Tax Break

John Fisher, international tax consultant

The Celtic Tiger changes its stripes

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I can’t wait for 2046

The biggest debunker of conspiracy theories has to be what the British call ‘the thirty year rule’  for the declassification of secret documents. It is not that the released documents reveal the truth (the really juicy ones are locked up for far longer); it is, rather, the realization that the behind-the-scenes machinations of government way back then were far more chaotic than anything we imagined at the time. Conspiracies need thought.

So, my conspiracy theory about Ireland’s mammoth tax bill  to pharmaceutical giant Perrigo towards the end of last year will probably be utterly disproven sometime in 2048. But, by then I will be either dead or too old to care. So, here goes.

The (undisputed) story:

In 2013 the (undisputed) Irish Elan Corp sold its interest in Tysabri, a multiple sclerosis drug, to Biogen Idec Inc for a lot of money. A few months later (undisputed) US corporation Perrigo Inc entered into an inversion transaction with Elan. The transaction involved the smaller Elan achieving ownership of Perrigo, with the Perrigo shareholders receiving a majority of the shares of Elan. The principal  (undisputed) advantage to Perrigo was a reduction in future tax. This would be achieved by (calculated conjecture) including future non-US acquisitions under the Irish parent, thus bypassing the then draconian US tax system, and engineering debt from the US to the Irish parent. The latter  would reduce US taxable income at 35%, and increase Irish taxable income at rates of between 0% and 25%, with the Irish foot secretly holding the scale at the lower end thanks to leprecaunish Irish wheezes such as the Double Irish and Single Malt schemes ( the Irish clearly chose names they were convinced could never be traced back to them).

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Ireland is quite a distance

In December 2018 it became known that the Perrigo group (Elan had very cleverly changed its name to that of its new subsidiary) had been issued a bill by the Irish tax authorities for  €1.64 billion. The justification was the reclassification of  the profit on sale of the intellectual property to Biogen from trading income (somewhere between 0% and 12.5% tax) to capital gains (33%). Perrigo promptly announced  that  it was suddenly hard to run a US customer-service organization from the other side of the pond. It is now rumoured that the group is threatening shelving plans for expansion in Dublin unless, presumably, their appeal against the tax assessment is successful.

And now, the conspiracy theory:

As opposed to the $13 billion tax claim from Apple forced upon Ireland by the EU (poor Ireland), the issue  here is what one commentator called Tax 101 – the party trick of tax advisers worldwide walking the tax classification tightrope between capital gains  and trading income, ready at all times to pull the tax-saving bunny out of their moneybags. The sale of the IP was several months before Perrigo merged into Elan. It is to be presumed that Perrigo ordered a tax due diligence, and even if some bits and pieces were obscured by the Guinness, had some inkling of a potential €1.64 billion tax bill. Either they received an utterly obese indemnity from Elan’s shareholders, or there was a clear understanding from somewhere that lreland’s long-standing open-sewer policy of encouraging American investment at all moral cost meant that the authorities could be expected to stay out to a liquid lunch.

Fast forward to the beginning of 2018, and the US had a new tax law . The complementary regimes of Foreign-Derived Intangible Income on certain income of US companies from abroad, and Global Intangible Low Taxed Income of non-US subsidiaries, established a planning benchmark US effective tax rate  in either case of  around 13% . Add to that new inversion rules and restrictions on interest deductibility, and the question that comes to the befuddled mind is: ‘Why Ireland?’

So, what does a country do when its economic raison d’etre is disappearing down the  sewer? It takes a leaf out of Donald Trump’s book – and thinks protectionism. But, in the case of Ireland – other than its beer and whiskey industries – there was precious little of its domestic economy to protect. Other  than its tax advantage, that is.

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And where do you think you’re going?

In October 2018 the Irish budget included, as expected, Controlled Foreign Corporation provisions as required by the EU (see Tax Break 1/1/19). What wasn’t expected was the early imposition of an Exit Tax (which was not due until 2020). Companies wanting to expatriate from Ireland will now face a 12.5% ‘capital gains tax’ – or, in other words, they are pretty well stuck.

All this opened the door for the Irish Treasury to take off its kid gloves, and treat captive foreign companies just like any other. The Irish seem to be saying to Perrigo: ‘You can check out any time you like. But you can never leave.’ I wonder how many Irish-Americans there are in California.

 

Telling it like it isn’t

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Very last call …

A rabbi, a priest and the secretary-general of the OECD walk into a bar… Not heard that one before? Read on.

Last Wednesday, January 2nd, as the 20th Knesset breathed its last before flatlining in the run-up to a General Election, the Finance Committee approved regulations paving the way for the introduction of the international ‘Standard for Automatic Exchange of Financial Account Information in Tax Matters’.

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Game over

The New World Order, where there is nowhere for the less-than-honest to hide their ill-gotten gains, has been heading this way to much fanfare for some time. Too long, in fact. Israel signed on to the G20/OECD 2014 initiative early on, and was committed to having the necessary legislation in place by January 1st 2017. This was to be followed by necessary bi- or multilateral agreements (it committed to two multilateral ones), necessary bilateral commitments to ensure  the other side would respect confidentiality – as well as being both legislatively and operationally sound – and technical guidance to Israel’s banks on how to provide data on accounts of foreign resident in standard international format (so they could be easily deciphered at the other end). Information exchange was to start in September 2018. In fairness, Israel didn’t score too badly other than on one rather critical point – although legislation was in place in mid-2016, well in time for the 2017 deadline, it could not come into force until accompanying regulations took effect.

Well, as the naysayers would have it, a miss is as good as a mile and the road to hell is paved with good intentions. By December 2018, there were only seven countries that were non-compliant: Antigua & Barbados, Brunei Darusallam, Dominica, Niue (is that a country or a spelling mistake?), Qatar, Sint Maarten and … Israel. This prompted a desperate letter from the secretary-general of the OECD to Israel’s prime minister, and the eleventh hour passing of the regulations last week, exactly two years and one day late. If you are going to be late, you might as well do it in style.

What went wrong?

The required regulations, as the American FATCA information exchange regulations before them, hacked at one of the mainstays of ultra-Orthodox society (and a much valued traditional Jewish institution)  – the ‘Gemach’. The concept is a simple one. Groups of largely anonymous donors provide money to an intermediary who generally disburses the funds as interest free loans to those in need. In the event the borrower is unable to repay, the donors (who have generally kissed goodbye to the money) have no recourse. Until now, these arrangements have had no legal or regulatory basis – essentially private arrangements that could run into incredibly large sums. When FATCA came along, Israel’s banks started closing Gemach accounts as they were unable to verify to the US authorities that there were no US ‘depositors’. On the other hand, as the chairman of the Finance Committee repeatedly protested, requiring a donor who gets nothing other than a place in Heaven out of the whole process to fill in forms for the tax authority is a kiss of death for the institutions.

A solution was found, with the evident acquiescence of the US authorities, for small Gemachim, and in August 2016 Gemachim generally were given two years grace, in which time they would – against their will – be brought under regulation, and they could organize their affairs to be compliant for the banks. To cut a long story short, after a lot of weeping and gnashing of teeth, including the flat refusal of the Bank of Israel and Capital Markets Authority to supervise them (The Capital Markets Authority lost, and ‘won’ the job), the very last piece of legislation to pass its third reading in the 20th Knesset was the attrition-much-reduced Gemachim Law, which paved the way for the Chairman of the Finance Committee to agree to approve the information exchange regulations.

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The only thing crooked about him

Had the script of this farce been written by the 2008 financial crash’s moral voice, then Archbishop of Canterbury Rowan Williams, the Finance Committee and Israel might have walked away with their heads held high. Williams had maintained that the ‘markets’ that bankers claimed dictated the path of the financial system, were – in Judeo-Christian – terms a form of idolatry, something man-made being attributed independent powers. He argued that modern financial transactions lacked the face-to-face component of yesteryear – it is much easier to default when lenders are obscured behind a curtain of intermediate transactions than when recognized at an individual or community level. Here were self-regulating funds that should not be collateral damage in the post-2008 meltdown regulatory war against the unfettered avarice of the players in the financial markets.

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There are always the traditional methods

However, Anglicanism hasn’t had much of a look-in around these parts since 1948, and  the ‘guilty’ Knesset Finance Committee was chaired until last week by an ultra-Orthodox rabbi-politician not given to philosophical musings, but rather to horse-trading in the name of his flock. The reason there was a need for a law regulating the Gemachim was that a number of them, predominantly in the United States and Israel,  had been the facilitators of big-time money laundering and tax evasion. A war of attrition in the long process of arriving at the final wording,  holding the inevitable (and, hence, unforgiveably late) information exchange regulations hostage,  is considered  to have severely compromised the regulatory effect of the law. Any collateral damage ultimately suffered by the moral majority of Gemachim is thanks, therefore, to the unsavoury dealings of some of their number, rather than the excesses of the financial system.

The last weak joke of the 20th Knesset…

Double Dutch

Another way to keep the tax bill downBack in the days when there were twelve pence to a shilling and twenty shillings to a pound, there was an urban myth of a retired Maths teacher who runs into his worst student as the latter climbs out of a Rolls Royce. The younger man embraces his old nemesis, proceeds to thank him for the great Maths education that enabled him to succeed, and declares: ‘I buy ties for a pound, sell them for one pound ten shillings (Google translate: £1.50), which means a ten per cent gross profit. My after-tax earnings are amazing’.

As 2018 was drawing to a close, Holland appeared to be having a similar problem with basic Maths in meeting its commitments to the European Union, albeit that the EU had itself been guilty of gross bureaucratic circumlocution.

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How will the EU manage with the English language when the UK leaves?

In 2016, the EU issued its ambiguously entitled, ‘Anti Tax Avoidance Directive’, which might have been the credo of our low-taxed tie entrepreneur had it not been for the fact that the text made very clear that this was a pro-tax directive aimed at ensuring there was no avoidance. It was however a warning that members would be dealing with poor-language damage control. The Directive directed that interest limitations, exit tax, hybrid arrangements and controlled foreign corporations (CFCs) all had to be dealt with in individual national legislation by the end of 2018. So far, so clear.

As summer gave way to autumn (and, in some cases autumn gave way to winter) member states seemed to inexplicably vie for last place in the legislating stakes, despite having no ultimate choice – even the hapless British, who were hanging off the edge of the EU, had to comply.

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There are other ways of solving the problem of offshore jurisdictions

As the stragglers came on board, thanks to the abovementioned Dutch, there was one curiosity deserving attention. The Controlled Foreign Corporation (CFC) has been with us since the week of the Cuban Missile Crisis (CMC) in October 1962, when John F Kennedy (JFK) signed the US version into law. In a nutshell, despite jurisdictions adopting various incarnations of CFC, the underlying nous is that certain income either parked in or diverted to a low-tax jurisdiction is to be taxed on a current basis in the hands of the parent as if a dividend has been distributed.

One of the features common to most CFC regimes is that the calculations are objective – identify the item and tax it. The EU version offers two options to choose from. Option A is the traditional method – identifying specific types of income, while Option B has CFC provisions stepping in where state-of-the-art Transfer Pricing isn’t satisfactory. Option B is clearly subjective, and seems to beg to be ignored (when was the last time a company volunteered that its transfer pricing wasn’t up to much?)

Common to both methods, however, is the ownership level triggering CFC, and the rate of tax below which the CFC legislation can apply. That last point is where the Netherlands  appear to have lost track of the numbers, and the EU to have lost track of its mind.

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I think I’ll stick with the mind reader

We all surely remember the ‘great’ mind-reading trick of our youth – telling some unwitting stooge (usually a younger brother) to ‘think of a number, double it, add X, divide by two, and take away the number you first thought of’. The answer, due to the rudiments of Mathematics, was always X/2.

Well, the Directive establishes low-tax for CFC purposes by the following calculation:

‘The actual corporate tax paid on its profits by the entity or permanent establishment is lower than the difference between the corporate tax that would have been charged on the entity or permanent establishment under the applicable corporate tax system in the Member State of the taxpayer and the actual corporate tax paid on its profits by the entity or permanent establishment.

Now, as hard as I try, I  cannot interpret this gobbledygook as anything other than a horribly complex and roundabout way of arriving at half the parent company’s corporate tax rate. Almost all the EU member countries appeared to come to the same conclusion. However, not the Dutch. Perhaps the official Dutch translator in Brussels was drunk or stoned, but after a lot of bellybutton watching in recent months over an initially proposed 7%, they finally plumped at the eleventh hour for 9%. Despite wrestling with every combination of current and proposed higher-income and lower-income Dutch corporate tax rates, I could not justify 7% or 9% when fed into the above ‘equation’.

So, what is happening? As far as I can see – nothing. The EU bureaucracy is in Christmas hibernation, with instructions only to be aroused from its slumber by occasional wake-up coughs from the tiresome British.

It will be interesting to see if, now we are in the New Year, anybody notices.

Happy New Year – especially to my Dutch friends.

Comfort and joy (for some)

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This Prime Minister doesn’t need a babysitter

Several years ago I wrote a newspaper article about a fresh addition to the Israeli Income Tax Ordinance that included four subparagraphs. Or, at least, there should have been four subparagraphs. The fact that there were only three made the whole thing toothless. My tongue-in-cheek piece suggested a scenario where the Knesset Finance Committee was working late into the night, and the person with the most tax knowledge received a phone call that they had to relieve the babysitter – so they all went home. Joke – right? The following day I received a call from a senior tax official asking me how I knew. You couldn’t make it up.

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If you pay peanuts….

The drafting of tax legislation in this country is often notoriously slapdash. But, that doesn’t explain all the problems with tax statute. For a start, there is the pain of keeping up with changing business environments – just look at the mess the international tax system is in over taxation of the digital economy. And then there is accounting. Corporate taxation is based on accounting profits.  Once upon a time, thanks to the ancient simple art of double entry bookkeeping, the profit and loss account was a fairly close reflection of the dollars and cents performance of a company give or take capital expenditure, debts, liabilities, inventory, and the odd accrual . A few additions and deductions and the taxman could take his toll. An explosion of accounting standards plus that thing they call IFRS led, in recent years, to more adjustments to the accounting profit than fairy lights on a Christmas tree – but as long as tax departments kept their heads, it could be handled. Almost.

For reasons best known to the British Mandatory Authorities that planted the seeds of our tax law, dividends – while mentioned freely throughout the Ordinance – are not defined for tax purposes. The upshot is that they go according to company law and are ultimately calculated in line with the latest whim of the accounting wonks in their ivory towers. That means that a company can distribute either more or less than its taxed profits. It’s the ‘more’ that bothers us here – or more precisely the parties to a court appeal that was heard this month.

Israel adheres broadly to the classical system of taxation – corporate profits are taxed twice, first at the company level, and then in the hands of  the individual on dividend. In order to avoid taxation mushrooming to three, four or heaven knows how many times, if there are several layers of companies passing dividends up the chain, Israel generally exempts intercompany dividends on which Israeli corporation tax has been paid. The second level of tax waits for distribution to the individuals right at the top.

General view of Buckingham Palace in central London.

Rumour has it, her great-great-great-great grandfather bought this place for a fiver.

That last paragraph probably sounds logical to anyone reading this – but it demanded a 39 page, beautifully reasoned ruling by the judge to put it to bed. The appellant company had received accounting profits from a subsidiary manufactured from the revaluation of certain real estate on which tax had, correctly, not been paid as the real estate had not been sold. The tax authorities and a judge had already told the appellant that the intercompany exemption didn’t apply. The company decided to try its luck on an appeal using a combination of sophistry (the wording  – but not the intention – of the law was, indeed, pitiful), a real concern for future double taxation (the subsidiary would be liable to tax on sale of the real estate even though tax was being paid now by its parent), and a childlike plea that, if all else failed, could the nice judge please treat the whole thing as a nightmare and pretend the dividend didn’t happen.

The judge wasn’t having any of it. He countered their sophistry with his own, and treated the request to reverse the transaction like a parent  explaining to a 6 year old that Santa doesn’t really exist. That was all reasonable and fine – but, it was the double tax issue that restored my faith in a system that so often seems broken.

The judge analyzed the concept of avoiding double taxation in Israeli law. He noted that, while the double taxation issue is an important principle underpinning the law, there are situations where double tax applies – predominantly where there is a change of ownership in-between certain transactions. Had the appellant sold the shares to a third party, its representatives would not have been in court arguing that – because the subsidiary company would have to pay tax again in the future on sale of the real estate (the value of the shares sold now would already have taken into account the increased value once), it should be relieved from the resulting double tax.

The Ten Commandments. Image shot 1956. Exact date unknown.

Thou Shalt Not Steal

So, armed with that logic, the judge rejected the appeal and insisted that tax was payable on receipt of the dividend. However, he literally ‘commanded’ the tax authorities to relieve any subsequent sale of the property from double tax, as long as there was no change of ownership in the meantime. That produced a result in parallel with normative Israeli law, as opposed to a narrow, literal interpretation that could have caused unnecessary hardship.

All too often, tax rulings rely on logic as much as  a fish relies on a bicycle. Not this time.

A Merry Christmas and Happy New Year to all those celebrating.

Tales from the Crypto

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There were always a few kids in the class who refused to look at the camera

Kurt Vonnegut famously said: ‘True terror is to wake up one morning and discover that your high school class is running the country’. The G20 summit in Buenos Aires earlier this month spawned a myriad online articles about the international taxation of cryptocurrencies (Bitcoin etc). Intrigued by the efforts of my ‘classmates’ (most of them belong to my generation) to get their heads around a difficult subject, I delved in only to find an even truer terror: ‘To wake up one morning and discover that your children’s high school class is running the online economic press’.

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You could forgive the journalist for missing the nuance of the paragraph break

My suspicions were aroused when I noted that each and every article relied on the same statement of a Japanese news agency ‘drawn’ from the final declaration of the summit. To anyone with a modicum of tax knowledge,  it was clear that the Japanese rumour-monger had got their taxes in a twist. With immense determination unknown to the younger generation, I spared no effort in googling: ‘G20 Buenos Aires final declaration’, the text of which, lo and behold, appeared before my very eyes. A further 5 minutes spent actually reading the entire thing (f-i-v-e whole minutes!) produced the answer. A bland paragraph  including reference to the need to regulate crypto-assets against money laundering and terrorism, followed by another bland paragraph about BEPS that even my classmates could understand. Somebody clearly forgot to tell the Japanese reporter that there is a reason for paragraph splits in the English language, and somebody forgot to tell the on-line reporters – who it appears don’t know what it is to get off their backsides for a story – that they should not blindly rely on every piece of fake news they read online. Bottom line – the G20 summit was silent on the taxation of cryptocurrencies.

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At least the Germans have always understood what money is

In the meantime, cryptocurrencies have been in free fall, and the world’s tax authorities may be about to regret their approach. Although cryptocurrencies have been around for a while, tax authorities were slow to sink their teeth into them. By now, possibly encouraged by price increases in 2016 and 2017, most jurisdictions have come to the conclusion that they are legally assets rather than currencies. As such, the exemptions that often exist  for individuals on exchange rate differences do not apply. In general, capital gains tax will be charged on realized gains (most authorities have at least managed to convince themselves that VAT should generally be avoided).But there is still confusion – as late as October 2018 an IRS Advisory Committee asked for certain clarifications from the IRS, while possible British taxation runs right across the spectrum depending on circumstances. Germany has a slightly different approach, having recognized them as money. At the same time, Israel took a literal view of the definition of currencies in its tax ordinance (cryptocurrencies do not qualify), and is there in the conservative pack.

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And what’s wrong with gambling?

The catch for tax authorities is that, by insisting gains are taxable, they have to recognize losses as allowable – and the losses in 2018 have been horrendous. If that G20 paragraph on regulation is properly acted upon, the days of wild fluctuations may be numbered in 2019 – and the pain of what was a bad gamble by individuals on something totally speculative, will be irrevocably shared by national treasuries. Maybe it is time to pass the baton to my grandchildren’s generation.

Wakey-wakey!

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Two minutes to midnight

It is the morning of the Maths exam that will decide which, if any, university awaits the candidate. He/she suddenly realizes that he/she hasn’t even started learning the syllabus.

How many of us have periodically woken in a cold sweat from that nightmare in the course of our adult lives?

I sometimes feel that, especially around the December full moon, tax advisers do their darnedest to  induce such feelings in the populace with ‘Achtung!’ articles of what must be done  (but clearly can’t be achieved)  before drawbridges go up for the Christmas/New Year break.

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Don’t panic!

I only ever tried to panic a prospective client once. (I warned a foreign company that  they needed to get their VAT house in order to avoid risk of  criminal prosecution, they ignored me and went to an alternative firm that proffered soothing advice, and they were criminally prosecuted two years later).

So, allow me to preface my remarks on Israel’s  10 year tax exemption period for first-time and certain returning residents by stressing that they are not aimed at those whose benefits end in the next few weeks, but rather in 2019 and thereafter. People who arrived on their equivalent of the  Mayflower  in 2008 (or earlier) are either sorted out, or the best of luck.

Everybody – that is the entire Jewish world, the OECD and the IMF – by now knows that Israel has operated a territorial tax system for first-time and certain returning residents since 2008 (with retroactive force to 2007). The law states that a first-time resident or veteran returning resident is exempt for ten years from income produced or derived outside Israel or whose source is in assets outside of Israel, as well as capital gains from the sale of such assets. The problem is that (from my experience) many mistakenly believe that, as long as they don’t go to work on a kibbutz milking cows, they can forget about tax for ten years. In reality, even those who do not incur any Israeli taxation during the exemption period need to be prepared for the day at the end of the decade when they fall off the tax cliff.

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New olim, yes. New residents, perhaps

First of all the good news. Despite the drafting of the law being as hopeless as much other tax legislation in the country, more than ten years down the road the  tax authorities seem to have made their peace with much of the excruciatingly inconsistent language, as well as the fundamentals of residence. Grammatical glitches appear to have been passed over unnoticed, and nobody seems to be bothered about the repeated careless use of the word ‘Oleh’ in pronouncements, aliyah not being a prerequisite for tax residence. 2018 saw the first annual filings of residents coming out of the ten years (for the 2017 tax year), and most of the reporting snafus will presumably be ironed out over the coming months. Similarly, some of the more heroic assumptions required as the assessee slowly glides out of the exemption period (there are special provisions for capital gains) can be expected to be blessed, or otherwise, by the authorities.

As people start to report, the authorities could take an interest in the exemption period, looking for amounts that should have been reported despite the exemption.

In any event, among the issues assessees need to be considering as the watershed approaches are:

  1. When did they actually become resident? Although, in terms of the wording of the law, residence under domestic law as opposed to treaty is an annual thing, the authorities have repeatedly made clear in writing that they interpret it as something that can change mid-year. So far, so good. The problem is that their pronouncements on when the ten years actually starts have made clear it is not necessarily the night they give you a funny hat and a flag at Ben Gurion airport if, for example, there was already a home in Israel and/or significant time has been spent in Israel.
  2. Are they sure none of their income was ‘produced or derived’ in Israel, and thus liable to tax? There have been rulings over the last decade concerning new residents working  with foreign companies from Israel ‘by remote control’ through internet, e-mail etc, or trading foreign securities from Israel. The tax authorities are operating an amnesty procedure until the end of next year – although if an anonymous request is desired, it has to be made by the end of this month (ouch!).
  3. Corporate structures abroad, while being convenient as long as Israeli taxation does not apply, may need reorganizing. That is something that generally needs to be done while the exemption is still in place.
  4. Decisions need to be made regarding whether to realize assets – significantly  parts of securities portfolios  – before the end of the exemption period, or to benefit from the only gradual linear increase in capital gains in the post-exemption period.
  5. Thanks to developing legislation since 2006, trusts are supposed to be largely tax neutral – but there are still some horrible jagged edges that can create nasty tax accidents . There are certain benefits to new-resident settlors or beneficiaries that soothe the pain as long as the exemption period lasts. The long-term future of such trusts needs to be considered.
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Public Service Announcement

I sincerely hope this hasn’t scared anybody. I prefer to think of it as a Public Service Announcement. Really.

Bad Cumpany

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‘Come, come Mr Bond’

If, like me, you have been wondering for decades what the European Parliament is there for, wonder no more. Following a recent vote, the august institution is considering  setting up an investigations unit to tackle two humongous European fraud schemes  named improbably  ‘cum-cum’ and ‘cum-ex’. The first warning that something was afoot came in 1992, and the fan turned brown in 2017, but the wheels of power turn slowly in Strasbourg. (Or was it Brussels? Or Luxembourg?)

For those without a Latin education, the schemes translate as ‘with-with’ and ‘with-without’. It would be nice to leave it at that, but I had better explain.

Both schemes revolve around dividends on stocks. A stock is cum-dividend when a securities buyer is destined to receive a dividend that a company has declared but not paid. That is the status quo (more Latin) until the date at which the stock trades ex-dividend – when the dividend will go to the seller. Thanks to lacunae (Latin noun – first declension nominative plural, like mensa/mensae) especially in German law, but evidently in about ten other European jurisdictions, bankers and the other usual suspects were (possibly still are) able to bleed national treasuries of scarcely imaginable sums.

The cum-cum smacks more of an old-style tax avoidance scheme than hardcore evasion. Stocks of German companies held by foreigners who were not eligible to  dividend witholding tax exemption were ‘lent’ (effectively sold with an agreement to repurchase , – but it isn’t written that way) to bona fide German banks shortly before a payment date. The stock went back at a lower price without the dividend. Naughty, but with loud protests that it only made hay while the legislators slept. There was one exemption, and the bank had a technical right to it.

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He knew how to make sure a secret was kept

Cum-ex was a far dodgier form of exploitation, which did not rely on foreigners. It did, however, require collusion and, on the grounds that ‘two people can keep a secret as long as one of them is dead’, it was bound to be found out eventually (having said which, the German and other authorities seem to have made gargantuan efforts to miss what was going on beneath their noses). Basically, a bank would ‘borrow’ stocks cum-dividend within two days of the dividend payment date and would sell them (short) to a third party. Delivery was required in two days, by which time the stock had gone ex-dividend. The procedure in force until 2011 in Germany (and heaven knows what is still happening elsewhere) was that the bank had to make a compensatory transfer between the seller and the buyer for the net after-tax amount of the dividend, and then issue a certificate of withholding to the buyer even though he did not actually receive the dividend. The theory went that the seller would no longer be entitled to that withholding as he had transferred the dividend amount to the buyer, and therefore would not receive a withholding certificate. Aye, and there’s the rub. The short seller of the stock was not the ultimate owner and had not suffered the withholding tax. The ultimate owner also received a witholding tax certificate (if handled correctly, the number of withholding tax certificates could be multiplied) enabling two or more ‘owners’ to cash in on the same tax benefit. This is not clever tax avoidance. It is clearly tax evasion. And it has cost European state coffers an estimated €60 billion.

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The words ‘company’ and ‘companion’ derived from the Latin ‘cum panis’ – with bread

But, at least we know we can now sleep safe at night in the knowledge that the European Parliament is on to it. It has only taken them 26 years. Rumour has it that MEPs are soon to issue a communique announcing the end of the Second World War. The suspense is killing.

 

Before our very eyes!

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The Ten Commandments weren’t supposed to be easy

When it comes to aphorisms, ‘Oldie but Goodie’ is high on my list of suspect examples. Generally quoted by the generation above mine to fill the void of laughter following a particularly hackneyed joke,  it only  rolls happily off the tongue when served with lashings of irony.

Such was my reaction to a ruling published by the Israeli tax authorities the other day. It stumbled through a long preamble, only to mention, before things really warmed up, that it was essentially in line with another ruling from Christmas week in 2016. It begged the question: ‘ Why waste busy peoples’ time knocking out another one?’ Was it because it was so enjoyable the last time, we had to be fed it again?

Not quite.

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‘Well they would, wouldn’t they?’

The new ruling, though causing no surprise to the cynics that make up the numbers in our profession, is well beyond a joke. The Man on the Clapham Omnibus would surely ask: ‘How could they?’

Well, they can, and they did, and it was obvious they would.

The ruling related to an individual who had left Israel for the US, breaking residency, and  subsequently returned home. As part of his US salary package, he received options with various vesting periods. The tax authorities had to decide what part of the financial benefit from exercising the options should be taxed in Israel.

Thus far, we were in 2016 country. That ruling, based on court precedent, established that the profit earned abroad from options exercised while the individual was still abroad would not attract any tax in Israel, as it was not sourced in Israel. So far, so good. Given that information, and asked an inane quiz question: ‘What  taxation would apply to the profit earned abroad during the vesting period if the options were simply exercised in Israel on the individual’s return to Israel?’, our Clapham Omnibus gent would reasonably have come up with: ‘Zero’. At that point, the trapdoor under his upper deck seat would have opened and sent him crashing into the arms of the conductor collecting fares below.

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‘You’ve got to pick a pocket or two’

The decision given, in 2016 and once again in 2018, was that – although Israel operates a standard modified personal tax basis (Israeli residents are taxed on their internationally sourced income, and foreign residents on their Israeli sourced income), as salaried employees are charged to tax in Israel on a cash basis, the entire amount should be charged to tax in Israel, even though it was not sourced in Israel.

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A rare oldie but goodie

The 2016 decision, with its literal accuracy but flawed concept (cash basis is a timing concept, not a country source concept), stopped there. Clambering to his feet, the bus inquisitee – still hoping for the holiday for two in Benidorm – would have accepted the challenge of the next question: ‘If the individual once more leaves Israel, and he subsequently exercises options abroad, part of the vesting period of which was while he was Israeli resident, what would be his tax in Israel?’ Easy! Already seeing in his mind’s eye his six-pack lying on the beach next to his bright yellow lilo, he would answer: ‘Zero! He is on a cash basis!’ At which point the floor would open up and – if he managed to avoid the rear axle of the bus – he would be left, not believing his bad luck, in the middle of the road, holiday dreams in tatters. All thanks to the November 2018 decision that – correctly – states that the income sourced in Israel is taxable in Israel with no reference to where it was received. The problem is that it also restates the 2016 ruling’s cash-basis conclusion, making it inconsistent and illogical.

The 2016 ruling brought a sardonic smile to my face. The 2018 ruling is laughable.

I think I’ll try this one on my kids.

It’s just not cricket

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He might still need more proof of residence than this

Last month’s news from India, that tax residency certificates would no longer be a must for  foreigners claiming treaty benefits, will come as a welcome relief to the finance departments of organizations doing business with that great country. Obtaining certificates of residence can be a pain in the neck, especially when they are needed quickly. When it comes to transparent partnerships, like accounting firms, the bureaucracy can be a nightmare.

Although at first sight this announcement may put India in a positive light, it is more a reflection of the relief to heads no longer banging against brick walls – the original requirement for certificates stemmed from a silly amendment to the law in 2012. There is so much that is daft about India’s approach to international taxation.

When I hear the words ‘India’ and ‘Tax’ juxtaposed, I invariably think of Kipling’s quote ‘Power without responsibility – the prerogative of the harlot throughout the ages.’

India – the largest democracy on Mother Earth – has, when it comes to international tax, a split personality. On the one hand,  its appellate tribunals and courts wax more lyrical than anybody else on tax  issues brought before them. In 2017 it was estimated that nearly a quarter of a million disputes were awaiting resolution. Every international tax practitioner knows that, when examining the case history of OECD treaty articles, it is rare for a bon mot from India not to pop off the page. On the other hand,  India maintains primitive imperialist designs on the tax that rightly belongs to others (I wonder what Gandhi would have said). Its Dividend Distribution Tax, declared a tax on the distributing company rather than a withholding tax on the recipient, has deftly (and, I believe, uniquely) sidestepped treaty withholding restrictions, while its technical services tax has long-armed income that should have nothing to do with India. Then there was that beautiful moment a few years back when they followed seller Hutchison and buyer Vodafone up the food chain, and rather than going for  a bite out of the indirect seller’s cake, tried improbably  to extract it from the indirect buyer’s mouth. That’s chutzpah.

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It could have been worse. It is only an accident of history that they didn’t produce Austin Allegro doppelgangers

Perhaps, however, this recent loosening of the tax belt is not just a blip, but a symptom of something bigger. Since 2014 India has jumped a remarkable 65 places in the World Bank’s Ease of Doing Business rankings. Starting in 142nd place, it is today sandwiched at 77 between Uzbekistan (the butt of many of Borat’s jokes) and Oman. To show they were aware that the century had turned, they even stopped production of the Hindustan Ambassador in 2014 –  a copy of an early model of the Morris Oxford that the British replaced nearly sixty years previously. That’s progress.

Microsoft, IBM, Proctor and Gamble, Tesco, Wallmart, motor companies (thank heaven not British) – India is opening up for business. This has been accompanied by a massive reform in indirect taxation.

It is to be hoped that international direct taxation will be next. Wouldn’t it be nice if those legislators who draft the laws so suspectly could listen to those world-class judges charged with interpreting them so expertly? Or is that an encroachment upon the foundations of democracy?

The taxman takes his cut

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At least he also had a day job

Initially dubbed ‘the war to end all wars’, the act of carnage that ended a hundred years ago this week had to later suffer the ignominy of having ‘First’ stuck at the front of its name. While recognizing the sacrifice of the combatants and the tragedy of 20 million dead, subsequent generations have suggested the futility of the whole thing.

As the world prepared to commemorate those events, Israel’s judges, perhaps ironically, had to waste their valuable time on something else absolutely futile – the taxation of professional poker players (not one, but two). The wording of the judgements (and appeals) gave the distinct impression that each learned judge would have been quite happy for the young men in question to take their chances being ‘sent over the top’, but they had no choice other than to give them a fair hearing.

Although I have no sympathy for gamblers, and in both cases the end result was the payment of tax at marginal rates (one of them had to be reined in by the court as an Israeli tax resident), the result bothered me.

Israel, like other tax jurisdictions, operates a system of marrying income to various sources (such as business or vocation, work, interest). The word ‘income’ is defined in dictionaries as deriving from capital or labour – fitting nicely with the sources mentioned in the Income Tax Ordinance (which is just as well, really,  since it is called the ‘Income’ Tax Ordinance). The proceeds from gambling and lotteries  do not derive from labour or capital, and did not therefore have a place at the sources table in the law.  In the course of time, however, legislators were reminded of HL Mencken’s definition of Puritanism: ‘The haunting fear that someone, somewhere, may be happy.” As a result they shoe-horned an extra clause taxing  profits from gambling, lotteries and prizes. To make the whole thing work they called  the resultant windfall ‘income’, a sleight of hand that would not disgrace the most unsavoury of card sharks.

However, when the tax authorities brought the two intrepid poker players to the table, they did not play for the 25%  tax that the misplaced clause then legislated, but full marginal tax on the basis of ‘business’ income. Both these characters were, after all, professional players. The position of the courts was that – similar to business income – their income could be considered income from a  vocation, their expertise implying effort and, therefore, labour. The last hand played was the appeal against the tax authorities’ insistence not to allow expenses in the production of income such as flights, hotels and payments to the casinos that financed some of the tournament games (the mind boggles). Here, the judge was consistent – if it’s income from a vocation, it’s a vocation, and proven expenses should be allowed.

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And so did they…

The bug in all this is that while these poker players were taken out of the bunker of  restricted tax  onto the battlefield of regular income, there is still dissonance.

The various sources of income (labour and capital) that combine to form the backbone of the Income Tax Ordinance are inextricably linked to Gross National Product and Gross Domestic Product. It isn’t by chance that governments measure their tax take accordingly – by taxing income, they are  taking their share of the value created in the economy.

Gamblers – professional or otherwise – do not add to the value of the economy. It is a zero-sum game. One person’s  gain is another’s loss. When, the legislature incorrectly added a section on gambling to the Income Tax Ordinance instead of legislating an excise tax (as they should have done),  they at least had the sense to exclude the possibility of setting off losses from other sources of income while isolating the gambler’s activity.

In transferring professional gamblers to a business/vocation basis, while the rate of tax may be higher, in a perfect world the overall tax take should be zero  (or negative due to expense set-off). Of course, in practice, most of these games are taking place abroad against non-Israeli taxpayers which clearly changes the domestic picture – but today  the name of the game in international tax  is a level playing field.

It feels like somebody wasn’t playing with a full deck.

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