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COMMENT 13
THURSDAY JULY 26, 2018 • THEEDGE FINANCIAL DAILY

Pakistan needs an

independent civilian govt

Only such a non-military regime can solve the country’s problems and not the generals

For a civilian government to nor-
BY EDITORIAL BOARD Khan’s party and other candidates malise relations with Pakistan’s giant
Y et again, Pakistan’s priorities, including some known neighbour would infringe on the
equally sympathetic to the military’s
army’s dominance of foreign and
army seems intent on Islamic extremists.
Khan denies having the military’s

determining the out-
security affairs; declining tensions
would challenge its vast claims on
come of national elec- backing. But if he wins after all the
tions held yesterday. hijinks, he will inevitably face doubts
Unfortunately, that about his legitimacy. And whoev-
But if Pakistan is to escape its
means the polls almost certainly er takes charge will confront a dire state resources.
boom-and-bust cycles, it needs a
did not deliver the strong and inde- economic situation. civilian government strong enough
pendent civilian government Paki- The Pakistani rupee has lost al- to focus not on its own political sur-

stan needs. most 14% of its value this year. Foreign vival, but on the long-term needs of
Even for a country accustomed exchange reserves are running short. the economy.
to military interference in politics, The central bank, alarmed by the The government has to invest in

the current campaign stands out. country’s US$18 billion current ac- the health and education of the work-
Candidates from the former ruling count deficit, has hiked interest rates force to boost productivity, and enact

party, led by three-time prime minis- and restricted the import of more tough structural reforms to make
ter Nawaz Sharif, say they have been than 130 items. the export sector more competitive.
pressured to switch loyalties or be The country’s external debt and Imran Khan Pakistan’s economy has to be

hauled up on corruption charges. liabilities have risen to 31% of gross opened up to reduce rent-seeking
Sharif himself was forced to step domestic product (GDP), the high- and to make it easier to do business.
down for allegedly violating an ob- est in six years, and its credit rating And to attract the foreign investment
scure clause in the constitution, then has been downgraded to negative. the country needs, the government

was convicted on fl imsy corruption The new government will most Imports are up now in part be- tends to run into political diffi culties is going to have to shed all support
charges and sentenced to 10 years likely need to approach the Interna- cause of machinery brought in to seemingly engineered by the mili- for militants.
in prison. tional Monetary Fund for a bailout, build China’s Belt-and-Road pro- tary. (The regime of former military China has stepped up its aid. In

Members of the press have been less than two years after an earlier jects in Pakistan. dictator Pervez Musharraf was an just the past fiscal year, it has ex-
harassed and threatened; one crit- emergency infusion of US$6.6 billion Meanwhile, export industries exception.) tended Pakistan an additional US$5
ic of the military was abducted in was paid back. have been shrinking to the point The generals turned on Sha- billion in loans.

Lahore. (The army denies any in- Pakistan has needed a dozen such where they now account for barely rif three times — most recently, it But China’s largesse is not unlimit-
volvement with press harassment bailouts over the past three dec- 7% of GDP — about one-fourth the seems, because he tried to improve ed. Ultimately, only Pakistan’s civilian
or election interference.) ades, as every short-term eff ort at average for developing Asia. ties and trade with India and chal- leaders can solve the country’s prob-
The campaign seems designed to economic reform has given way to The trouble is that every new gov- lenged the coddling of Islamic mil- lems. The generals should stop mak-

clear a path for ex-cricketer Imran more profl igate spending. ernment, often within a year or two, itant groups. ing their job harder. — Bloomberg
Fighting tax dodgers can kill economic growth
recorded by multinationals and lo- France, Germany and the US criticise or pay out as taxes. As of March 31, imposed a levy on income generated
BY LEONID BERSHIDSKY
cal firms in a country per dollar of them for facilitating profi t shifting. Apple was holding US$267.3 billion by intangible assets in tax havens; it

wages paid. But it also caused large profit of cash and equivalents. Even though is a prime candidate for unintended
On average, a company makes 36 drops for the 682 US fi rms, including the company distributes enormous consequences.
US cents (RM1.46) in taxable profi t major ones such as General Electric amounts of the cash to shareholders
IT is easy to be outraged about mul- for every US$1 of wages in a non-ha- and most of the US pharma industry, through dividends and stock buy- Best approach?
tinational corporations’ shifting of ven country. that were using the loophole in 1995. backs, it still has more than it knows The best approach to profi t-shifting

profits to tax havens, but much hard- In low-tax jurisdictions, the ratio Serrato calculated that the ef- what to do with. would involve all countries agreeing
er to figure out how to stop them soars — to more than 100% in Singa- fect on their income was equiva- The 2017 US corporate tax reform, on certain taxation principles, a pro-

from doing it without hurting the pore and Hong Kong, to more than lent to that of losing US$232 billion which allowed companies to repat- ject on which the Organization for
economy. 200% in Ireland, Luxembourg and (RM941.92 billion) in combined riate overseas cash piles formed by Economic Cooperation and Devel-
Evidence exists that curbing tax Puerto Rico. sales. profit-shifting at the cost of a 15.5% opment works with more than 100

avoidance opportunities makes The example of that US territory, That, according to Serrato, trig- one-time tax payment. jurisdictions.
these firms move actual jobs, not coincidentally, is used in another gered a decrease in US investment Quite a few multinationals have But in a world where the US pre-

just accounting profi ts, overseas. recent paper, by Juan Carlos Suarez and the shifting of actual production done so and followed Apple’s exam- fers to take unilateral action and

In a recent paper, Thomas Serrato, to study what happens when to cheaper countries. The repeal of ple in showering shareholders, and even fight trade wars, its multina-
Torslov, Ludvig Wier and Gabriel a government actually tries to curb §936, according to Serrato, cost the sometimes employees, with the cash. tionals are vulnerable to all kinds
Zucman argued that governments profi t-shifting. US economy a million jobs. And yet they are left with huge, of one-sided tax actions.
throughout the world are cutting Between 1921 and 2006, US mul- Causality, of course, is always a ineffectively used war chests. Both Zucman and Serrato be-

corporate tax rates (to an average tinationals were exempt from taxes concern in studies of this kind. Ser- Last year, McKinsey estimat- lieve it could be reasonable to tax
of 24% today compared with 49% on income earned by their Puerto rato checked his fi ndings against ed the 500 largest non-fi nancial profits according to where they were

in 1985) simply because they have Rican affiliates under a regulation data on firms that were not exposed companies had accumulated US$1 earned, not where the accounting

given up on trying to fight profit known as §936, after the relevant to the §936 repeal and confi rmed trillion more than their business- department decided to book them.

shifting, defined as the recording section of the US tax code. they were robust. es needed. The current rate of in- If the European Union, whose

of accounting profits in low-tax ju- In 1996, the exemption was re- Based on both Zucman’s and Ser- vestment and payouts to investors economies, according to Zucman
risdictions. pealed with a 10-year phase-out rato’s research, one might conclude is nowhere near enough to draw and collaborators, lose the most tax
“Machines don’t move to low-tax because legislators decided it was that letting firms shift accounting that down. revenue thanks to profi t-shifting,

places; paper profits do,” the econ- doing more harm in the mainland profits allows them to keep more Policymakers should still keep applies this approach unilaterally,
omists wrote, estimating that about US than good in Puerto Rico — es- money for investment and job cre- looking for ways to tax the excess US tech and pharmaceutical fi rms

40% of multinational profits were ar- sentially the same argument Torslov, ation, while at the same time sup- profits — but without creating un- could experience a shock similar to

tificially shifted to tax havens in 2015. Wier and Zucman make concerning porting the low-tax countries with wanted effects like those caused by that of the §936 repeal.

the shifting of paper profi ts. extra revenue. the §936 repeal. Then, their US investment and

Scale of profi t-shifting The repeal of §936 contributed But though that looks like a win- Serrato cautions that moves to job creation would suff er, contrary

The authors used an ingenious de- to Puerto Rico’s financial crisis — a win situation, it is actually imperfect. curb profit-shifting should not be to the intentions behind US Presi-

vice to describe the scale of the prof- consequence countries like Ireland Corporations end up sitting on unilateral. dent Donald Trump’s tax and trade

it-shifting: They calculated the profi t and Luxembourg fight to avoid when huge piles of cash they do not invest The US tax reform, for example, policies. — Bloomberg