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wary of making any rash promises

Kitty Miv, Editor
18 October, 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.

More than one political commentator has picked up on the body language of the chief negotiators involved in the Brexit talks and wondered if they betray the exercise for what it really is: futile.

Following the latest round of talks, Michel Barnier, for the EU side, wore the look of a man who'd rather be anywhere else than negotiating with his UK counterpart, David Davis. Indeed, it felt like he was almost embarrassed to be there. Which is rather curious given that you'd think the EU holds most of the cards here. On the other hand, Davis, for the UK, was familiarly upbeat and irrepressibly optimistic. Which is also curious, given what's at stake for the UK, and the perception that little discernible progress has been made towards a divorce settlement.

What do these conflicting demeanors mean? Ultimately, they might be meaningless – the natural dispositions of the respective men. But they could tell us what's really going through their mind. Is Barnier increasingly of the opinion that the talks are pointless, because the UK shows few signs of putting together a sensible negotiating strategy? Is Davis in denial that the EU is going to make it easy, and, crucially, cheap, for the UK to leave the EU?

Whatever all this means, businesses in the UK – as well as those in the EU with a substantial presence in the UK – must be getting increasingly frustrated with the Brexit process (or lack of it). Companies with substantial levels of imports and/or exports are anxious to know what the post-Brexit trading arrangements will be, not only between the UK and the EU, but also between the UK and the rest of the world. However, the EU insists that trade talks cannot begin until Brexit itself has been wrapped up. And it has no intention of sending the UK a gift-wrapped package either.

So from the UK's perspective, perhaps no deal at all is better than a bad one. The overwhelming majority of respondents to a recent British Chambers of Commerce (about 98 percent) don't at the moment support the "no deal" option. But it's an eventuality that they may have to start contemplating seriously now.

We often refer to Ireland's corporate tax advantage when discussing international tax issues and the competition for foreign investment. Less discussed beyond Ireland's shores, I'm sure, is its individual income tax disadvantage.

While Ireland's top rate of personal income tax at 40 percent (recently reduced from 41 percent) is broadly in line with other European countries, it kicks in at a relatively low amount of income (EUR33,800 in 2017). When Universal Social Charge – brought in as part of Ireland's fiscal retrenchment deal with its bailout creditors – is factored into the equation, this has resulted in a marginal tax rate of over 50 percent for some, which places Ireland among the Nordic nations in terms of individual tax.

By comparison, the UK's higher 40 percent rate of tax applies to income exceeding GBP45,000 this year, which is the equivalent of more than EUR50,000. Unsurprisingly then, there has been something of a brain drain of Ireland's best and brightest across the Irish Sea in recent years. Indeed, overwhelmingly, entrepreneurs in Ireland believe that the country's personal income tax system is the single-biggest deterrent to those interested in establishing and growing a business in the country, if the results of a recent survey by EY are to be believed. Of the 160 entrepreneurs from Ireland who were previously finalists in the firm's Entrepreneur of the Year program, 72 percent expressed this opinion.

In fact, while Ireland excels on corporate tax, it hugely disappoints on individual tax. According to IBEC, Ireland's main business and employer association, it is misleading to label the country as "low-tax" just because it has a 12.5 percent corporate tax rate. In 2014, IBEC said the individual income tax burden as a percentage of GDP was 11.6 percent in Ireland, comfortably above the EU average of 9.5 percent. And according to the OECD, Ireland's tax system is one of the most progressive in world.

Finance Minister Paschal Donohoe deserves some praise for recently calling out the injustice of the current situation, describing it as as "unsustainable" and "unfair." And the Government is at least attempting to alleviate the tax burden on the middle class. But it's a slow old process. The marginal tax rate on income up to roughly EUR70,000 ticked down to 49 percent as a result of tax measures announced last year, and will ease to 48.75 percent under changes announced in the 2018 Budget last week. Hang on to your hats! At this rate, it's difficult to forecast what will happen first – a top marginal rate of 40 percent or humans setting foot on Mars.

But this isn't necessarily all the Government's fault. It is still locked into achieving certain fiscal targets. And there simply isn't room to go slashing personal tax. What's more, it seems to have accepted that high personal taxes are a price worth paying for low corporate tax, and all the investment and employment it leverages for Ireland. So perhaps Donohoe should be wary of making any rash promises, lest they come back to haunt him and his government.

Another country where middle-income earners seem to be clobbered is the Netherlands, where at the moment taxpayers earning more than approximately EUR67,000 per year can expect to see more than half of their income taken in income tax. The Dutch individual income tax system is also notoriously complex, with income categorized into various "boxes" depending upon where it comes from. But the incoming Government, due to be formed over six months after the last election took place following a long-awaited agreement between a group of mostly right-of-center parties, is attempting to put a stop to all that.

The new program for government proposes that the income tax schedule be compressed into just two brackets, of 38 percent and 49 percent. This at least reduces the top rate of tax below the key psychological 50-percent mark, and the attempt to streamline the current regime – apparently, the tax authority has warned that it is approaching breaking point in its attempts to administer the existing system – is admirable. But I was still quite struck that the lowest rate of tax is approaching 40 percent under the reforms. That's more than the current top federal rate in the US, where most people are inclined to think that their taxes are already too high.

Still it's progress, I suppose. And even though elements of the coalition agreement were leaked ahead of its official announcement, the extent of the tax cuts included in the program came as something of a surprise, containing as it does corporate tax cuts, the removal of dividend withholding tax, and a tax on royalty payments to low-tax jurisdictions.

It's an interesting plan because it provides further evidence of how governments are juggling their commitments with regards to tax. On the one hand, they are plugging the gaps that contribute to BEPS – and the Netherlands has been accused of being a particularly aggressive facilitator of profit shifting – and, on the other hand, they are committed to competitiveness, hence regular corporate tax cuts, and in the Netherlands' case also, the dividend tax proposal.

Even though the latter may be contentious again from a BEPS standpoint, you could call it a typical tax plan for the post-BEPS era.

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

Netherlands post-BEPS

Ireland baby steps

Kitty's Execrations

United Kingdom denial



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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