Guest Post: Where Taxes Are So Low, Some People Might Actually Pay…

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From Simon Black of Sovereign Man

Where Taxes Are So Low, Some People Might Actually Pay…

Do you remember those days, 25+ years ago, when the Olympic games
were an extension of the Cold War? We heard stories about these Soviet
athletes who were groomed, practically from birth, to become champion
athletes, taken from their families at a young age to live and train
nonstop for the glory of the Communist Party.

RUSU1827 193x300 Where taxes are so low, some people might actually pay...Bulgarians historically excelled at summer sports like boxing,
wrestling, track & field, and rowing, and today I worked out at a
gym that used to house the country’s up-and-coming athletes during
Soviet rule.  It’s in a neighborhood of old Soviet-era apartment
buildings, all built in that concrete shoebox style that defined
Communist architecture.

Such neighborhoods are a constant reminder of the days when they
allowed their society to descend into a totalitarian police state. A lot
of Bulgarians I’ve encountered seem embarrassed by these Communist
remains, brushing the entire period off as ‘experiments in socialism.’

They’re looking to the future now, and they’re cautiously optimistic.

When you survey the various countries in the former Soviet bloc, it’s
a truly mixed bag. East Germany, for example, enjoys a lavish economy
after being successfully reunited over 20-years ago thanks to an
incredible amount of aid and support from the West.

Slovakia has spent the last two decades creating a manufacturing
powerhouse for the rest of Europe, and its citizens today enjoy a much
higher standard of living than before.

Estonia built a very successful knowledge and services economy by
establishing a limited, low-tax, business-friendly government. When Mart
Laar took over as Prime Minister after Estonia’s independence in the
1990s, the only economic text he had ever read was Milton Friedman’s
Free to Choose. It’s fortunate for his country that it wasn’t Keynes.

Belarus descended even further into totalitarianism; Aleksandr
Lukashenko, the country’s first democratically elected president since
the fall of the Soviet Union, has remained in power ever since,
effectively seizing dictatorial control over every aspect of the economy
and society.

Ukraine continues to vacillate between revolution, corrupt cronyism,
and economic collapse… yet the country still has a lot of potential
thanks to its resource wealth and talented young work force.

Bulgaria, from where I write this letter, is an interesting case. As
the poorest member of the EU, there is a lot of opportunity at face
value. Labor is dirt cheap. Property is dirt cheap. Living costs are a
joke. English is widely spoken and is, in fact, more prevalent than
Russian in the capital city.

More importantly, the government is finally beginning to privatize
some of its state-owned companies, as well as make some
business-friendly decisions related to taxes.

Now, this is not a part of the world where tax compliance is
particularly strong. The immediate post-Soviet years turned the entire
region into a veritable Deadwood, and devoid of any functioning tax
authority, people got used to dealing in all cash and keeping 100% of
their earnings.

Several governments, including Russia, Ukraine, and Bulgaria, have
tried to make compliance easy by slashing tax rates. At just a 10% flat
rate for corporate, individual, and capital gains, and just 5% on
dividends, taxes in Bulgaria are now so low that some people might
actually pay.

For foreigners, it’s a boon. Bulgaria has an extensive network of tax
treaties with countries across Western Europe, Canada, and the United
States which ensure foreign-owned Bulgarian companies are only subject
to the 10% rate.  Using this ‘tax rate arbitrage,’ multinationals keep a
large part of their earnings offshore in lower tax jurisdictions.

At present, a number of multinationals have set up overseas
headquarters and manufacturing facilities in Ireland to take advantage
of that country’s low tax rate of 12.5%.  Given Ireland’s pending
bankruptcy, however, the government is under pressure to raise this
rate… and I expect that this will drive a number of companies to move
operations to Bulgaria.

Given the country’s low tax rates, cheap minimum wage of just
$185/month, and business-friendly policies, Bulgaria is a reasonable
alternative for companies that want to stay within the EU’s customs
union. Bulgaria is, after all, an EU member… though they likely
fabricated their financial statements to gain entry in the same way that
Greece did.

Simply put, Ireland’s decline will be Bulgaria’s gain, and the influx
of foreign investment will be of great benefit to this economy and
asset prices.

Meanwhile, entrepreneurs and investors looking to capitalize on
offshore tax treaty advantages, cheap talent, and a cost effective
European base may want to consider Bulgaria for their needs.