well-trodden path to Ireland

Kitty Miv, Editor
31 August, 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.

In more ways than one, France and the United States are a long way apart. 3,000 miles of ocean separates Nantes from New York, and there are obvious linguistic and cultural differences between the two. They do share one thing in common though: high rates of corporate tax.

According to a recent report by the Tax Foundation, the United States has the world's third-highest corporate tax rate, when the federal and average states rates are combined. However, France is not far behind, in sixth with a total rate of 34.4 percent. Companies in France also bear a heavy burden in social contributions and red tape. So it's little wonder that Flamel Technologies, which has operations in France and the United States, and which had an effective tax rate of 48 percent last year, is following a well-trodden path to Ireland.

Both countries are also well aware of their shortcomings on tax, and are trying hard to rectify the situation. However, each country is finding it difficult to bring about long-called-for change. In the United States, this is largely the result of political gridlock, although the presence of a budget deficit expected to exceed three percent of gross domestic product this year makes many pause for thought when considering tax reform. Fiscal problems of a similar nature in France also constrain tax policy.

It is these constraints that have led France to propose only a partial reduction in corporate tax, which Prime Minister Manuel Valls revealed would be included in the finance bill for 2017. The Government has yet to put flesh on the bones of the proposal, but the basic premise is the insertion of an intermediate 28 percent rate in between the lower rate of 15 percent and the full rate of 33.33 percent. And it seems like there may be strings attached to restrict the number of companies that benefit from it. That is, if there is any benefit to be had at all. As Medef, the French employers' association pointed out in its scathing response to the proposal, this "half measure" will just add complexity to France's already onerous tax system. Until the full details of the proposed measure emerge, it is difficult to see how it will do much good. It's certainly not going to help France compete with the likes of Ireland, the UK, and Canada on tax.

Now, from one end of the tax scale to the other – to offshore. And there has been further evidence in recent weeks of just how well offshore and low-tax financial centers are performing amid economic insecurity and regulatory change. Recently, we learned that the number of active companies registered in the Cayman Islands surpassed 100,000 earlier this year; that the Isle of Man's e-gaming sector is going from strength to strength; that members of the Association of Bermuda Insurers and Reinsurers reported a strong 2015; and that the British Virgin Islands is of the belief that it is on the cusp of becoming the best-regulated financial services jurisdiction in the world.

Of this list, the last one in particular stands out. For it was the BVI that was found to be home to many of the corporate entities set up for those exposed in the Panama Papers, and the jurisdiction was consequently excoriated by the world's media and politicians as a consequence. So it will be interesting to see if the Panama Papers affair has any effect on incorporations in the BVI, and indeed other offshore jurisdictions, when company registration data covering the period since April 2016 emerges. We probably won't begin to find out until the end of this year, or early next year. But I'm betting, if there is a dip in offshore incorporations, it's probably going to be more likely to do with economic conditions, rather than reputational concerns. Like it or not though, the major IOFCs are largely compliant with international tax and anti-money laundering standards, and they are continuing to provide investors with what they want: fiscal efficiency, stability, flexibility, and legal certainty.

Unfortunately, fiscal efficiency, stability, flexibility, and legal certainty aren't traits you'd ordinarily associate with Africa. If anything, many African states are the very antithesis of these things. This isn't just a shame for taxpayers and investors attempting to navigate unpredictable and dysfunctional tax and legal frameworks, it is a tragedy for governments too, as they lack the tools to deal with fiscal and economic crises. However, it has to be said that African governments don't help themselves sometimes, and they have a tendency to make matters worse in this respect. A common example is by changing the terms of long-standing tax agreements with foreign investors, especially in the resources sector. And there seems to have been a general failure to get to grips with corruption.

Take Nigeria for example, where the Government is about to shoot itself in the foot by introducing a new tax on electronic communication services. Not only will this add to an already highly taxed sector, it could also scupper the Government's own laudable plans to spread affordable internet access throughout the country, a policy intended to accelerate the nation's economic and social development.

It looks as though Nigeria is bringing in this tax for no reason other than the Government needs the money – 70 percent of its revenues are derived from oil sales, and oil prices recently underwent a historic correction. In a way, this isn't surprising. After all, what government doesn't raise taxes, or create new ones, for this reason? But what has irked the business community so much is that very little thought seems to have been given by the Government to the impact of this tax. Perhaps the Government's thinking is that Nigeria already has one of the worst tax systems in the world for businesses – PwC ranked it 181st out of 189 countries in its Paying Taxes 2016 Index – so one more tax isn't going to make a great deal of difference. It would probably deny such an allegation strongly. But it's a tragedy for an economy with such enormous potential that the only consolation to be gained from all this is that things can't get much worse for taxpayers.


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

BVI bold

Kitty's Execrations

France half-baked

Nigeria ouch!




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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