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taxpayers tend not to like mysteries

Kitty Miv, Editor
25 January, 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 seemingly never-ending deliberations over the proposed introduction of a value-added tax in the Gulf Cooperation Council (GCC) countries must be testing the patience of taxpayers to the limit. Will they? Won't they? Will they? Won't they? It's almost like the plot of a soap opera! Perhaps this time they will. We were informed by UAE Deputy Ministry of Finance Younis Al-Khouri last week that the GCC is near an agreement that could see VAT introduced in 2018. However, I wouldn't hold your breath. We've heard such pronouncements on many occasions over the last few years. For instance, I dipped into the news archives and found a report dated April 2010 in which an adviser to the UAE Government suggested a start date of 2012. Similarly, it was reported in November 2012 that VAT would be introduced within four years. However, the Gulf states appear no nearer to finalizing the tax than they were four years ago.

The reason most often cited for the delay is that some GCC member states are less prepared than others, technically and administratively. However, surely they have had long enough now to complete the necessary preparations? After all, this idea has been on the drawing board for several years. Maybe there is some other reason for the delay, something that the governments involved are reluctant to share with the public. I'm not quite sure what that could be, but I have a feeling that perhaps there is a reluctance on the part of some GCC governments to take this leap. We are talking about some of the most lightly taxed jurisdictions on the planet after all, and economies in some parts have thrived as a result of an almost complete absence of taxation. Will VAT be the thin end of the wedge? It's certainly the case that the UAE has been contemplating a future in which it can no longer depend on oil revenues, and the Government has hinted on several occasions over the past couple of years that a general income tax may be on the way. When this will happen, who it will apply to, and at what rates – these all remain a mystery. However, taxpayers tend not to like mysteries. They are in the business of certainties. So a rare execration goes the UAE's way.

Here's a novel idea: what if, instead of rewriting the entire world's corporate tax rules in an effort to stop base erosion and profit shifting, governments instead slashed their corporate tax rates, to reduce multinationals' incentives to engage in profit shifting in the first place? Perhaps if most corporate tax rates were roughly at the same low-ish level, let's say 10 to 20 percent, countries wouldn't feel compelled to compete with one another so aggressively for multinational dollars, introducing the sort of schemes so loathed by the European Union. And maybe, just maybe, if corporations were less inclined to exploit such schemes, instead preferring to pay a simple, low income tax, governments' corporate tax revenues might actually go up, rather than diminish, as they have tended to do in recent years. What's more, if less resources were expended on tax planning, companies might have more in reserve to invest, create jobs, and contribute to national economies.

As John Lennon famously sang, you may say I'm a dreamer – but I'm not the only one. A similar idea was floated in Australia last week, although not by any politician. No, this proposal to slash Australian corporate tax came from a somewhat unusual source, the Financial Services Commission. It's not often we hear financial regulators comment on tax policy. But that's probably because many politicians feel they can't deviate from the OECD line.

And now to a country where influential lawmakers aren't so shy about challenging prevailing opinion on matters of international taxation: the United States. The US Government insists that it is fully supportive of the OECD's work in the area of BEPS. However, unlike some other major economic powers, it has hardly been singing its praises to the rafters either. Indeed, one gets the sense that Washington wasn't the most enthusiastic participant in the consultations that led to the OECD's recommendations. We certainly know how some – mostly Republican – sections of Congress feel about it. They see BEPS as an extraterritorial raid by foreign tax authorities on US taxpayers and a likely drag on the US economy. And they want the Government to put up a sterner defense of US interests and question the motives of the OECD and foreign powers. But it's not only Republicans who feel this way. As we saw recently, a quartet of Senators – two Republicans and two Democrats – urged the Treasury to stand up for US taxpayers against the EU in its controversial state aid investigation into national tax rulings, some of which affect US companies. Admittedly, it is a bit rich of America's politicians to complain about the extra-territorial effects of BEPS and the EU's corporate tax agenda when the US foisted FATCA on the world. However, someone has to do it, and they don't come more powerful than Uncle Sam.

Now, from plain-speaking Americans to prevaricating Germans. Well, one prevaricating German to be exact: Wolfgang Schäuble. I think the German Finance Minister is in favor of some form of "crisis" tax to top up EU budgets stretched by the migration crisis in the Europe. But I'm not entirely sure if even Schäuble himself knows what he thinks on this issue. Perhaps Angela Merkel's position, that no additional taxes are needed given German's healthy budgetary position, is preventing her Finance Minister from articulating his view on the matter clearly.

At an IMF conference in Peru last year, Schäuble told Reuters that a crisis tax was a "matter for the European Commission," but nonetheless the problem of under-resourced EU budgets "must be solved." Last week, he appeared to come off the fence by supporting an EU tax on gasoline to help those member states most in need. However, judging by the contents of a speech at the "The Future of EU Finances" in Brussels, he was standing on the other side of the fence just a couple days earlier. "It has been argued that a new source of revenue like an EU tax is necessary to provide more money for Europe," Schäuble said. "This sounds like a convincing argument but it is not correct. There is no need for new sources of revenue like an EU tax to provide additional money for Europe." For my money, that sounds a lot like a definitive rejection of an EU crisis tax. Or perhaps he just meant there is no need for a general EU-level tax, which might leave the door open to special "crisis" taxes. Who knows. But after a good run, the confusion earns Germany a rebuke this week.

We could dissect Schäuble's comments to the nth degree but the results would be largely academic anyway. An EU tax is unlikely to happen, crisis or no crisis, because certain member states are bound to oppose it. The crisis tax question does, however, indicate that there are growing cracks in Germany's leadership and the hitherto rock-solid Merkel is suddenly looking vulnerable, and slightly at a loss as to how to deal with the migration issue.


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

Australia dreamer

United States suspicious

Kitty's Execrations

UAE procrastinates

Germany prevaricates



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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