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we could be in for a period of stalemate

Kitty Miv, Editor
24 January, 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.

For all the anticipation, last week's revelation by Prime Minister Theresa May that the UK is headed for a "hard Brexit" wasn't quite the seismic shock it perhaps should have been. People have had so long to ruminate on all the myriad possibilities for the UK's post-Brexit relations with the EU that most have concluded that if out is to truly mean out, then hard Brexit it has to be. But at least we know now.

As the EU's most influential figures have been insisting for the last six months, membership of the Single Market and the "four freedoms" that go with it are indivisible: you can't have one without the others. Otherwise, it would be a double market, or a triple, or a quadruple market, which defeats the whole purpose of the thing. It became fairly obvious early on that a "soft Brexit" i.e. the UK's continued membership of the Single Market, would necessarily entail continued interference – as Leave supporters perceive it – by the EU in the UK's political, economic, legislative, and social affairs. At the same time, the UK's influence in the EU would be substantially diminished, yet it would still have to stump up membership fees. In other words, the worst of all worlds if you are a Leaver, and certainly not what the (albeit slender) majority of voters wanted.

Hard Brexit means there are going to be advantages and disadvantages for UK taxation once the deal is done. On the one hand, the government of the day will have a lot more freedom over tax policy. There will be no more worrying about state aid or discriminating against taxpayers from EU countries (in theory). Therefore, the UK will have much more scope to offer tax incentives (as long as they're not "harmful").

But disentangling the UK tax system from the EU is going to be no easy task. Think about all the EU legislation and regulations that have been transposed into UK law over the past four decades, not to mention the thousands of pages of case law issued by the EU courts. How will these be dealt with in the negotiations? How long will EU case law apply in the UK? And will the UK seek to repeal EU-related law wholesale, bit by bit, or in the interests of stability, not at all? And we haven't even mentioned VAT yet, the only tax which is "harmonized" at EU level. For UK taxpayers, the future either looks very exciting, or really quite scary. I haven't quite made up my mind which.

Another predictable event occurred in India last week. Yes, you've guessed it, the routine delay to the incoming goods and services tax.

If India's GST reforms were a train, those on board could be forgiven for thinking that there is no destination, that the tracks must stretch on infinitely, and that they are destined never to leave their coach. However, there have been some encouraging sights sliding past the windows recently.

That the constitutional amendment bill, required to levy GST on services, was passed at all was a major milestone last year. And the GST Council appears to have made swift progress towards settling some of the most important rules, such as GST rates and registration thresholds, etc.

But perhaps the Central Government created a rod for its own back by insisting that GST be ready in time for April 2017. To roll out such a vital reform the length and breadth of India is going to take time, so perhaps a more realistic deadline should have been set after the passage of the GST legislation, of say two or three years. Taxpayers have got used to waiting after all, but the litany of broken deadlines hasn't exactly done wonders for the credibility of governments past and present. I hope, for India's sake, I can be proved wrong, and we're not back here in June discussing yet another GST deferment.

Last, but certainly not least, is President Donald Trump's policies on trade, which are – and I'm reaching for a diplomatic description here – shall we say, robust. Indeed, some commentators believe the world is on the brink of a trade war. And they would have been emboldened in their view by the news that Mexico would quickly retaliate against any tariffs applied to its exports by the US.

Others, however, are less pessimistic. The International Monetary Fund, for one, believes that Trump would be unlikely to follow through with his border tax threat because much of the damage it causes would be self-inflicted.

In another interesting development, China indicated that it would turn the other cheek against any form of border tax on its goods, even going so far as to say that it would be the world's leading example of a freely trading nation.

Trump's tariffs may also not materialize any time soon because of internal political wrangling within the Republican Party, with two rival border tax ideas on the table.

The so-called border adjustment tax advocated in the tax reform blueprint signed off by House Speaker Paul Ryan last year is a markedly different approach to Trump's, and some say it would effectively usher in a form of value-added taxation into the United States for the first time. But President Trump, who finally broke his silence on the matter last week, is not a fan. He agrees with those observers who surmise that the border adjustment tax is an overly complicated way to achieve what are in effect the same goals as his proposed tariffs.

Judging by their recent comments, and notably those from House Ways and Means Committee Chairman Kevin Brady, the Republican leadership in the House sees the border adjustment tax as a cornerstone of comprehensive business tax reform. That Trump demonstrably doesn't share this view suggests that we could be in for a period of stalemate on tax reform. Another period of stalemate, that is.


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 Kingdom decides

Kitty's Execrations

India delay



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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