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the power to take money straight from people's bank accounts

Kitty Miv, Editor
17 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.

One does have a modicum of sympathy for Her Majesty's Revenue and Customs, albeit a tiny one. Regularly lambasted by Parliament's Public Accounts Committee (PAC) – led by Labour MP Margaret Hodge, who has emerged as Britain's answer to Senator Carl Levin in America – and the mainstream media for being soft on corporate tax avoidance and cosying up to large multinationals in a series of so-called "sweetheart" tax rulings, HMRC is also castigated by the same set of critics for an increasingly heavy-handed approach in its numerous tax compliance campaigns. Damned if you do and damned if you don't, you could say. On the first point, the criticism of the department has been a tad harsh. HMRC can only uphold the laws which are set by parliament in the first place, and a study of five sweetheart deals by the public spending watchdog the National Audit Office (NAO) in 2012 found that they actually were pretty good value for money for the taxpayer. Although the NAO expressed concern about the transparency of these private tax rulings, it concluded that the revenue derived from them was "reasonable" in four cases and "better than reasonable" in the remaining one. More worrying perhaps was that the NAO said there was no clear answer as to what represented the "right" tax liability for these five taxpayers in the first place. So if this is the case, should HMRC be handed the power to take money straight from people's bank accounts or insist that those who have used a tax avoidance scheme pay disputed tax upfront before the case has been decided, apparently with no appeal mechanism? It's almost like serving a prison sentence before the jury has decided whether you are guilty of the crime or not. The difference is I suppose that at least you will get your money back if HMRC are proved wrong. Time on the other hand is non-refundable. Statistics show, however, that the department, with a much larger pot of money for lawyers than your average taxpayer or small business, has a success rate of about 80 percent in tax litigation. So on the second point, HMRC has been rightly grilled for proposed new powers that could see it act as prosecutor, judge and jury and possibly executioner of many an SME. As we keep pointing out in this column, tax evasion shouldn't be condoned; but neither should the vesting of such sweeping powers in an organ of state, and a pretty unaccountable one at that. Magna Carta? What's that?

Writing for another publication not so long ago, an editorial colleague of mine suggested that Hong Kong was finished as a financial center. Well, actually, he didn't go quite that far. But questions about Hong Kong's place in the world at present and in the future, now it is nestled firmly in the bosom of communist China, are worth exploring. For a start, it seems incongruous that China should be creating more competition for Hong Kong by establishing financial centers in the mainland, notably Shanghai, where a new free zone for the financial services and investment, commodities trading, and logistics sectors have been created. Then there's its rivalry with Singapore which has emerged as a regional investment and trading hub par excellence and voted the best place in the world to do business for the sixth year running by the Economist Intelligence Unit. Labuan, the chosen route of investment into South Korea, is also coming up fast on the rails. Hong Kong does undoubtedly have a problem with its narrow tax base, and its open economy is vulnerable to the waxing and waning fortunes of global finance, which leaves the Government's budget exposed in economic downturns. Earlier this year, the Hong Kong Government's fiscal commission arrived at the gloomy conclusion that if current fiscal trends continue, i.e. it continues to spend more on public services without raising taxes, it will have a structural deficit on its hands within seven years. The Government doesn't appear to want to reel in spending, but it does want to keep taxes low. So it has come up with the solution of a rainy day account akin to the sovereign wealth funds used in many oil-rich states. It could be argued that, had the UK had the foresight to do the same before North Sea oil and gas began to run out, it wouldn't have found itself in such fiscal dire straits. So Hong Kong gets a thumbs-up for what sounds like some sensible financial planning. But then perhaps we shouldn't have worried anyway. It has fiscal reserves equivalent to about 30 percent of GDP already, and it is not in China's interests to allow Hong Kong to go to wrack and ruin, as evidenced by its endorsement of the "one country, two systems" mode of government that underpins their relationship. So move along! Nothing to see here!

Regular readers of this blog will be aware that I am not Tax Commissioner Algirdas Šemeta's greatest admirer, to use a bit of British understatement. Last week's column ripped into the EU Savings Tax Directive, and Šemeta's attempts to plug legislation that has more leaks than a piece of Swiss Emmental (or should that be Lithuanian Džiugas – and yes I did need to look that up, not being an expert on Baltic cheeses, although it turns out to be devoid of holes). However, the opportunity to put the boot into the Lithuanian statistician can't be resisted. Last week, Šemeta implored the new Italian Presidency of the EU to ensure that progress is made on a number of tax initiatives ranging from the not-so-sublime to the ridiculous. These include ongoing efforts to simplify the EU VAT regime, which sounds sensible enough except that it will probably lead to higher VAT rates, the common consolidated corporate tax base, controversial amendments to the Parent-Subsidiary Direct, a revised Energy Tax Directive and of course Šemeta's pet project, the financial transactions tax. I've never met him and I'm sure Mr Šemeta is a perfectly agreeable, hard-working sort. But one has to question his suitability for a job that affects the lives of hundreds of millions of individual and business taxpayers across Europe. Does a resume including eight years as the head of the Department of Statistics in Vilnius and three years as Lithuanian Finance Minister (in two stints) really stand you out as the ideal candidate for this role? Evidently so. Then how do you get a job as a European Commissioner and a salary of almost EUR20,000 a month (plus a residence allowance, an allowance for representation expenses, a resettlement allowance, travel expenses, a "transitional" allowance on leaving office, and a pension) paid for by EU taxpayers? You have to be nominated by the Government of your member state (presumably it helps to be a member of said Government), then the European Parliament gives you the once-over (but will only vote against your candidacy if it really really doesn't like you). And that seems to be it. The EP does have the ability to sack the entire Commission through a vote of no-confidence, although it has never used this power (the threat of it was enough to convince the Commission to resign en masse in 1999 amid corruption allegations). But once you are through the door you tend to stay there. No pesky voters to answer to. No real way to measure your performance. Not that Algirdas has under-performed as such. On the contrary; he's probably achieved exactly what was expected of him. But it does highlight an in-built democratic deficit that is turning people off the European project from Aberdeen to Athens, as the recent elections to the European Parliament showed.


Kitty's Encomiums and Execrations

Methodology: each week (this is the 113th) 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 plus 1, 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:

Hong Kong saving for a rainy day

And Kitty's Execrations:

EU jobs for the boys

UK presumption of guilt




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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