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no system is flawless

Kitty Miv, Editor
26 September, 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.

It's been an interesting few days for the European Union, or more specifically its executive arm, the European Commission.

First came the announcement of a screening framework for FDI. This is intended to shine a light on the more shadowy sources of foreign investment into the EU. It's quite ironic really; after all, the European Commission is hardly the most democratic and transparent of governmental organizations. More on the matter of transparency later.

The other notable development was the publication by the Commission of its vision for "fair" taxation of the digital economy, which came after France, Germany, and other influential member states had been pushing the issue of digital taxation for a number of weeks.

We can't say for sure whether the Commission's announcement is the result of increasing political pressure for solutions to tax issues in the digital economy, or whether it was working towards it independent of influence from member states. Either way, there is a sense that the EU is rushing towards legislation in this area, and that is never a good idea.

It is worth noting that not all member states are as enamored with the idea of a special tax on digital companies, or on the services they supply, as are France and Germany. Luxembourg's Finance Minister, Pierre Gramegna, for example, has spoken out against the proposals currently being bandied around Europe, cautioning the EU that digital companies "might leave or circumvent Europe," in an interview with Luxemburger Wort. Furthermore, he fears that such measures may look politically motivated as they will affect many US-based companies. "[T]hey might feel targeted so we also have political issues that need to be solved," he told the paper.

Above all, this is a global problem requiring a global response, or at least discussed at the level of the OECD, Gramegna said. What was the point of BEPS otherwise? Indeed, as the OECD itself observed in its Action 1 report, the digital economy is increasingly becoming the economy itself. So, as Gramegna suggested, the EU should proceed very cautiously here.

Indeed, perhaps the EU should be listening to the advice of Luxembourg more regularly. For it is a country that now knows all about finding an appropriate balance between adapting to a changing international tax environment driven by calls for increased transparency and fairness, and maintaining international competitiveness. And according to Standard & Poor's, it has largely succeeded in treading this fine line, as evidenced by its strong economic performance in recent years.

However, every silver lining has a cloud. In assessing its economic outlook, S&P observed that a major source of stability could be the ongoing state aid investigations into Luxembourg's tax rulings, and if the EC's rulings are upheld on appeal, this could have a destabilizing effect on the country's tax regime. How fitting that the Commission should pose one of the most significant risks to Luxembourg's economy!

Switzerland is also attempting to come to terms with this new culture of transparency, which is another irony given that it is the fifth-most transparent country in the world, according to Transparency International's most recent Corruption Perceptions Index. Incidentally, this makes it more transparent than France, Germany, and the United Kingdom, countries which have been leading proponents of measures to increase transparency in the area of taxation and company ownership.

Of course, the Corruptions Perception Index is designed to measure how transparent or corrupt a country's public sector is, rather than its banking sector. But it does indicate at least that the Swiss Government is one of the more trustworthy governments around. And it is quite encouraging, when much of the world is about to flick the switch on automatic information of bulk financial account data, which is something of a journey into the unknown, that Switzerland is taking the issue of protecting personal data seriously.

Will other jurisdictions be as judicious as Switzerland is expected to be with the personal financial information of thousands – possibly millions – of people. Many undoubtedly will, or at least try to (recently, digital records have a nasty habit of going missing or being misappropriated). But there are some jurisdictions due to exchange information under the CRS this month or next September that lurk in the depths of the Corruptions Perceptions Index. Russia, which has committed to automatic EoI from 2018, is 131st on the list of 176 jurisdictions. Mexico, which is making its first exchanges this month, isn't much further up the league in 123rd place. Not that this guarantees that information transmitted to these countries will be used for nefarious purposes. But no system is flawless, least of all one involving scores of tax authorities, hundreds of financial institutions, and millions of 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

Luxembourg balanced

Switzerland transparent

Kitty's Execrations

European Union hasty



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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