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potential is huge but shackles need removing

Kitty Miv, Editor
22 December, 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.

I’ve written much in these columns about the measures Narendra Modi’s Government has taken to improve India’s tax and investment frameworks. But it isn’t purely on the domestic front that Modi must seek change if he is to unleash some of India’s true economic potential. He must also look outwards to India’s major trading partners. So that’s why India receives an encomium this week for its part in persuading the negotiators of the proposed India-European Union free trade agreement back to the table after a long hiatus. And not before time. Trade data from the European Commission shows that trade between India and the EU is growing strongly even without an FTA in place. However, while the EUR72.5bn of two-way trade in 2013 sounds an impressive figure, it’s not as impressive as it actually could be. At the moment, in monetary terms, what the EU and India trade in a year, the EU and China trade in about two to three months. Yes, China’s economy is larger than India’s, but trade volumes with some of the EU’s smaller trading partners also outstrip EU–India flows. For example, bilateral trade with South Korea, which has an FTA with the EU, was EUR82bn in 2014. And total two-way trade between the EU and Brazil, which is not much larger than the Indian economy, was just under EUR90bn last year. Indeed, it is still staggering that given an industrious population of over a billion people, India’s GDP, at about USD2 trillion, was only the ninth-largest in the world last year, according to most measures. That’s slightly smaller than Italy, and more than 16 times smaller than the United States. Clearly, India’s potential is huge. But its shackles first need removing before it will be realized.

Question: When is a tax reform not a tax reform? Answer: When it’s in Australia, of course! Appropriately, given the time of year, it sounds like the sort of weak Christmas cracker joke that needs the post-lunch Rémy Martin to kick in before it becomes vaguely amusing. However, it is kind of true, isn’t it? Certainly, many a government is fond of a tax reform committee or two, especially right after they’ve been elected. And rarely do so-called “root and branch” tax reviews result in change anywhere near that level of ambition. However, if failing to follow through on independent tax reform reports was a crime, they’d be shoving Australia into the international penitentiary and throwing away the key. Does anyone remember the grandly titled Future Tax System Review? Don’t worry if you don’t. This exercise was supposed to lay the path for a tax reform process lasting ten years, but by the time the former Labour Government that launched the Future Tax Review in 2008 was booted out at the 2013 election, I think it had become largely forgotten anyway. Familiarly billed as a “root and branch” look at Australia’s federal and state-level taxes, this was supposed to meet the “demographic, social, economic, and environmental challenges” that lie ahead. Unless I’m missing something though, a new mining tax that was eventually repealed constitutes more of a twig than a root and branch. And now Australia is stuck with a AUD40bn (USD30bn) budget deficit, an uncompetitive corporate tax (30 percent versus a worldwide average of 23 percent), and personal income tax for some pushing 50 percent. Yet the Government still feels the need for yet another consultation as part of its own “White Paper” on the tax system. And politicians all over the country seem to talk about tax reform ad-infinitum (or should that be ad-nauseum?). After a succession of such consultations, what can possibly be left to talk about?

Now then, forgive me if I come across as a little naïve here, but isn’t the BEPS project designed to stop the sort of thing that Luxembourg has just announced? I refer to the five-year plan to promote Luxembourg’s finance industry and transform the Duchy into the domicile of choice for “digital” financial services. As the promotional agency for the country’s finance industry observed in its announcement, Luxembourg has become a leading hub in the European Union from which global financial institutions manage their international operations. I wonder why that is? Could it have anything to do with Luxembourg’s tax regime perhaps? The agency’s news release doesn’t mention tax, and you have to wade quite deep into the accompanying report on the initiative, through all the stuff about Luxembourg’s commitment to tax transparency, before you get to it, but it’s in there alright - “Luxembourg will always strive to offer a competitive tax regime,” it says. “Being at the forefront of international discussions on automatic exchange of information does not prevent Luxembourg from providing an attractive tax environment,” the report goes on to informs us. “Remaining competitive will be a key objective of future tax reform in Luxembourg.” So, by extension, any new companies must be being drawn to Luxembourg from countries where taxes aren’t as competitive, no? Sounds suspiciously like some base erosion and profit shifting could be involved here. Not that I’m execrating Luxembourg for this. Quite the contrary. As Australian Prime Minister Malcolm Turnbull observed when talking about (surprise, surprise), tax reform shortly after ousting his predecessor, Tony Abbott, tax “is one of the key levers the Government has to promote economic activity.” All governments know this, and most of them have used the lever at one point or another. That’s not going to change, BEPS or no BEPS. Which kind of makes a mockery of the whole thing really.


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

India talking

Luxembourg leverage

Kitty's Execrations

Australia verbose



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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