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rising anger about corruption

Kitty Miv, Editor
13 December, 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.

Those who know a bit about English history might be familiar with the rhyme that describes the fate that befell King Henry VIII's six wives: divorced, beheaded, died, divorced, beheaded, survived. The rate at which presidents and prime minister are falling by the wayside, you could almost apply the rhyme to events in 2016. Perhaps something like: impeached, resigned, died, impeached, resigned, survived.

Given New Zealand Prime Minister John Key has chosen his moment to go – essentially quitting while ahead – he can probably claim to be the survivor. President Park Geun-hye, on the other hand, is facing a long and tough fight for political survival after members of parliament voted last week to launch impeachment proceedings against her.

The attempt to topple Park shares characteristics with the other major impeachment this year – that of Dilma Rousseff in Brazil. In both countries, there is rising anger about corruption, cosy relationships between business elites and political leaders, and a general railing against the "establishment" in general.

If the result is that we see less corruption in these countries, and in the developing and emerging economies generally, then this is surely a good thing for investors. For high levels of graft are hardly conducive to a stable and predictable business environment. Problematically, though, the journey to get there is also an uncertain one.

In Brazil, it was a year ago that the impeachment petition against Rouseff was accepted by the President of the Chamber of Deputies. But it took until August 31 to resolve the matter – in other words, eight months of political uncertainty was the result. Similarly, in South Korea, the impeachment process of Park could take up to six months.

Given that South Korea is at an important juncture for its economy and its tax regime, the timing of this is not perfect. There is currently a debate going on regarding fiscal policy, with some calling for corporate tax cuts to help stimulate investment and the economy and others saying fiscal consolidation should be the priority, and the wealthy should pay through tax hikes.

Even the IMF Board was split in its review of the Korean economy earlier this year over whether there is fiscal space to implement necessary economic and social reforms without tax hikes or an expenditure cut, and the Fund is never usually short of an opinion on a nation's tax regime! Therefore, we can add South Korea to the growing list of countries where investors face political, legal, and tax uncertainty.

Also featuring on the list is Italy, led until a few days ago by Matteo Renzi (resigned). And while the erstwhile PM has been accused of hubris by staking his career on the outcome of the recent constitutional referendum (which to few people's surprise, he lost), and potentially leaving Italy in another fine economic mess, he deserves some credit for sticking around to see through the 2017 Budget, which contains some long-awaited tax cuts for large and small businesses.

Still, those tax cuts, while welcome, do not address the root of the problem with Italy's tax regime. Yes, taxes are high – the tax burden is an "untenable" 49 percent, according to the association of sole traders and small businesses – but they are also fiendishly complex.

Shockingly, PwC placed Italy 126th out of 189 economies in its recently released 2017 Paying Taxes Index. So there's a huge amount of ground for the country to make up on its main competitors, many of which can hardly be described as having simple tax regimes themselves.

Politically and culturally, Italy is very different from China in many ways. But they do have some things in common: they've both got challenging tax environments, but they are attempting to improve things.

China recently announced that it is lining up new measures to simplify a simplification, as it seeks a smoother roll-out of its new value-added tax system, which is replacing the complex business tax regime. But it remains to be seen whether the well-meaning intentions of state officials turn out to be a help or a hindrance to business.

In a similar vein to Italy, it could also be said that China's ongoing reforms have not been terribly effective. Otherwise it wouldn't find itself in 137th place in the Paying Taxes index. Indeed, where China is concerned, company executives seem to think that the legal framework is becoming less predictable, if the results of PwC's Doing Business in China survey are anything to go by. This found that businesses are more concerned about their ability to interpret regulations and anticipate costs, with only 12 percent of China/Hong Kong CEOs more confident today in forecasting compliance or tax liabilities compared with 16 percent who shared the same view last year.

However, despite a more difficult operating environment, exacerbated by rising costs and slowing economic growth, China remains the market everyone wants to crack. For US companies, it is worth USD400bn, according to the US China Business Council, so foreign investors aren't going to turn their backs on the Middle Kingdom in a hurry.

Now, it would be mischievous of me to compare bureaucratic Brussels with Communist China, but there are also parallels between the EU and China. Legal reforms are largely driven by unelected officials who could be accused of being distant from the people and businesses that they claim to be helping. And despite a long-standing commitment to removing regulatory and tax barriers to the single market, I suspect few would say that doing business in the EU was a seamless experience.

The EU is also attempting deep reforms to the bloc's VAT regime, and last week the Commission announced with much fanfare new proposals designed to ease the VAT compliance burden on e-tailers as part of its much vaunted digital market strategy. However, before we get too excited about the changes, perhaps we should remember that the EU's track record in this area isn't brilliant. Just ask the micro-business owners who shut down in the wake of changes to place-of-supply rules for suppliers of electronic services.

Not that we should be too hard on the EU. At least it recognizes that the VAT regime is not fit for purpose in many ways. Indeed, I learned recently that the Commission actually offers courses for national tax authority staff on EU VAT legislation. When the tax man struggles with EU VAT, what chance have taxpayers got!


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

Italy tax cuts

China streamlines

Kitty's Execrations

South Korea uncertain

European Union distant



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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