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in future, investors will be encouraged to diversify their egg placement

Kitty Miv, Editor
19 October, 2015

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.

Ireland likes to be different. Just look at how it has kept faith with its 12.5 percent corporate tax rate when it could have easily caved in to international (but mainly Franco-German) pressure to hike it – effectively keeping its head when all about were losing theirs. This low-corporate tax policy was one of the catalysts for the pre-crash Celtic Tiger economy, and now it is partly responsible for Ireland standing out from other euro area economies, with its remarkable economic recovery. Even Ireland's crash was different to a certain extent, having been precipitated largely by the over-exposure of its banks to a property bubble that the Government largely ignored, rather than dodgy derivatives that few understood. I just hope that lessons have been learned, and that in future, investors will be encouraged to diversify their egg placement, rather than being encouraged to throw them en masse into one basket. Encouragingly, Ireland's recovery is largely export driven and foreign investment, especially from the United States, is flowing as smoothly as it ever was.

The Irish Budget, announced by Finance Minister Michael Noonan on October 13, is certainly a measure of the Government's confidence, with it gradually loosening the fiscal reins. As requested by business representatives on a regular basis in the weeks prior to the budget statement, Noonan cut Ireland's high marginal personal income tax rate, reduced the scope of the Universal Social Charge, and addressed the tax disadvantages that self-employed individuals experience relative to their salaried peers. Having said all this, Ireland remains vulnerable. A slow-down in the US could reduce that flow of foreign investment, and the country has a large debt overhang, to the tune of 120 percent of GDP, as a consequence of the crash and the bailout by the IMF and the EU. What's more, the conclusion of the BEPS project – within which Ireland was demonized, unfairly, as an arch base eroder – has the potential now to stymie investment flows over the next few years. Given these uncertainties, all the Government can really do is stick with what is working.

If Ireland is one stubborn so-and-so, with its dogged commitment to low corporate taxation, then it must have an equal in the US Treasury Department, with its equally single-minded commitment to the flawed FATCA law. But what's this? Praise for the Internal Revenue Service? For FATCA? I'm afraid so, but not from me I hasten to add. It came in an analysis from the Treasury watchdog, the TIGTA, which generally commended the way the IRS went about the task of implementing the legislation. And I have to admit, begrudgingly of course, that I do have a sneaking admiration for the way the IRS has made possible what many – including me – thought was an unworkable and unenforceable law when it was enacted five years ago. However, that's about as far as I'm prepared to tip my hat where FATCA is concerned, for, as long-time readers of this column will know, I'm no fan of this over-bearing, extra-territorial piece of legislation. Tax evaders should be caught, of course – but at what price? Well, as far as FATCA is concerned, I'll tell you what price: about USD7bn and counting. That's roughly how much financial institutions around the world have spent complying with this law, and that is probably a conservative estimate. (And we don't know yet how much the world's tax authorities have spent to adapt their systems). We do know, however, that the revenue from FATCA is estimated to be less than USD1bn, and probably closer to USD700m. But, for governments, it's not so much about the money anymore; it's about information, and more specifically information about people, which is fast becoming the new, unofficial currency.

The BRICS (Brazil, Russia, India, China, and South Africa) are considered the emerging economies most likely to break into the premier league of rich nations first. Yet, based on current form, this isn't going to happen any time soon. Brazil's economy might actually go backwards this year, while Russia is also in the economic mire thanks to last year's plunge in oil prices and Western sanctions. India meanwhile is only just beginning to recapture its mojo after the depression of the Manmohan Singh administration, and China is seemingly in a panic about its decelerating economy. What's more, South Africa's economy is hardly setting the world on fire at the moment either. No, for emerging market investors, the real darling is now Mexico, which is ticking along quite nicely under the steady hand of the Nieto Government. Since he commenced his term in 2012, President Nieto has undertaken – with varying degrees of success – much-needed structural economic and tax reforms. The recent announcement of a series of special economic zones in the impoverished southern regions of the country is an example of the latter. However, there is also another the reason why Mexico has become one of the world's most important trading nations: its extensive network of free trade agreements (46 of them) cover about 90 percent of its trade. With the help of NAFTA, Mexico's bilateral trade with the United States is now worth more than half-a-trillion dollars a year, and the recently agreed TPP should help to cement its place as a key Pacific Rim economy. Perhaps some of the other once feted emerging economies, which have a tendency to lurch towards protectionism when times are tough (no names, no pack drill, but I'm thinking of one aforementioned country in particular) should take a leaf out of Mexico's book.


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

Ireland different

Mexico emerging

Kitty's Execrations

United States do the math!



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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