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what's Manaus doing wrong that the DIFC is doing right?

Kitty Miv, Editor
23 February, 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.

I caught up with an old American friend of mine during a shopping trip to New York recently. She has relatives in England and the last time we met she excitedly told me about her plans to buy a little bolt-hole in the Cotswolds for her regular visits to family and friends.

"So how's your new pied-a-terre in England's green and pleasant land?" I inquired. "I haven't bought it yet," came the reply. "And why's that – surely you'd have found something you like by now, and the exchange rate is very favorable at the moment?" said I, to which she responded: "Well, they keep changing the property tax laws over there don't they. It's almost as if they are trying to discourage foreign investors!" I found it hard to disagree.

Indeed, the UK hasn't been faring very well in these columns for a while. Certainly, the Government must take some credit for the country's economic recovery – the UK economy has outpaced almost all of its G7 competitors recently – but the same government must also take the blame for sowing the seeds of uncertainty, and not just with regards to the real estate market. Chancellor George Osborne seems to like the response he gets when pulling rabbits out of budget hats, but he ought to be careful that his magic tricks don't turn into a curse for the UK economy. If the Confederation of British Industry (CBI) is to be believed, much trouble is already being stored up for the future. According to CBI research, the policy change "burden" will end up costing British businesses GBP9bn (USD12bn) per year by 2020. But this isn't even the half of it.

As most of you who follow European affairs will doubtless know, there is a level of uncertainty about Britain's economy at a much more fundamental level, as the country decides whether its future lays in the European Union or out of it. One could debate the possible consequences of the Brexit at length and still not decide whether it will be good for the UK economy or not. If Britons vote out of the EU in the referendum, which Prime Minister David Cameron has set for June 23, 2016, the consequences of a Brexit on the UK (and EU) won't be fully apparent until many years after.

However, what interests me is the potential damage the EU referendum will inflict on the UK Government itself. Perhaps Cameron has made a strategic error by allowing euro-skeptic members of the Government to speak their mind in the referendum campaign, rather than towing the party line (which, I think, is "in" on the basis of a renegotiated settlement with the EU). This position may be admirable but may be misguided. Then again, he probably had no choice.

But whatever the referendum result, there are going to be some bruised egos, and eggy faces. Indeed, the issue of the EU is the ruling Tory Party's Achilles heel. Former PM John Major's Conservatives were trounced in the 1997 election with the party openly at war with itself over Europe. Although the next general election is more than four years away, these wounds, if not allowed to heal, could simply fester. Will we see the Tories tear themselves apart over Europe again? And what if the country votes for Brexit? Will Cameron have to go? Will Boris Johnson be the one leading the Government into the next election? Lots of questions wait to be answered. If nothing else, there will be few dull moments in the months ahead.

On the other hand, at least we can say that the UK is attempting to tackle what are perceived to be problems (the property market, the EU, etc). At the other extreme, we have Costa Rica, which after more than a decade, is still trying to pass a major fiscal reform package designed to put the Government's finances on a more assured footing. Granted, there are some controversial elements to the original proposals, including a switch from a territorial to a worldwide basis of taxation, and investors won't like that. And overall, the package is meant to increase tax revenue as a share of the economy. But for taxpayers, and particularly for foreign investors, policy paralysis is just as bad as a situation where the rules are apt to change frequently, because it also breeds uncertainty and a lack of confidence in the government and the legislature. The lack of a political consensus on the fiscal reforms earned Costa Rica a rebuke from Moody's Investors Service earlier this month, and it also gets another execration from me this week.

Traveling further down Latin America, I'm not entirely sure what's going on at Brazil's Manaus special economic zone at the moment. One week you read that it has secured investment from another major multinational firm. The next that business in the zone is falling. The negative headlines stand out all the more starkly given that generally, the world's most prominent free zones seem to be growing rather than shrinking. For instance, the Dubai international Financial Centre (DIFC) announced yet another record jump in company registrations last week.

So what's Manaus doing wrong that the DIFC is doing right? Well for a start, companies locating in the latter don't need to pay any income tax. They also have the support of a highly responsive government attuned to the needs of businesses and investors. What's more, Dubai has more or less established itself as the major trade and finance hub between the European and Asian time zones.

Companies in the Manaus free zone also benefit from tax exemptions and reductions, although not on the same comprehensive scale as those in the DIFC, or the 20-plus other free zones crammed into Dubai for that matter. Firms established in Manaus that meet certain requirements are exempt from import and export taxes, excise duties, and the PIS/PASEP and COFINS taxes, which are linked to imports. The key phrase here is "meeting certain requirements," for the guide to the Manaus free zone's tax incentives is 36 pages long – itself an indictment of Brazil's byzantine tax system, one of the most complex in the world. On the other hand, I wouldn't think that one needs to create new neural pathways between the brain's synapses to grasp the tax framework of the DIFC. In fact, in terms of regulatory and legal simplicity, Brazil and the UAE are poles apart; the UAE once again topped PwC's Paying Taxes index in 2016, while Brazil languishes in 178th.

Manaus's other obvious disadvantage is its far-flung location, which is deep in the Amazonian region of Brazil. The DIFC on the other hand is on the doorstep of one of the world's major aviation and shipping hubs and emerging financial centers. But I suppose a direct comparison between the two is unfair. Manaus was intended to provide employment in one of the most remote and impoverished regions of the planet, which it seems to be doing. The authorities in Dubai on the other hand had a blank canvas to create one of the world's most vibrant economies, and the money to see it through. Still, perhaps the Brazilian Government could be a little more helpful to Manaus by easing those tax requirements.

 

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

Dubai free zone

Kitty's Execrations

United Kingdom uncertainty

Costa Rica apathy

Brazil complicated

 

Ciao

Kitty



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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