we are cursed to live in interesting times
Kitty Miv, Editor
14 June, 2016
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.
The world is a very uncertain place at the moment. Probably more uncertain than at any period in the post-World War Two era. And uncertainty forms the theme of this week's column.
It can't have escaped many people's attention, unless they've spent their recent holidays on the moon, that one of the main sources of uncertainty at the moment is the United Kingdom's agonizing over its membership of the European Union. According to the economic experts – and politicians – backing the remain side, there will be at least some economic turmoil in the UK and Europe, and perhaps in the wider global economy also, if the British vote to leave. However, we must consider the whole spectrum of possibilities for a post-Brexit world: from not much happening at all, to all hell breaking loose. What the experts (and the politicians) do agree on though is that an economic downturn will inevitably knock the Government's fiscal consolidation plan off course, necessitating a combination of tax increases and public spending cuts, according to the Institute of Fiscal Studies, which has been one of the more level-headed contributors to the gamut of economic forecasts that the Brits have had to consider.
A vote for remain won't necessarily alleviate the uncertainty either, at least not for the British. Having followed the campaign quite closely, it's difficult to see how the governing Conservative Party, divided between "euroskeptics" and Europhiles (or, more accurately, less vehement and more pragmatic euroskeptics like Prime Minister Cameron) can survive intact given how they have verbally been knocking lumps out of each other for a number of weeks. A vote for Brexit would surely be curtains for Cameron and probably more extensive change in the UK's political leadership. Will we be talking about Prime Minister Johnson in the coming weeks?
At least one tax rise that the UK won't have to suffer is the EU financial transactions tax (FTT), which looks like it will be given its last rites in the next couple of weeks. But the UK should count itself lucky that the remaining member states still backing the idea can't agree on the tax's details, because UK financial institutions would have been paying a fair chunk of it without seeing a penny of the estimated EUR35bn in total FTT revenues, regardless of whether it is in the FTT zone, or even the EU. This is because the Commission's draft proposal was based on the principles of issuance and residence – in other words, tax liability hinged more on where a financial instrument was issued rather than traded – giving the FTT wide extra-territorial reach. With this is one of the issues the FTT group are currently grappling with, along with some basic parameters like tax rates and scope, it seems highly unlikely a final version will be agreed by the mid-2016 deadline it has set itself. Just as well. The tax is intended to reflect a fair contribution from the financial industry for its role in the financial crisis. But there must be better ways of doing it than disrupting financial markets, especially at such an economically uncertain time. So I award Belgium an encomium for reportedly turning its back on the FTT in May, possibly delivering the tax a decisive blow in the process.
Another way in which governments cause uncertainty is by making frequent changes to tax laws and regulations to an extent where it becomes very difficult for taxpayers to plan their affairs ahead. Occasionally, governments commit the cardinal sin – in the eyes of investors at least – of changing tax laws retrospectively, or by arbitrarily amending the terms of legally binding taxation agreements they have concluded with taxpayers. The latter example often occurs in the minerals sector, where tax certainty is paramount because of the substantial amount of time and money extractive companies expend on mining or drilling projects. With the rise of "resource nationalism" we have seen many developing countries seek to amend tax and royalty arrangements with mining companies in their favor. Understandably, they do so to take more control of their vital natural resources and a larger share of the company's profits. It is a dangerous game to play however, because it sends bad signals to other potential investors. So Mexico ought to be careful, after apparently cancelling its advanced pricing agreement with Canadian mining firm Primero. It's never a good sign when a company has to take a country to international arbitration.
Another deep source of uncertainty is one that most people are probably blissfully unaware of, but those of us who follow international tax developments are only too aware of: BEPS. The OECD and those governments bringing in BEPS-inspired measures seem fairly certain that the implementation of these recommendations will create a better world, one in which multinational corporations pay their "fair share" in corporate and other taxes, and the international tax system is based on the realities of business and commerce in the first half of the 21st century, rather than the latter half of the 20th. This all sounds good, but the reality, according to many businesses trading across borders, is different. Some countries have fatally undermined the BEPS project by diverging from the OECD's recommendations, a scenario that the Tax Executives Institute has warned will cause "global tax chaos." Or, to put it another way, create an even more complex, unfit, and uncertain international tax system than existed prior to BEPS. Indeed, just one-third of the respondents to a recent survey of middle-market business believed BEPS would provide a level tax playing field. How these changes will disrupt cross-border trade and investment flows nobody knows yet. But it's probably fair to say that most governments haven't really thought about it.
As the famous Chinese proverb goes, we are cursed to live in interesting times.
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.
Belgium sees sense
United Kingdom question marks
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