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stating the bleedin' obvious

Kitty Miv, Editor
07 May, 2015

Kitty's Kountry Rankings are below, with a description of how they are kompiled. 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.

Well done, Singapore, for suggesting that the OECD's focus with its BEPS project is almost entirely focused on "harmful" tax practices to the point where the beneficial ones have been forgotten about. It sounds – in the spirit of one of John Cleese's characters again – like stating the bleedin' obvious, but it's about time somebody did. Of course, from the OECD's point of view, I suppose that's the whole ethos of The Project: the elimination of tax competition. Not that you'll hear such an admission from the mouth of Angel Gurria or the finance ministers of the OECD governments who regularly praise the work of the OECD without ever seeming to question it. If they ever did stop to think what they are about to unleash on the world, perhaps they might begin to have second thoughts. Then again, politicians generally are incapable of thinking beyond the next election and will say whatever needs to be said to attract the necessary number of votes from the necessary demographic groups. How else do you explain something as ill-conceived as the UK's Diverted Profits Tax, rushed through to take effect just a month before the general election? Indeed, numerous studies suggest that governments all over the world, despite their routine pro-BEPS platitudes, are already fatally undermining the Project by legislating before it's even finished. As the European Centre for International Political Economy succinctly concluded in a critique of the OECD's plans to ensure proper taxation of the digital economy (which, it pointed out, contradict much of what the OECD stands for, i.e. free trade and technological progress), the way things are shaping up, the cure could be worse than the disease.

One territory that fears losing out in a big way as a result of BEPS and other multilateral tax initiatives is the British Virgin Islands, which is developing a new strategy for its financial services sector as a direct response to international regulatory pressures. In fact, it is not just the BVI that is facing a very real threat to its livelihood. Much of the Caribbean region – the parts of it with major financial services sectors at least – feels very vulnerable at present. A demonstration of what might lay in store for these IOFCs occurred recently in Belize, where international banks are said to be curtailing their operations due to fears of incurring regulatory fines for infractions. Banks call this "de-risking," apparently. This development followed a warning last month by Antigua and Barbuda's Prime Minister of "potentially devastating threats" to the Caribbean's banking sector because of perceptions that investing in Caribbean financial services is more risky than elsewhere. True, the word "offshore" is almost always used in a pejorative sense these days in relation to matters of international finance and tax. But these offshore financial industries are also vital economic lynchpins, providing tax revenue and employment in islands that have few other resources to fall back on other than their appeal to tourists. And they are vital cogs in the international financial machinery. It is another way in which the negative consequences of the BEPS plan for some territories and their people, not to mention the wider world of foreign investment, have been ill-considered, or ignored altogether. As UNCTAD observed in a recent working paper, "offshore investment hubs play a systemic role in international investment flows, and any measures at the international level that might affect the 'investment facilitation' role of offshore hubs must take into account the potential impact on global investment." But, it concludes, the movers and shakers in the OECD "pay limited attention to investment policy." And this is because of their obsession with anti-avoidance. One wonders: If the OECD does eventually succeed in nullifying IOFCs, will the worst affected territories be helped to get back on their feet by the rich countries? After observing Antigua and Barbuda's ongoing trade dispute with the United States, which has devastated the tiny country's e-gaming industry, I wouldn't bet my house on it, and the BVI certainly isn't hanging around to find out.

By the time this blog is published, we will be very close to finding out the identity of the next Prime Minister of the United Kingdom. Then again, perhaps not, given that there is almost certainly going to be a hung parliament, followed by several days, maybe even weeks, of horse trading to form a coalition. So we have more time yet to ruminate on the increasingly desperate last-minute tax gimmicks of the main contenders. This week, it's the Conservative Party's pledge to leave rates of income tax, social security tax, and value-added tax on hold for the life of the next five-year parliament. It sounds good doesn't it? But that's just it – it sounds good. But I don't necessarily think it is that good. What I don't like about the idea is that Prime Minister Cameron wants to "lock" this pledge into place by enshrining it in legislation. Why would a Conservative Government want to limit itself in this way? What's more, if these taxes are to be "locked," does it mean that the Tories are ruling out cuts to these taxes, as well as increases? Cameron wasn't very clear when announcing the proposal, which is ironic as this is supposed to promote tax stability rather than uncertainty. Either way, it looks to me like the PM could be setting himself up for a fall. Although the British economy has performed relatively well recently, the effects of the financial crisis continue to linger, and as much as I'm against high taxes, I'm not sure that the UK can afford to be so confident about its fiscal health. I mentioned in last week's blog how President George Bush senior's infamous "read my lips" pledge on the campaign trail in 1988 led to one of the more embarrassing u-turns in modern times. But it seems that, when it comes to tax and elections, politicians rarely learn from history.


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:

Singapore honest

British Virgin Islands prepared

Kitty's Execrations

United Kingdom election fever



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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