Dubai is now uncatchable as a business hub for the region

Kitty Miv, Editor

January 3, 2013

Kitty's Kountry Rankings are below, with a description of how they are kompiled. This week, as every week, I give out three Encomiums to countries which have done Good Things, and award three Execrations for countries which according to my highly personal and partial views have done Bad Things.

A friend of mine took his family on holiday to Dubai just before Christmas, and apart from spending far too much money, reports back that the place is bursting with optimism and go-go spirits. It does seem to have put the real estate crisis well and truly behind it, and is now uncatchable as a business hub for the region, meaning not just the Mid-East, but a large swathe of Asia Minor and Africa. Now comes confirmation that Dubai's free zone courts are emerging as the common law forum of choice for international business in the region. While England was ruling the world in a commercial sense in the 18th and early 19th centuries, its accessible and business-minded courts were an essential component of its success; you are watching a similar scenario playing itself out in the UAE. All credit to the rulers who have permitted and encouraged such an unlikely development.

If having an independent and accessible judiciary is one of the hallmarks of a welcoming business location, and who will gainsay it? then Indonesia deserves a pat on the back for siding with an Australian company in a transfer pricing case against its own tax authority. I don't know too much about Indonesia, but it seems to have traveled a long way from the authoritarian, crony regime of yester-year, although recent rules about mineral extraction and processing seem counter-productive. I am tempted to mark the country down for all those endlessly repeated ads on Bloomberg, but that would be unfair, wouldn't it? I could always watch CNN or Euronews instead, although at the moment my television will only deliver the latter in Greek, for a reason no technician can understand. And my Greek, is, well, challenged! Anyway, a star for Indonesia, even if one swallow doesn't make a summer, and the legal system in general appears to be quite chauvinistic. It's based on civil law, as you'd expect with Dutch origins.

"XYZ To Slash Tax Rates In 2013". Now surely that is a headline that will lead to a Good Country prize? But it's Brazil, and we need to inspect the fine print very carefully before expecting any real progress; the notorious Custo Brazil awaits the unwary businessperson around every corner. There are three main components to the package, and the first is actually a tax increase, at least over 2012 rates, with the IPI sales tax returning to nearer its normal levels in 2013. But, obscurely, this amounts to a leveling of the playing field for foreign manufacturers, since the reductions in 2012 were only available to domestic manufacturers and foreign cars with high domestic content. Brazil was much criticized for this. The second plank is a reduction in social security taxes, and apparently a savage cut, from 20% to 1%; but it applies mostly to retail and construction. Surely it will have a boosting effect for local businesses, but it's not clear it will do much for international investors. Finally, the tired old ICMS is waved about again: the administration has been wanting to reduce ICMS (the state level VAT) ever since I started to write about Brazil, but the complications of federal/state rivalry and associated political power-broking have always stopped progress. The ICMS is a beast of ferocious complexity, but I see no reason for this government to be any more successful in taming it than were previous ones. So, only half a cheer for Brazil. At least they have good intentions.

Adopting children doesn't seem to be very close to international tax news, but of course in the Magnitsky affair the spring for later events was Russia's admission to the World Trade Organization, and after Russia's crass attack on American adoption of Russian children, there will be consequences for Russian/American trade and cooperation, although it is not easy to perceive yet what they may be. At all events, both countries deserve a black mark for having mishandled the matter, creating a major and unnecessary failure of international diplomacy, and certainly worsening conditions for companies doing business in Russia. The story starts with the Johnson-Vanik amendment in 1974, which withdraws Permanent Normal Trade Relations (PNTR) from countries with human rights abuses. Year after year, Congress has granted a waiver to Russia, but when Russia joined the WTO last year it was obliged to give the country permanent PNTR. This legislation was duly passed, but as a result of the Magnitsky incident (Russian lawyer assumed to have been killed in detention for trying to expose state involvement in the theft of US business assets) clauses were added in the House punishing Russian human rights violators with visa denials and asset freezes. The Magnitsky legislation may be justified, and might even have been effective, but it seemed an error to attach it to a trade bill, and the White House, to its credit, tried but failed to avoid that conjunction. It was inevitable that Russia would respond, and now it has, but in such a heavy-handed way that I fear some further escalation. The chairperson of the Russian Duma's Family, Women and Children Committee called it "using children as human shields." If we're lucky it will all blow over; but it's a sour end to a sour year, and nothing will now help the thousands of children incarcerated in Russian orphanages.

Since I'm writing this on New Year's Eve, I suppose it's right to end the year where we began, with the banks, and it's surely one that they will want to forget. My main question, and perhaps I am just being stupid, old-fashioned or both, is to wonder why, if Glass-Steagall was such an unmitigated disaster when it was tried in the 1930s, the separation of retail and investment banking would be any more successful today? During the year we've been over and over the unedifying reasons for politicians' dislike and persecution of high-flying, over-paid bankers, there have been many reports which absolved hedge funds and derivatives traders from any direct responsibility for the debt crisis (on the contrary, all evidence is that they restrain volatility), we have noted exhaustively that the debt crisis is caused by governments borrowing too much from willing banks; yet here we are at the end of the year as if none of this had ever happened, with the US far ahead with implementing Dodd-Frank (never trust a hyphenated law!), the UK going beyond the Vickers' Commission's trenchant proposals, and now the French in the vanguard in Europe with a Banking Bill that will surgically separate the suspect Siamese twins. Indeed President Hollande is the enemy of finance, but no problem, Francois, relax: you soon won't have any left to worry about.

Kitty's Encomiums and Execrations

Methodology: each week (this is the 33rd) three countries are given encomiums and three 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 has a ranking of ? 1, 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, falling back again in week 24 to minus two.

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:

Brazil may be reducing taxes

Dubai's courts on a roll

Indonesia being fair-minded

Russia being bearish

United States provokes Russia

And Kitty's Execrations:

France the bankers' enemy





Tags: construction | United States | social security | sales tax | Germany | transfer pricing | hedge funds | banking | retail | legislation | Dubai | court | trade | law | France | Australia | Indonesia | business | Brazil | Russia | tax

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