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sometimes doing nothing might be the better option

Kitty Miv, Editor
09 May, 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.

Once again, we start our round-up in the United Kingdom, but mercifully for you, the reader, I'm not going to harp on about the whys and wherefores of the Brexit this week. Nope, I'm going to look at something I'm sure you'll agree is far more exciting: capital gains tax.

Chancellor George Osborne received quite a bit of criticism for his decision to slash the rate of CGT in his most recent budget in March. This is because it was perceived by his opponents to be a tax cut for the rich, as it will largely benefit those wealthy enough to invest and to have built up a company. That may be true, but surely the corollary to that is a high rate of capital gains tax will discourage people from investing and building up companies? And what's the sense in that when economic times are already uncertain? The UK's business leaders certainly seem to think this was the right move at any rate, with almost 80 percent telling a recent survey that investing in small companies in the UK would be more attractive as a result of the new CGT regime.

This is, however, something of a qualified encomium. For successive UK Governments have had an almost irresistible urge to tinker with capital gains tax over the last ten years or so, cutting it, tapering it, raising it, then cutting it again. Indeed, this is the second major change that Osborne has announced in his time as Chancellor. First, he split the tax into two bands of 18 percent and 28 percent in 2010, then he slashed these bands by 10 percent in the 2016 Budget. While the latest move has been welcomed, this chopping and changing, and these regular attempts to pick winners and losers in the tax system, certainly can't help from a tax planning point of view. Finance ministers seem to like to make their mark on the tax system, but sometimes doing nothing might be the better option. Indeed, many taxpayers might thank them for sitting on their hands for once.

Extending the theme of tax uncertainty, a story caught my eye in the last week involving Fortum's ongoing tax dispute with the Swedish tax authority, SKAT, over a transfer pricing matter. Now, as most readers are no doubt aware, transfer pricing disputes are a dime-a-dozen these days, especially in the era of BEPS and Lux leaks. But this one stood out because Sweden, largely unnoticed, seems to have committed the cardinal sin of governments, at least in taxpayers' and investors' eyes, of taxing retrospectively. If I have read the situation correctly, the tax authority is seeking back taxes from transactions that took place in 2004/05 and 2008, but based on tax rules which were introduced in 2009. In which case, what chance has the company got of defending its position? Perhaps SKAT should be issuing taxpayers with crystal balls to help them predict future changes in taxation.

What with Spotify's recent warning shot to the Swedish Government on tax and regulation, Denmark chewing the cud over a possible meat-based environmental tax, and Finland's smash-and-grab raid on its expat pensioners, it hasn't been a very good few weeks for Scandinavia. And especially for the latter of this Nordic trio, which gets another ticking off from me this week for being named the queen of the "nanny states."

I expect that not every reader will be familiar with this particularly British turn of phrase. Essentially, it refers to the actions of an overbearing government that has a propensity for telling people how they should be running their lives. In other words, nanny knows best. Perhaps the most obvious example of the nanny state is in the mollycoddling health and safety laws in place in many countries, which tend to treat people like errant toddlers and which are the bane of many a responsible citizen. Another example is when a government attempts to discourage certain activities deemed undesirable. Traditionally, this has entailed restrictions on, or laws against, such things and drug-trading and taking, or the possession of weapons. But in the modern day, undesirable activities are just as likely to encompass cake eating, wine drinking, and cigarette smoking. And while engaging in all three of these scandalous activities is unlikely to land you in jail, it could leave you seriously out-of-pocket due to the high "sin taxes" that some countries, like Finland, now charge. It might also give the Minister in charge of Discouraging Undesirable Things cold sweats if done in his line of vision – although his colleague at the Treasury won't be quite so judgmental. That's because there's no hard evidence that "sin taxes" reduce the level of sin – but they are a good little earner for the coffers.

Finally, we go Down Under for the Australian Budget. And I'm pleased to report that Treasurer Scott Morrison ignored the advice of 50 economists and announced cuts in corporate tax. However, I must say the Government has chosen to go about this in a very complicated way, with various changes to the revenue thresholds, discounts rates, and discount caps used to calculate the small business rate of corporate tax. Can't the Government simply apply a lower rate for small businesses, like many other countries do? Doubtless many small business owners in Australia are wondering the same thing.

Unfortunately, despite defying the economists, I can't award Australia an encomium. Not only is it making things unnecessarily complicated for taxpayers, it has also created more uncertainty with its decision to impose a UK-style diverted profits tax at a rate of 40 percent. Of course, this will be a popular measure given the level of animosity being shown by the tax-paying public to multinational corporations and their tax-planning strategies. But popular decisions aren't always the most well-judged ones. As has been pointed out, while the UK corporate tax system has the stick of the 25 percent DPT, it now has an element of carrot, with a corporate tax rate due to fall from 20 percent to 17 percent by 2020. Australia still has a corporate tax of 30 percent, and under the Government's two-phase tax cut plan, it is going to take a decade to cut this by just five percent. What's more, as Michael Croker, head of tax at the Chartered Accountants Australia and New Zealand said in response to the DPT proposal, the taxation of multinationals in Australia is becoming based less on the framework of tax legislation and regulations, and more on what the Tax Office thinks they should pay after a little "chat." So, next to its impressive set of dangerous fauna, for companies it looks like the tax system of Australia is becoming a bit scary too.


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

United Kingdom capital idea

Kitty's Execrations

Sweden moves the goalposts

Finland nannying

Australia scary




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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