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this marathon will have to be run at sprint pace

Kitty Miv, Editor
12 December, 2017

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.

On either side of the Atlantic, taxpayers have waited a long time for political breakthroughs. Then two came along in the space of a week.

In the United States, it began to feel as if Congress and the Administration were destined to always talk about tax reform but never deliver it, especially when Republicans and the administration of President Trump failed to deliver on their most basic pledge, that of expunging Obamacare.

However, spool the tape forward a few months (I'm from an analogue era), and now that the Senate has passed its version of the Tax Cuts and Jobs Act, we are possibly within a few days of witnessing one of the most sweeping changes to the US tax code, certainly this side of the Reagan tax reform of the mid-1980s, and possibly decades before that.

But let's not count our chickens just yet. If the House of Representatives intends to merge its bill with the Senate's, there could be some more hard yards ahead, for some of the differences between the two sets of proposals are quite stark, notably around the taxation of pass-through business income.

And it's undeniable that, whatever one's politics, this bill is fairly divisive. The Democrats will likely try every trick in the legislative book to stop the TCJA in its tracks, and continued doubts about the cost of the tax reform could be the weak point in the Republican lines that they'll attack. What's more, the Republican Party in Congress is far from unified around these reforms. So the next few days and weeks could be the most crucial.

On the other side of the pond, the end of last week also saw a long-awaited breakthrough in the Brexit negotiations after months of stalemate, notably with regards to EU citizens' rights, the Irish border question, the divorce bill, and, importantly from a tax law point of view, the jurisdiction of the European courts.

But, again, I feel duty-bound to sound a note of caution here. That it's taken since March 2017 to get this far in the talks does not bode so well for the trade negotiations, which are expected to be much more vexed. And given the EU's insistence that they won't start until next February, leaving only about one year for the talks to conclude, this marathon will have to be run at sprint pace.

As one well-established multilateral economic union loses a significant chunk, another is beginning to coalesce. And in what can also be described as something of a breakthrough for Africa's future economic prospects, ministers agreed on December 2 – possibly around the same time as the US Senate was burning the midnight oil over tax reform – to form the Continental Free Trade Area (CFTA).

The CFTA is being touted as a massive opportunity for Africa. One of the main reasons cited for the region's slow pace of economic development isn't so much it's lack of trade with the rest of the world, but its well-known inability to trade with itself. As Marc Yombouno, Minister of Trade of the Republic of Guinea, observed at the end of the talks in Niamey, Niger, intra-African trade represents only about 16 percent of the continent's total trade, whilst in Asia and Europe, intra-regional trade is more like 50 to 60 percent.

This isn't because African countries aren't producing things that other African countries don't want to buy. The problem is rooted in high trade barriers. According to the World Trade Organization (WTO), an African company faces an average tariff of 8.7 percent when selling within Africa, against 2.5 percent elsewhere. In fact, the WTO has said that the cost of moving goods within Africa is twice the global average.

Non-tariff barriers also remain a significant problem, and traders are said to encounter numerous issues when importing and exporting goods and services. These include: outdated regulations; lack of competition in the transportation market and poor services; export bans; unnecessary permits and licenses; costly documentation requirements; and standards that, rather than facilitating trade, often create a barrier for small producers.

And as if the unstable and unpredictable tax regimes of many African jurisdictions weren't enough of a deterrent to doing business, companies also face unofficial "taxes" in the form of bribery and corruption by public officials. A 2012 study conducted jointly by Transparency International and Trade Mark East Africa gave an indication of how endemic this problem was in Tanzania, for instance, where bribery costs per year had amounted to about 18.6 percent of the total value of the goods transported.

It is to be hoped that the CFTA does a better job of reducing these barriers and boosting intra-African trade than the numerous regional free trade agreements that have been concluded in recent years. Indeed, that so little progress appears to have been made towards increasing trade within Africa is not an encouraging sign. It is also an indication that there is much ground to be made up, which is why the target date for the completion of an integrated African economy is a distant 2063. That's a double marathon, if you like. And you thought US tax reform and Brexit was hard!

Indeed, it has taken the European Union most of the post-World War Two era to develop to its current state. And what is that state? Well, it would be possible to argue about that all day. But in the context of international tax issues, you could describe it as a state of confusion. Not that the European Commission, which is driving the agenda at the request of the Council, would say it is confused. It's just that everybody else is.

We've already seen it take ownership of the digital tax issue – who's in charge of this now, the EU or the OECD? Furthermore, it seems to have confounded the Irish Government – and many other governments come to that, including the US Government – with its demand that it collect EUR13bn in extra tax from Apple. And now we have a tax blacklist that features not a single offshore financial center, at least not the ones everybody thinks of when asked to name a "tax haven," but features a major economy like South Korea. Explain yourself please, Moscovici!

In a sense, the composition of the blacklist isn't surprising. The IOFCs have told us for years that they meet every new international transparency standard going, and that they have removed harmful elements of their tax regimes. Perhaps with this blacklist the evidence is there to back them.

As to South Korea's presence on the list, this is more puzzling, especially as one of the main reasons cited by the Commission is tax concessions provided by the country's free economic zones and foreign investment zones. Does this mean, as South Korea's Government seemed to suggest in challenging the EU's assessment, that the BEPS harmful tax remit has expanded to tax regimes which help shift physical production as well as financing and profits? That would be a bold move, because such zones number in their thousands and are positioned all over the globe.

The EU has a long track record of intervening in the tax affairs of third countries. But perhaps it's time an intervention was staged in Brussels, because the Commission appears to be forgetting where its power ends. Maybe the OECD should do it. After all, it's their project. If they jumped on the early morning Thalys they could be there by breakfast.

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 States home straight

Kitty's Execrations

European Union intervention



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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