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one size doesn't fit all

Kitty Miv, Editor
04 April, 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.

The United Kingdom has been told by influential figures within the EU that it can't have its cake and eat it — in other words retain those aspects of EU membership that benefit the economy, like membership of the Single Market, while rejecting those things it finds harder to swallow, like free movement of persons. The way things are shaping up, it won't be able to have a divorce settlement and a free trade agreement either, at least not at the same time.

I touched upon how a hard Brexit could potentially affect taxpayers in the UK (and the EU) last week, and how businesses were less concerned with process, and much more concerned about how the legal landscape will look when terms are reached, or not reached as the case may be. However, we can't get away from the fact that the process is fundamental to how Brexit will play out. And it seems that if the EU gets its way, it could be a saga of many acts.

Not surprisingly, the UK wants to hold talks about the exit settlement and the post-Brexit free trade agreement that it hopes will replace existing arrangements, in parallel, so as to ease lingering uncertainty for investors. This would also save a considerable amount of time. The EU, by contrast, wants each stage to be negotiated consecutively, rather than concurrently, starting with the withdrawal talks.

Just how the EU expects this process to fit into the two-year negotiation timeframe that commenced with the UK's triggering of Article 50 last week is something of a mystery. Perhaps it is of the belief that the negotiations will be a breeze. Many experts on such matters think otherwise. We have no precedent to guide us on the likely timescale of EU withdrawal negotiations, since no full member state has ever attempted to leave before. What's more, on the evidence of recent negotiations between other trading partners – including the Comprehensive Economic and Trade Agreement between the EU and Canada, which is held up as model trade deal for the UK to aspire to – FTAs can take several years to come to fruition. All of which makes the two years allotted to finalize a member state's exit from the EU seem woefully inadequate, especially given that commentators don't expect talks to begin in earnest until both the French and German elections are decided, which won't be until the leaves are starting to change color in Europe. And other thing: how will the British Government find time to actually run a country while all this is going on?

Now, most Australians would probably tell you that they have little in common with their British cousins – or "whingeing poms" as they affectionately refer to the Brits – beyond a shared language. However, in the area of tax, Australia has seemed only too willing to jump onto a bandwagon that originated in the UK by approving a diverted profits tax – albeit, a very short bandwagon.

While there are laudable intentions behind the UK and Australian DPTs – to prevent mainly technology companies from "artificially" shifting profits to low-tax jurisdictions – it doesn't necessarily mean that they represent sound tax policy. Nowhere in the OECD's final BEPS recommendations are the words "diverted profit tax" mentioned, or even alluded to. Indeed, multinational businesses and tax experts have said that this is a glaring example of unilateralism, of countries interpreting the BEPS proposals in their own peculiar ways. And this is the very thing that the OECD is trying to avoid to ensure that the integrity of its BEPS work is maintained. Indeed, when the UK DPT was first announced, even the OECD itself was heard to question it, and it's not every day you hear senior OECD staff question decisions made by member governments.

Furthermore, if a DPT is such a great idea, why haven't we seen the bandwagon growing? At the moment it is hosting only two countries. That suggests to me that it's not a very good idea after all.

On a similar note, the proposed European financial transactions tax (FTT), which was in the news again recently, is also a tax with a very noble cause at its heart. But like the DPT, it's an idea that isn't really catching on. Quite the opposite in fact.

The European Commission estimates that the tax would raise something like EUR35bn a year, which, in theory, could be spent on all sorts of good causes. And it represents at least some recompense for the tens of billions of euros of public money spent on propping up ailing financial institutions at the height of the financial crisis, while also showing the public that European governments are serious about reining in the banks and investment houses.

However, there are numerous analyses – and not just from the finance industry – suggesting that the FTT's flaws may considerably outweigh any benefits. The European Council's own legal advisers have warned the EU that as originally drafted by the European Commission, the FTT would break a host of the EU's own laws, not to mention customary international law, and would therefore be open to numerous legal challenges. Furthermore, studies on the economic impact of the FTT conclude that it would not only drive up costs in the pension industry and reduce returns for savers, but also increase the cost of government borrowing at a time when heavily indebted eurozone countries need this least.

The fact that only 11 member states could be persuaded to sign up to the project in the first place says a lot about the FTT. And the prospect that this group could soon be reduced to less than the nine needed to steer the tax through under the "enhanced cooperation" legislative mechanism says even more! Perhaps the kindest thing to do would be to put the FTT out of its misery, and start again from scratch. But who to execrate or congratulate? Ay two of Belgium, Slovakia, and Slovenia could hammer the final nail in the coffin. But I think an encomium should go to Estonia, for making the bold move to abandon the sinking ship first.

Moving on, but staying in the EU, there is probably a perception outside of continental Europe that the vast majority of EU member states toe the line come what may, committing themselves blindly to the principle of "ever closer union" and doggedly standing by EU initiatives even when they are found to be quite bad ideas. It's only the pesky, rebellious Brits that think they're so special, isn't it? It is perhaps an assertion that's unfair.

Many member states have serious misgivings about such initiatives as the FTT and the proposed common corporate tax base. And even Luxembourg, which was ruled for many years by arch-Europhile Jean-Claude Juncker, the current President of the European Commission, is prepared to rebel occasionally.

Luxembourg has shown by its recent actions that it fundamentally opposes the European Commission's assertions that certain tax rulings between its tax authority and multinational companies are a form of state aid. For not only is it taking on the Commission in the European Court, it also intends to support Ireland in its battle with the Commission over billions of euros in state aid supposedly given to tech giant Apple.

Indeed, the EU's White Paper on the future of Europe hints that the goal of ever closer union among all member states is perhaps achievable, and that greater harmonization can only be achieved among a "coalition of the willing." It is perhaps finally an admission from the EU that one size doesn't fit all.


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

Estonia sensible

Luxembourg outspoken

Kitty's Execrations

United Kingdom overwhelmed

Australia diverted



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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