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something worthy of further study

Kitty Miv, Editor
07 March, 2018

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.

Canada's Finance Minister, Bill Morneau, said last month that Canada would not be rushed into responding to the tax reforms just enacted in the United States until the implications of the measures have been fully worked out. And so it has proved, with a federal Budget almost completely devoid of any excitement or razzamatazz, at least not on the tax front.

It is understandable why the Liberal Government has opted to announce a conservative (with a small "c") Budget. Ill-considered knee-jerk responses may be lead to unintended fiscal and economic consequences, and these could ripple out far and wide – marry in haste, repent at leisure and all that.

However, for a business community growing increasingly concerned about what it perceives as a growing gap in competitiveness between Canada and the United States, the budget offered virtually nothing to calm its fears. Indeed, judging by the pre- and post-Budget reaction from businesses of all sizes, the Government couldn't have performed much worse; essentially, it ignored calls from larger businesses to begin relieving the tax and regulatory burden, even if only in a small way, and disregarded pleas from small firms to put the brakes on complex new anti-avoidance laws. So unfortunately, this looks like yet another blot on Canada's copy book.

Just as water flows downhill, investment has traditionally flowed to those jurisdictions with the lightest taxes. Therefore, we must wait and see whether the trickle of companies announcing new investments in the US becomes a torrent.

Ordinarily, you wouldn't expect to see companies and investors flow from a low-tax jurisdiction to a high-tax one (although, in the complex world of international finance, it often does in a roundabout kind of way). But sometimes, water can be seen flowing uphill too. In this case, from the United Kingdom to Italy.

The UK isn't exactly a low-tax jurisdiction. But when compared with Italy, it's a fiscal paradise. In the World Bank's ease of doing business index, the UK is positioned 7th out of 190 jurisdictions, with Italy trailing in 46th. Narrowing the comparison down to just tax, and the gap gets significantly wider: the UK is 10th, and Italy is down at 112th. So not exactly the most logical move for a business or investor.

Yet, according to a senior official in the Italian finance ministry, those from the UK were represented among the 150 wealthy people who decided to take up residence in Italy in the past year. But don't worry, there is method behind the madness. This is all because of a new tax scheme designed to lure exactly the type of people – potential investors – who have shunned Italy's high and complex taxes in the past.

Several other nationalities were among the first-year take up of the new Italian flat tax scheme, including Americans, Russians, Dutch, Norwegians, and Swiss. So the UK was far from alone, and in relative terms, the number moving to Italy so far is small. However, the UK's case is of particular interest, because it would appear to support the view that the UK's attractiveness to the global entrepreneurial class is fading.

Research by New World Wealth published in January found that there was a net outflow of 4,000 high-net-worth individuals from the UK in 2017 alone. In absolute terms, in a country of 65 million people, that's a tiny proportion. But considering that a similar number of US passport holders – about 4,500 – left America (population 326 million) permanently last year, perhaps the UK does have something of a HNWI exodus on its hands.

Many reasons for this have been given, some tax-related. An important factor, perhaps, is the ongoing erosion of the "non-dom" rules. This archaic principle of UK law allows a select group of largely wealthy foreign individuals to be resident in the UK, but not domiciled there (i.e. retaining strong links with their country of origin) and traditionally this has meant that they do not have to pay tax on foreign income as long as it stays offshore. Unsurprisingly, given the public's current mood when it comes to the issue of tax, the non-dom regime has become harder for the Government to justify, even though it is suggested that non-doms have a net benefit for the UK economy overall. Hence, successive administrations have legislated to make the non-dom system steadily less attractive.

In addition to continued uncertainty about the UK's residency and tax rules, property taxes have increased markedly on high-value real estate purchases in recent years. These measures are probably designed more to take the heat out of London's sky-high property market, more than to deter rich foreigners from buying property in the UK. But the rises in Stamp Duty Land Tax in particular, which can be as high as 15 percent in some cases, have been cited as another major reason why HNWIs might be searching for pastures new.

Then, of course, there is the elephant in the room that everybody is talking about: Brexit. And it is probably no coincidence that Italy has chosen to introduce its tax scheme at a time when the UK's future economic relations with the EU remain so uncertain, particularly with respect to access to the single market for financial services. It will be interesting therefore, to see if other EU member states eyeing up a slice of London's financial market – France and Germany have shown predatory intentions in this regard – now proceed with similar measures to poach London's bankers and businesspeople.

And on a not-unrelated note, perhaps Italy's "non-dom" tax scheme shows that there is life yet in the flat tax. As Russia considers whether to scrap its 13 percent flat tax in favor of a more progressive system – potentially following several other Eastern European countries that have taken the same path – flat taxes now look like a dying breed. Now that's something worthy of further study!

It was only just over 10 years ago that President George W Bush was enthusing about the Estonian economic miracle, which was largely attributed to its flat, simple tax regime, and suggesting similar tax reforms could benefit America. How quickly attitudes can change in the world of tax!

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 Execrations

Canada conservative

United Kingdom uncertain

Ciao

Kitty



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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