Tax Break

John Fisher, international tax consultant

Archive for the month “December, 2011”

Irish blarney

I have always been skeptical about the rave reviews on the covers of books. “I just couldn’t put this book down”, may  have been the first part of a sentence that concluded, “the kitchen sink disposal unit”; “His best novel yet” , could have ended, “which, given his other semi-literate offerings is no great achievement”.

So, when Irish ministers recently insisted on quoting  over and again an OECD survey praising the preservation of the 12.5% corporate tax rate despite the country’s ills, I dived for the survey to find out what it really said.
And what it really said was: “The decision to maintain the corporate tax rate at 12.5% is prudent as a sudden increase in tax rates would create uncertainty about Irish tax policy that could undermine investor sentiment.”
Now,  before I go on, I must be fair to the Irish. They may have found themselves waist deep in the bog  and requiring a bail-out by the IMF thanks to their outrageous housing speculation but, if there is one thing the Irish are really good at, it is austerity. And that is just as well, because that is just what the IMF and everybody else has demanded of them. They learned it from the British, who spent hundreds of years abusing their economy, and then spent the first sixty years of independence  doing the same to themselves. As a result, the prognosis for the Republic, which has stoically accepted its position, is surprisingly good according to most economic indicators.
Having said all this, the new government’s November budget included two entirely understandable, but morally questionnable, tax elements. The first, as mentioned above, was a commitment to the 12.5% tax rate which – while, as noted by the OECD, may under current conditions  be unavoidable – is obscenely low for a country relying on the charity of others and arguably gives it an unfair advantage over many of its EU competitors. The second, which received little publicity, was an incentive scheme for Ireland’s all-time number one export – people; tax benefits are being offered for Irish residents working abroad part of the year for Irish companies. The emphasis was put on the BRICS countries (Brazil, Russia, India, China and South Africa) which, given that they only comprise around 3 billion citizens, are obviously short of labor or, at least, will not notice another million or two Irishmen taking jobs that could have gone to the locals (I may be suffering here from a minor bout of Irish Exaggeration).

The Irish economy has always bothered me. I vacationed there with my family a few years back, before the Celtic Tiger tripped over its tail, and apart from coming close to being throttled by a petrol (gas)  station manager in the border area for asking for a copy of the London Times (“We don’t like the British round here, you know”), we had a delightful time driving up and down the country’s only motorway admiring the myriad of signs advertising EU financed infrastructure projects. It seemed pretty clear that the country was not doing enough to build an independent economy for when the foreign multinationals get tired of relying on the tax rate and decide to move on. Should the Euro Zone survive, it will be interesting to see what happens to Ireland in the long term.

And, as regards those book reviews, I remember the late Auberon Waugh reviewing the results of a BBC poll of the “Best English Language Novel of the 20th Century” at the end of 1999.  Tolkien’s  Lord of the Rings and Orwell’s Animal Farm took second and third places.  First place went to the Irish Joyce’s Ulysses which, Waugh pointed out, proved that the British are a nation of pseuds since hardly anyone manages to read it from start to finish. The writer Anthony Burgess (A Clockwork Orange) said on the cover of my (half-read) copy  that “Everybody knows now that Ulysses is the greatest novel of the century”. History does not record whether that was the end of the sentence.

Happy New Year.

Amnesty International

English: United States Internal Revenue Servic...

Image via Wikipedia

The casual observer may be forgiven for thinking that last month’s announcement by the Israeli Income Tax Authorities of a  new amnesty  program for foreign undeclared income was motivated by the realization that if – as the US authorities close in on tax evaders – Israel does not act fast, all the “captured” tax of US citizens living in Israel will flow into the coffers of the US Treasury.


Back in 2005 the ITA started a Voluntary Disclosure Program to enable Israeli tax residents to come clean on their undeclared income. The scheme, which was open-ended,  offered immunity from criminal prosecution but not much else. The announcement in November 2011 that Israeli residents coming forward by the end of June 2012 could hope to pay the tax, without interest or penalties, on undeclared foreign income was a far more tempting proposition.

The conditions under which the foreign undeclared income is eligible for the amnesty, beyond the requirement that the applicant has broadly not been caught red-handed,  are flexible – but the sample list given by the ITA provides an indication as to the  extent that this was aimed at immigrants: undeclared income from foreign assets inherited from, or gifted by,  a foreign resident; undeclared income from foreign assets that were purchased using funds that arose from income taxed in Israel or income that was not liable to tax in Israel; and undeclared income from foreign assets that only became liable to tax from 2003 when the Israeli system moved from a largely territorial basis to a worldwide basis. 

Remembering that  Israeli-born residents were heavily restricted in their ability to invest legally abroad until the end of the last century, the bias towards Olim from “Western Countries” (which is a euphemism for the US, since the English, French, Canadians and others are just a statistical error in the ITA’s worldview of lost tax) is obvious.

Now that the IRS has won the battle in Switzerland and  should  soon finish bayoneting the wounded, it is widely rumored that the next stop on its tax-grabbing crusade will be the Holy Land. Hence,  the timing could not be better for the ITA to step in and suggest that people pay up in Israel, which in most cases has the first right to tax. This may have a mitigating effect on subsequent disclosure to the IRS, given its newly instituted softer approach to dual citizens (see earlier post), especially where they have declared the income abroad – but it is too early  in the day to draw any firm conclusions.

The potential downside in the whole affair is that any application under the amnesty is to be considered by a Star Chamber of senior income tax officials. There is a promise  that, even if an application is rejected,  the facts will not be used in evidence elsewhere.

When I read this, it reminded me of my first year in High School. There was a particular teacher who had an unfortunate habit of boxing pupils around the ears (which, judging by his level of intelligence, is probably what happened to him as a child). We quickly learned, as he approached, to raise our hands to cover our heads. He would then go through the standard ritual (which took longer each time, as the months rolled by) of telling a poor victim to put his hands down because he was not going to hit him; I do not need to finish the story.

However,  in practice, it seems that it may be possible to initially present the facts to the ITA anonymously and only name names when it is fairly apparent that the application will be accepted.

Overall, these are interesting times for people who have undeclared income and there is a window of opportunity that  could be, for many, the Last Chance at the OK Corral.

La dolce vita

A headline on the front page of today’s International Herald Tribune caught my eye: “Fighting anti-tax mind-set, Italy deploys new tactic: Shame”. Given that this was Italy and that Italy is populated by Italians, the first thing that crossed my mind was, “Yeh..Shame they got caught”. On viewing the accompanying photograph of a class full of  angelic children being instructed to -metaphorically- educate their parents in the moral imperative of  double-entry bookkeeping , I felt that I was probably not far off the mark.

The article does not pull any punches in discussing the disease of rampant and almost overt tax evasion in Italy (it is claimed that 604 airplane owners declared annual income under Euro 50,000 ) but it was a comment of the director of the internal revenue service that was most interesting.

He compared the US and Italian systems. While he claimed that taxation in the US had originated in the far west to pay for the defense of the community, in Italy the first forms of taxation were imposed by princes, often foreign, to finance their battles – with the citizens getting nothing in return. As a result tax evasion became part of the culture right up to the present day.

Got it. Historically mobile morality. I can just see the conversation between two  plumbers fitting a new bathroom in the center of Rome: “Guiseppe, have they agreed to pay cash?” “Of course, Giovanni. I told the owner that your ancestors had their house swiped by the Borgias and he told me he had no problem with paying under the table as he was descended from the Medicis who hated the Borgias – that was a nice bit of luck.”

At the end of the day, however, perhaps these genetically conditioned tax evaders are ahead of their time. With new prime minister Mario Monti’s Euro 30 billion austerity package Italians might be looking once again at being required to pay taxes without getting much in return as the amounts collected are used to pay off  debts to foreign “princes”.

Machiavelli wrote in “The Prince”:”When neither their property nor their honor is touched, the majority of men live content”. That may have been true 500 years ago but, if the Euro crisis is to be solved, let’s hope those schoolchildren make their parents see sense.

The best of times, the worst of times

As 2011 prepares to hang up its boots,  closure is finally coming to one of the finest specimens of legislative panic in recent Israeli history.  With the coalition government resembling  a concoction of weird and wonderful characters from the Complete Works of Charles Dickens and the middle-classes appealing “Please sir, we want some more”, the stage was set  mid-year for a roller coaster autumn full of surprise twists and turns.

 Following a summer of social protest  over the lack of economic fairness in the country and formation of a committee to recommend ways to back out of the “No Thoroughfare” , early fears of a politically motivated Estate Tax – always more of a rabble pacifier than a revenue earner –  gradually abated.  Then there was the proposal to apply a 2% “supertax” on the wealthy which fell off a cliff at the last moment (but might experience one of those miraculous literary recoveries and come climbing back up next year).  Meanwhile, lurking in the background was the perennial  threat of a National Insurance hike: we had already experienced the temporary doubling of the National Insurance  ceiling which followed, about a decade ago, the temporary total cancellation of the National Insurance ceiling which had meant at the time a whopping effective top marginal tax rate of 67%.

The amazing thing, however, is that what finally got thrown up, whether you agree with it or not, makes sense – like the unusually tidy endings of Dickens’s Christmas stories.

The marginal tax rate came to rest at 48% – a clear statement of policy that individuals should be left with more than half their income in their hands (until the government decides otherwise); national insurance was put back in its traditional box with its traditional ceiling; tax on passive income was hiked from 20/25% to 25/30%. What is more, it was not an immediate knee-jerk, but imposed from January 2012 giving taxpayers the chance to sensibly plan the transition – including dividends at the 25% rate in 2011 as well as 2011 bonuses and the theoretical sale of assets – although time is fast running out.


Of course, being Israel, not everything has gone totally smoothly. While legislation raising the tax on passive income has passed, the tax authorities and legislature seem to be struggling with the updating of Regulations which, given that they basically involve the crossing out of one tax rate and replacement with another, could be done by a five year old with a spirograph. This means, for example, that unless the  authorities get their act together by the end of this week, public companies paying a dividend in January 2012 face the dilemma of whether to deduct the new rate at source (which is the recipient’s tax liability) or follow the existing  Regulation for tax deduction that has not yet been updated and leave the recipient with the obligation to file a tax return (which, in the case of foreign resident recipients is normally a theoretical point).


Season of goodwill at the IRS ?

“And to you taxpayers out there, let me say this: Make sure you file your tax return on time! And remember that, even though income taxes can be a ‘pain in the neck,’ the folks at the IRS are regular people just like you, except that they can destroy your life”.

Thus wrote American humorist Dave Barry at the end of a column some years ago describing his frustration at having been chosen by random sample for a tax audit.

As a European (or, more correctly, after David Cameron’s recent walkout at the EU summit– as a Brit) I have always viewed with a mixture of curiosity and horror the workings of the US tax system. It is bad enough that the US is substantially the only country on Mother Earth that still insists on taxing its citizens as well as its residents due to Abe Lincoln’s pique at Americans deserting the country during the Civil War (Guys – get over yourselves, already).

But, to add insult to injury, Uncle Sam’s recent adoption of a policy of wholesale persecution of the world’s banking system (including the soon-to-smoke –you-out  FATCA regulations)  in search of  unreported assets and income of its citizens, is beyond a joke.

To sweeten the bitter pill the IRS has offered Amnesties – the latest being the 2011 Offshore Voluntary Disclosure Initiative (OVDI) which, from my experience, was less an amnesty and more a case of “Come out slowly with your hands above your heads” – the terms were so draconian that, despite the genuine fear of the IRS gradually closing in on them, many people followed Jack Benny’s response to a gun-toting gangster demanding “Your money or your life!” – “I’m thinking it over”, he said. The September deadline passed and many did nothing.

But finally, in this season of goodwill, there are signs that the IRS is softening its stance slightly. On December 7 the IRS issued a Factsheet aimed at Dual Citizens living outside the US. The IRS recognizes that such individuals may have failed to  file their Income Tax Returns and FBARs (Report of Foreign Bank and Financial Accounts) in a timely manner, the latter requiring filing by June 30 each year. The standard penalties that will generally apply are explained but, where it can be shown that there is “reasonable cause”, penalties can be reduced or cancelled. Reasonable cause normally means that a taxpayer “exercised ordinary business care and prudence in meeting his tax obligations but nevertheless failed to meet them”.

There is a list of the sort of things that need to be taken into account  when deciding reasonable cause but possibly of most interest in the  Fact Sheet are the “real situation” examples provided. There appears to be a move to finally show the milk of human kindness to the dual citizen living abroad who has not intentionally evaded US tax and who comes forward voluntarily to report. Ironically, this could mean that those who ultimately shied away from the recent amnesty could now land a better deal.

Of course, as always, there is a sting. The IRS are unlikely to entertain anonymous applications to establish whether “reasonable cause” will apply, so it would appear that there is an element of risk which needs careful analysis before making a move.

Perhaps the IRS are finally turning their backs on an attitude that HL Mencken summarized  as:  “The haunting fear that someone, somewhere,
may be happy”.

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