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we haven't heard the last of this story

Kitty Miv, Editor
02 March, 2018

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.

In the chess game of international tax competition, it will be interesting to see, following enactment of the US Tax Cuts and Jobs Act, who moves next, which pieces they will move, and to where.

I think it's probably safe to assume that Australia won't be among the first-movers, as much as the Government would like it to be. As things stand, the political impediments to even a fairly moderate and phased corporate tax cut remain too high.

Germany? France? Unlikely. As long as Angela Merkel leads Germany, the country's coffers, bursting at the seams though they are, will remain firmly clamped shut, while over in Paris, Emmanual Macron has probably taken his de-tax and de-regulation agenda as far as it is politically possible to go for a French President in his freshman year. Besides, both countries are absolutely wedded to the idea of corporate tax harmonization, specific digital company taxes, and minimum rates of corporate tax. In other words, to the exercising of less fiscal flexibility, not more.

Canada is an interesting one, especially after Finance Minister Bill Morneau said recently that the federal Government is analyzing how the TCJA affects its own tax system, business environment, and the wider economy. Indeed, by virtue of its geographical position in relation to the US, Canada is especially vulnerable to the impact of the US corporate tax changes, therefore making a response to the TCJA all the more urgent.

Perhaps the United Kingdom, once free from the fiscal restrictions imposed by its EU membership, may be in a good position to counter the US's bold move (a little more on that later). But then again, it has been playing this game for a fairly long time already, and by 2020 it will have slashed corporate tax by more than 10 percent from its 2010 level, so it's already starting to run out of moves.

Indeed, you could say that for the time being, the US has put its competitors in check, if not quite in checkmate, and there are few signs of any new grandmasters emerging any time soon to guide the opposition players.

We can predict with some confidence though that South Africa isn't going to be playing the tax competition game for a while. Indeed, the tax measures in the recentlyannounced Budget for 2018 were themselves widely forecast, particularly the one percent increase in the rate of VAT.

Nevertheless, it's worth mentioning that, despite yet another austerity budget, the pall of economic and fiscal doom and gloom which has enveloped South Africa seems to be lifting. There are high hopes for new President Cyril Ramaphosa after the troubled tenure of his predecessor Jacob Zuma, and Finance Minister Malusi Gigaba began his Budget speech by describing the package of tax and spending measures therein as "tough" but "hopeful." His choice of words suggests that South Africa may have reached its fiscal nadir, and that it will steadily begin to claw its way back to health from here. Time will tell if this is merely a false dawn. But even if it isn't, South Africa's taxpayers shouldn't expect the tax hikes to stop here.

Moving on, and free zones are presently all the rage (including in South Africa). So much so that Poland has decided to go the whole hog and transform itself into one big, country-sized special economic zone.

The fact that the world seems to have lost count of the number of its free zones tells you something about the rate at which they have proliferated in the post-World War Two era, and particularly in the last couple of decades. According to the World Freezone Atlas published in 2010, there were 1,735 free zones, dotted all over the globe. However, an OECD study published two years previously suggested that there were as many as 5,000 free zones. Perhaps the true figure is somewhere in the middle – something like 3,500 perhaps, as the World Trade Organization suggests.

The actual answer, I think, depends very much on your definition of a free zone, because they come in all shapes and sizes. On the one hand, you have the all-singing, all-dancing Dubai-style free zone, within which companies are exempted from most taxes and many regulatory requirements and are, for all intents and purposes, treated as non-residents. At the other end, you have free ports, where goods can be stored, exported, and re-exported free from many of the usual customs formalities. And then you have many shades in between.

Free zones are now spread so far and wide across the world that it's probably easier to name the locations where they tend not to exist, rather than the places in which they do. Notably, the European Union is something of an island in a sea of free zones. And that's because rules preventing state aid make it difficult for member states to get away with providing targeted tax incentives.

This makes EU member state Poland's case quite intriguing, therefore. Perhaps the Government has reasoned that there is no state aid case to answer if, in theory, every business meeting certain requirements is entitled to free zone treatment, as opposed to just a select few. The European Commission might have something to say about that though, so it's entirely possible that we haven't heard the last of this story.

The Polish development is also interesting from another point of view – the UK's point of view, to be more precise. Because theoretically, the UK, once Brexit is done and dusted and the country is no longer bound by state aid rules, would be free to establish fiscally privileged special economic zones anywhere it sees fit. Indeed, such a possibility has already been mentioned in parliament in the context of the debate on legislation setting out the framework the future arrangements between the EU and the UK on tax and trade. And by creating a number of free ports, the UK could mitigate some of the bureaucratic problems importers and exporters expect from withdrawing from the Customs Union.

Of course, this depends on the sort of trading arrangements that are agreed in the upcoming trade negotiations. And it wouldn't be surprising if the EU attempts to include a state aid element in any free trade agreement to prevent new "tax havens" springing up off the shores of north-west Europe. If it fails to include such clauses, it probably wouldn't matter anyway. The existing EU state aid rules have become so flexible as to be used to challenge anything tax-related that the EU doesn't particularly like, irrespective of whether the country in question is a member state. Just ask Switzerland. Or Ireland, for that matter.

Imagine the fallout, then, if the UK dared to go the "full Polish" and declare the whole country a free zone. The Commission would have a field day with that!

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

Poland special

Kitty's Execrations

Canada vulnerable



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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