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so far so good

Kitty Miv, Editor
19 October, 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.

The United States Treasury deserves at least some credit for having taken on board the concerns of tax practitioners and businesses when formulating the final version of its proposed new debt/equity regulations. It could have easily ignored them all and ploughed on with the original proposals arguing that the need to shut down corporate inversions has become urgent. Instead, it has narrowed the scope of the proposed rules, and attempted to ease compliance requirements, in an attempt to release everyday group financing activities from the new obligations.

The fact that the Treasury listened to taxpayers is not enough for an encomium, however, because evidently, according to the immediate reaction to the final rules from the tax and business community, as well as from members of Congress, it didn't listen nearly hard enough. What's more, it's probably safe to say that there is a consensus among interested parties that the proposed new regulations were a terrible idea in the first place, and should have been dropped rather than persisted with. True, Treasury Secretary Jack Lew does have a point when he says that the Government had little choice but to step in and use its executive authority because Congress can't get its act together and change the legislation behind the inversion trend. But he's only partly right. Yes, Congress is currently unable to get its act together. But the Treasury didn't have to come along and make a bad situation worse.

Across the pond now, and as government budgets go, Ireland's 2017 Budget announcement was a fairly low-key affair which to most people would barely merit a blip on the international radar. However, where Ireland is concerned, the interest lies in what the Government won't do on the tax front, rather than what it ]actually has done, which this time around isn't a great deal except tinkering at the edges of the tax system.

When all is said and done, perhaps Ireland's greatest achievement of modern times is hanging on to its 12.5 percent rate of corporate tax. For while Ireland has copped enormous flak from many quarters, notably the powerful bits of the EU, for its benign corporate tax regime, it is clear that this has underpinned heavy investment in the economy – Ireland accounts for an astonishing 25 percent of all inward FDI in the EU – and the country would probably be a lot worse off at this state if this advantage was removed.

While the international bail-out program has obviously helped Ireland get back on its feet after it threatened to go the way of Greece – a 32 percent budget deficit was recorded in 2010 – the country wouldn't have survived on IMF/EU cash alone. Strong levels of investment, even in the depths of the crisis, and particularly by American companies, must have contributed heavily to Ireland's economic revival. Therefore, the Government's reiteration of its determination to hold the rate of corporate tax was probably the first thing that companies looked for in the Budget texts.

Zooming back across the Atlantic, and after little more than a year in power, it's probably too early to judge Justin Trudeau and his Liberal Government's handling of the Canadian economy. But looking from afar, it seems to be a case of so far so good. The IMF at least seems impressed. Welcoming the new Government's pro-growth policies, it predicted in June this year that measures contained in the last Budget would boost GDP by 0.5 percent in each of the next two fiscal years.

However, it is those "pro-growth policies" – essentially a euphemism for higher public spending – have seen Canada go from a budget surplus to a budget deficit either side of the last election. And worryingly, while spending has been rising, tax revenues have been fluctuating. This is despite the fact that, generally speaking, the new Government has been raising taxes – or at least not cutting them. For example, it has raised the top rate of income tax, cancelled a proposed cut in the small business corporate tax rate, and plugged loopholes left, right, and center.

Still, Canada's current budgetary situation is far from disastrous. At CAD1bn, its deficit is a drop in the ocean. The federal deficit in the United States for example, while no longer the hotbed issue it used to be, was USD438bn in 2015, or 2.5 percent of GDP. Despite the Eurozone's ongoing struggles with sovereign debt, the United Kingdom continues to run one of the largest deficits in the EU, at GBP69bn (USD84bn) in 2015/16, or 4.4 percent of GDP. Even more encouragingly for Canada, its national debt remains at a relatively sane 26 percent of GDP. By comparison, the UK's public debt is over 80 percent, and the US's is in excess of 100 percent.

While Canada's fiscal health owes much to the prudence of previous governments rather than the current one, it is still worthy of praise. History therefore will not judge Trudeau kindly if he undid much of this work.

Finally, a question: when is a tax amnesty not a tax amnesty? Answer: When it's in Portugal, apparently. Correct me if I'm wrong, but isn't being encouraged to pay unpaid tax with the carrot of reduced or waived interest rates and penalties and immunity from prosecution the defining qualities of a tax amnesty? Not in Portugal apparently. It's a chance for everyone to repay their debts. At least I think that's what the Government is farming the "amnesty" as.

It seems that the Government is worried that people racked up too much debt in the recent period of austerity, and should attempt to wipe the slate clean with the prospect of more bad times ahead for Portugal. And perhaps the Government is right to be concerned. If its own figures are correct, total tax debts stand at EUR22bn, which seems a lot for a country with a population of approximately 10.5m people. That's over EUR2,000 in tax debt for every man, woman, and child in the country. Of course, there's an element of self-interest here on the part of the Government. Because I'm sure the additional tax revenue from its "non-amnesty" wouldn't go amiss.


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 steadfast

Canada prudent

Kitty's Execrations

Portugal confused



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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