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the UK Government still firmly believes in the merits of tax competition

Kitty Miv, Editor
13 July, 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.

Many politicians try to be all things to all people, but few manage to achieve it. George Osborne, the Chancellor of the United Kingdom Exchequer (aka, the Minister of Finance), is making a very good claim to be inducted into the "few that manage to achieve it" hall of fame in later life after announcing a quite remarkable "emergency" Budget last week. Indeed, it was a budget statement that could justifiably earn Osborne a new nickname – The Borrower – for he seems to have borrowed key policies from political opponents vanquished recently at the general election, particularly from the Labour Party, including a big increase in the minimum wage and the virtual extinction of non-dom tax status (although, now he's taken them, he can't really give them back, can he!) I can recall that when the UK first got its minimum wage in 1997 – a key Labour pledge – the Conservatives, then in opposition, were dead against it, fearing it would increase employment costs and lead to job losses. However, the Conservatives now plan to force companies to pay a so-called "living wage" about 20 percent higher than the current minimum wage as part of Osborne's plan to create a "high-wage, low-welfare" economy. The idea behind this is that those on low pay will no longer have to have their wages topped up by the welfare system in the form of wage tax credits – a hugely expensive yet cumbersome system, which was one of former Labour Prime Minister Gordon Brown's flagship policies when he was Chancellor. Osborne's interference in the labor market to this extent would have been unthinkable under previous Conservative administrations, particularly those led by Margaret Thatcher. In fact, there is almost a slightly Nordic flavor to this Budget, and in Osborne's intentions to create a high-skilled, high-value-added type of economy. However, this is probably as much about politics as it is with ideals. In fact, Osborne has become the consummate pragmatist in his five years at the Treasury. With this Budget, the first Conservative one for 20 years, many think that Osborne has performed a political masterstroke, with the center ground now well and truly seized, and with it many votes that might have gone to Labour next time around. It leaves Labour, already struggling for a new direction, with only one way to go – left – which will probably see them in the political wilderness for a generation, until a new Blair emerges – if a new Blair emerges, that is. Perhaps the real genius of this Budget though is that Osborne has made many people feel like they're getting a tax cut. In fact it raises taxes by more than GBP40bn, with more revenue due to contribute to deficit reduction than ever before. All in all, it's a curious mix of economic liberalism and social democracy. Another measure also stands out for me: with another 2 percent corporate tax cut in the pipeline, all things being equal, by 2020 the UK will have a corporate tax rate just 1 percent higher than Singapore's and 1.5 percent higher than Hong Kong's. UK corporate tax rate will also be less than half the combined federal/state income tax rate currently faced by firms in the US. Few commentators have picked up on the significance of this, but if nothing else it confirms that, unlike much of the EU, the UK Government still firmly believes in the merits of tax competition.

Speaking of tax havens (or international offshore financial centers, as they prefer to be known these days), there's been some interesting reports published recently showing just how important they are in channeling investment between various parts of the globe, and particularly from rich countries to developing and emerging economies. The island of Jersey has long publicized its role as a conduit for investment for London and the wider UK economy. But according to a study by management advisory firm Investment Consulting Associates, Jersey plays a substantial role in routing investment in the global economy. The report highlighted that Jersey-originated foreign direct investment (FDI) supported 94 greenfield projects between 2003 and 2014. These projects had an aggregated value of USD13.34bn and created over 39,000 foreign jobs. The disproportionate amounts of FDI received and transmitted by offshore financial hubs was also highlighted recently by the United Nations Conference on Trade and Development (UNCTAD) in its latest World Investment Report. This states that 30 percent of cross-border corporate investment stocks (FDI, plus investments through special purpose entities) have been routed through "conduit countries" before reaching their destination as productive assets. Interestingly, the growth in what UNCTAD terms "transit investment" grew sharply in the second half of the 2000s, despite the fact that the OECD's campaign against tax havens was well established by then, and has continued to grow even though that campaign has intensified. However, while the report states that action against international corporate tax avoidance is "imperative," it goes on to caution the likes of the OECD and the EU to "consider carefully" the risk of negative effects on investment flows, especially to developing countries, posed by the BEPS project. "Insufficiently calibrated measures may deter necessary investment for development that might otherwise have taken place," the report observes. "Offshore investment hubs have come to play a systemic role in international investment flows: they are part of the global FDI financing infrastructure. Measures at the international level that might affect the investment facilitation role of these hubs, or that might affect key investment facilitation levers (such as tax treaties), need to take into account the potential impact on global investment and incorporate an investment policy perspective." There are those who will argue that investment would still take place regardless of whether tax havens existed or not. But we can't be sure how investment flows would be affected if these conduits became blocked or removed from the global financial architecture altogether. In fact, it is probably dangerous to assume that everything would carry on as normal. It would be ironic indeed if one of the consequences of the BEPS project was less corporate investment flows to low income countries, hampering their development.


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 competing

Jersey enabler



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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