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the BEPS project won't be all upside with no downside

Kitty Miv, Editor
29 September, 2015

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.

It's almost a heresy these days to question the word of the OECD on issues relating to taxation. So I congratulate the Singapore Government for saying what has almost become unsayable – that the BEPS project won't be all upside with no downside, contrary to what its most fervent supporters would have us believe. In fact, there could be quite a high price to pay for a level playing field, if such an outcome is indeed possible. The BEPS project carries with it the risk that the international tax framework could become more uncertain if its recommendations are applied inconsistently, and as Josephine Teo, Singapore's Senior Minister of State for Finance and Transport, pointed out, it could swing the pendulum towards more incidences of double taxation in future, which could be detrimental to cross-border investment flows. What's more, with tax risk and controversy already on the rise, multinationals are going to be a lot more cautious about where they invest. This could have a potentially harmful effect on economies in the developing world that need their investment the most. Indeed, the BEPS project may merely end up stymieing a global economy that is already tottering as a result of weak growth in China.

While Singapore is going against the grain somewhat with its criticism of the BEPS project, it's not completely alone in this respect. And some of the criticism has come from surprising places. You'd expect organizations representing the interest of multinational businesses to flag up these sorts of concerns, and by and large they have. It's also no surprise that the BEPS project is getting tails up in the US Congress, especially among Republicans, who see it as a way to merely increase tax on US corporations. But the United Nations? Yes, even the UN, which frequently lambasts the corporate world for shifting taxable profits out of developing nations, has said that insufficient thought has been given to the economic consequences of the BEPS project, and that any measures at international level "must include an investment policy perspective." Unfortunately, I can't award the UN an encomium, so Singapore gets it instead.

If the Volkswagen emissions scandal tells us anything, it's that meeting ambitious emissions reductions targets is proving to be very testing (if you'll pardon the pun). But governments are not helping themselves by continuing to subsidize fossil fuel usage to the tune of USD200bn annually in the form of tax breaks and spending programs, according to a recent report by the OECD. And this is just the combined total for the 34 OECD members and six key emerging economies. If we are to wean ourselves off our addiction to hydrocarbons, then clearly something very dramatic has to happen, and it has to happen soon, because the current hotchpotch of national energy policies clearly isn't doing the trick. Something much more joined-up is required, but I don't envisage that happening any time soon, Kyoto Protocol or no Kyoto Protocol. I don't want to get drawn into the debate about whether man-made climate change is taking place or not, but one only has to witness the alarming and unpleasant miasma of pollutants that are regularly seen to hang over the world's major cities to realize that something needs to be done to clean up our air. The technology is there to change things. Unfortunately the political will isn't.

There certainly seems to be no lack of determination from India's leadership for change, at least on the tax front. And while the Indian Government's decision to cancel the minimum alternate tax on foreign institutional and portfolio investors, and, more recently, foreign companies lacking a permanent establishment in India, sounds, in the grand scheme of things, like a run-of-the-mill technical measure, it sends perhaps the strongest signal yet about the Government's tax and investment policies. It is an indication that India is determined to break with the bad practices of the past, which sowed so many seeds of uncertainty about India's legal framework and damaged its reputation with foreign investors, and even with other governments. It's a shame that the BJP Party didn't repeal the retrospective tax measure introduced by the last administration under the 2012 Finance Act, but this is a good move nonetheless. And where India and tax policy is concerned, a certain amount of patience is required, so you can't expect too much too soon.

One government that has expressed concern about India's tax laws is the United States – quite ironic given the state of the US tax code. Indeed, the US itself is no stranger to retrospective law making. Congress does it every year or two, to renew an assortment of temporary tax breaks – some quite significant (the R&D tax credit) and others more obscure (the rum excise tax "cover over"). These are known as the tax extenders. And it's that time of year again, when Congress gears up to debate, and hopefully pass, these provisions. Indeed, it's almost become an end-of-year ritual now, and the congressional calendar would look rather bare without it. We'll doubtless see both sides proclaim that it's time to put an end to such law-making on the hoof. But then they'll fall out over revenue offsets and use the package as a vehicle to score political points, before passing legislation at the last possible minute and kicking the can down the road for another year. Expect plenty of heat and light but not much enlightenment.


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 outspoken

India determined

Kitty's Execrations

United States unenlightened



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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