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the nationality card trumps all other considerations

Kitty Miv, Editor
03 July, 2014

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.

This week there is a flurry of announcements of new or enhanced tax breaks for movie production, notably in China and California, which already had such incentives, and in independent Scotland, which didn't, since it hasn't existed since 1707, and probably never will again, although the UK does have such incentives. In fact, almost all countries, and sub-countries such as US States, have media production incentives, so one has to ask why? Even in the European Union such incentives are permitted, while many other types of tax break are frowned on or banned outright, although it's true that the Commission normally insists on a "cultural content" test, i.e. your movie must have something Lithuanian about it, if you are shooting in Lithuania. And therein perhaps lies the explanation for the prevalence of such douceurs: they are part of nationalism, which is still a popular sport even while increasing swathes of life become globalized. You can be sure that the French will not pay you to make a movie in English, or the Russians a movie in French. Among the English-speaking nations (an increasing number) that issue doesn't arise, although in China, where there is a booming market for movies in English, the tax breaks are presumably limited to Chinese language productions. There is also a considerable marketing aspect: New Zealand has undoubtedly benefited in spades from its hosting of the Hobbit movies, among others. Logically, then, it is short-sighted for China to limit its support to Chinese-language productions: spaghetti westerns were in English and gave lots of free publicity to Italy (the EU wouldn't allow tax breaks for them of course, not that either the EU or film tax credits existed at that time). The Chinese should definitely allow Clint Eastwood or Gerard Depardieu (who probably speaks good Russian by now) to make thrillers in foreign languages on the Great Wall; but the nationality card trumps all other considerations. Don't expect James Bond to land his Aston Martin in Tiananmen Square anytime soon.

If Japan sees itself as being in some sort of international competition to attract business investment, the confirmation from Shinzo Abe that the corporate tax rate will fall below 30 percent from its current level of 36 percent puts it securely ahead of the USA, which still charges around 40 percent if local taxes are factored in, and there is no sign whatever of any consensus legislation to lower the rate. Japan will also be ahead of France, whose 33.33 percent is unlikely to fall any time soon (they can't afford it), and of India, where the Government seems unable to get a long-planned reduction in its 33.99 percent rate through Congress (although Narendra Modi's new broom may change matters). Other countries on 30 percent or above include Belgium, Australia, Italy, Morocco, Nigeria, Spain, Costa Rica and Argentina. So Japan may find itself in the middle of the pack, just a few years after heading the field. Headline rates are not everything, though: reportedly, few Japanese companies pay corporate tax, either because of accumulated past losses or because of extensive tax breaks. A headline rate reduction would probably be accompanied by abolition of many of the tax breaks. But I started this paragraph with the word "if." It is not at all clear that Japan is about to compete with other major industrial powers, at least not domestically. Many of its largest sectors shelter behind high tariff walls or restrictive trading rules, as witness the soon-to-be-aborted TPP (Trans-Pacific Partnership) negotiations, in which Japan is steadfastly refusing to open itself up to US automotive competition, and seems utterly unwilling to dismantle its absurdly high agricultural tariffs (777 percent for rice, anyone?). Making all possible allowances for Mr Abe's domestic political difficulties, the corporate rate reduction seems to stack up more as a fillip for home-grown businesses than as a move towards genuine international opening.

By the time you read this, the farcical saga of Australia's carbon legislation may have reached the end of its beginning, to use Winston Churchill's words, but it probably won't have reached the beginning of its end. The new Senate will have been installed on July 1st, and after no doubt a considerable amount of ritual grandstanding (all legislatures do it) may have gotten to vote on the repeal of the carbon tax installed by the outgoing Labour government. But if it does so, the minority parties will have extracted a high price by forcing the Government to retain its Renewable Energy Target, and the Clean Energy Finance Corporation which has supported renewable energy projects. They are also going to try to compel the Government to enshrine a carbon pricing scheme in law, although the price would be set at zero until the country's "main trading partners introduce similar systems." Taking into account the effective collapse of the European Union's emissions trading scheme, the US Republicans' outright refusal to contemplate any such scheme, and the deferral for two years of South Africa's carbon tax, the Abbott Government may feel that carbon pricing legislation is a risk it can afford to take, and that the law may sit on the shelf at least until the next election. If on the other hand the Government refuses to pay the price demanded by the Opposition parties, and the Senate rejects the repeal legislation for a second time, there will be a "double dissolution" and Abbott will have taken a massive political gamble. Playing poker for such high stakes is no way to run a country – but that's not Abbott's fault, it's just how the constitution works, or rather doesn't.

The IMF had a normal week at work, recommending tax increases here, there and everywhere, often through its Article IV consultations; but what drew my eye was its Spillovers in International Corporate Taxation report, which gets close to saying that tax treaties are a bad thing, and puts the case for "an inclusive and less piecemeal approach to international cooperation." This betise should not be hung around the neck of Christine Lagarde, who seems to be quite a sensible person, but she heads an illiberal organization which is becoming an increasingly dangerous threat to international business. Those words can mean only one thing, which the authors do not dare to voice, and that is formulary or "unitary" taxation. Mind you, they could also mean the complete abolition of corporation tax, which is this column's policy prescription. But, as John Wayne might have said, "that'll be the day!"


Kitty's Encomiums and Execrations

Methodology: each week (this is the 111th) 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 neutral, 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 and now it's on plus 1 again.

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:

China on screen

Japan winning the sprint

And Kitty's Execrations:

Australia carbonized




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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