Tax Break

John Fisher, international tax consultant

Archive for the month “February, 2012”

The Yanks are coming

This post is dedicated to the memory of Orni El-Ad, my mentor and friend, who introduced me to the world of taxation and taught me how to “think tax”. Orni died suddenly this weekend at the premature age of 64. May his memory be blessed.

And then came the Zeppelins

“The Children’s Book” by A S Byatt is, without doubt, one of the most absorbing novels I have ever read. Set in the waning days of the Victorian era and first two decades of the 20th century, it is a saga of interwoven families where the adults gradually shrug off their Victorian correctness while the children gain their voice after a long period of being “seen but not heard”. 

One of the most poignant moments in the book is the attendance by the chief protagonists at the gloriously atmospheric first night of J M Barrie’s Peter Pan. Fooled momentarily into nostalgia for the Darling Family and the adventures of Wendy, Michael and John, the reader quickly regains the sad perspective that this idyllic world is sliding helplessly towards 1914 and the utter carnage of the Great War.

Years ending in 14 to 18 have always given me the creeps and that book got me marching in the direction of 2014 with much trepidation. It was, therefore, with a palpitating heart that I approached the much heralded latest proposed FATCA regulations which are full of 2014, 2015, 2016, 2017 and beyond (the way they are going they might even get to 2039 and  my heart will have a whole new reason to palpitate). In fairness, however, cause of death from FATCA is far more likely to be due to 389 pages of acute boredom than a grenade lobbed across the wire by Jerry.

The Foreign Account Tax Compliance Act (FATCA), which was enacted in 2010 and, according to the latest proposed regulations, is due to commence hostilities on January 1, 2014, is a supreme effort by the US legislature to combat offshore tax evasion by US citizens. At its core it is an ultimatum to nothing less than,the entire world’s financial institutions to act as mercenaries on behalf of the US Treasury by providing information about US account holders and deducting 30% tax at source on payments to identified and suspected US tax evaders – or themselves face 30% withholding on all taxable payments from the US.

You scratch my back James and I'll scratch yours

Due to wholesale opposition from America’s allies who saw this extraterritorial reach as an act of imperialist belligerence, there was, until recently, considerable doubt as to whether it would prove just another example of US saber rattling. However, a Joint Statement on February 8 by the United States, France, Germany, Italy, Spain and the United Kingdom abandoning all those tax evaders seeking a safe haven in exchange for reciprocal spying services by the Americans, means that it is probably time for any American with anything to hide to get his head down in the trench, pull his tin hat firmly over his ears and pray.

Foreign financial institutions (FFI’s) will need to enter into an agreement with the IRS sometime during  the first six months of 2013 in order to be in place for the first winter offensive starting January 1, 2014. In 2014 and 2015  names, addresses, taxpayer identification numbers, account numbers and account balances will need to be reported, while in 2016 any income paid to an account will be required. From 2017 gross proceeds paid to the account will be demanded.

In the meantime, with effect from 2014, participating FFIs, having performed appropriate due diligence to identify their American customers, will need to start withholding 30% tax on such payments as US source dividends, interest and royalties to recalcitrant individuals (basically anybody who is not willing to play) and recalcitrant non-financial foreign entities (NFFEs) aka companies with more than 10% US ownership. Such payments to non-participating FFIs would suffer the same fate. From 2015 proceeds from asset sales will also be subject to withholding.

Right for once

Implementation of the  most Rambo-like proposal has been postponed until  2017 at the earliest and will likely be hit by a stray, but lethal, shell sometime before that. With a view to really thrusting and turning the bayonet, the IRS want to force the participating FFIs to withhold tax on payments that do not even originate in the US using a formula based approach of applying the ratio of US to non-US assets on the FFI’s balance sheet to its payments to recalcitrant individuals and NFFEs. Well boys, you can push your luck and go “over the top” whenever you like but don’t be surprised if  the other side is just waiting to see the whites of your eyes before halting you in your tracks.

Not all entities will need to enter into an agreement with the IRS, an exemption applying to those where the risk of recalcitrant Americans hiding under a tarpaulin in the corner of the trench is not great. Considering the requirements for becoming a deemed FFI, it is not entirely clear what the advantage over entering into an agreement is and it has been suggested that it may just be a decoy.

Ultimately, it is the buy-in by foreign governments that will make this work. Local secrecy laws could have totally derailed the project whereas it is now likely that agreements will be worked out with participating governments for information to be provided to them for sharing with the US authorities. Meanwhile, banks in several jurisdictions are shouting “Yankee, go home” to their  American customers before the regulations come into force.

Looking to the future, the tax evader’s lot is not an enviable one as he is forced to retreat with his  funds into undesirable corners of the world where their risk of loss is greater. As the world goes global places to hide, like Peter Pan’s Neverland, are ever harder to locate. The IRS recently announced yet another Amnesty, offering offenders the chance to wave a white flag and pay their way out of trouble. In the meantime, advanced troops were sent in to lay Switzerland waste. Speculation is now rife as to where the crusading troops will go next .

The attitude of  the US authorities can probably best be summed up by the chorus of the most famous American song of the First World War:

Over there, over there,
Send the word, send the word over there
That the Yanks are coming, the Yanks are coming
The drums rum-tumming everywhere.
So prepare, say a prayer,
Send the word, send the word to beware –
We’ll be over, we’re coming over,
And we won’t come back till it’s over, over there.

The Greecy pole

The World Stage

When it was suggested last week by a sympathetic BBC interviewer that the Italian government’s decision not to fund Rome’s bid for the 2020 Olympic Games  had cost Italy the chance of taking its place on the world stage, the interviewee retorted sharply “Italy has been on the world stage for 2000 years”. Meanwhile, the Greeks keep reminding us that, as the cradle of democracy and western civilization, their continued hammering by the European Union is beyond comprehension. We should be thankful, at least, that the Germans  have not yet chosen to harp back to the past.

Greece really does appear to be sliding down a greasy pole. The new government has continued its predecessor’s vain attempts at improving tax collection while trying to make new taxes stick in a country in which, thanks to rampant corruption, tax evasion is effectively state sponsored.

On January 22, a list of 4152 tax cheats was published in an effort to shame people – they must be joking – into paying up. Most fascinating was the fact that, even though the authorities know where they live, most of them have not been prosecuted. This is evidently thanks to there being a backlog of 165,000 cases in the courts. One prominent exception is, top of the list, Nikos Kassimatis (an accountant!) with an amazing 952 million euro owed, who is currently serving a  prison sentence for VAT fraud which has probably taken away his appetite to settle. In a country where the judiciary clearly has a problem getting its act together, this may not be a case of the punishment not fitting the crime but  – to put it in perspective – had he been convicted just before Henry VIII became King of England in 1509 he would be looking at walking free about now (not allowing for a couple of hundred years  knocked off from his 504 year sentence for good behaviour).

It is not just their trains that are late

An earlier list of  6000 major corporate delinquents was made public in September 2011. First prize went to the Hellenic Railway Organization which was running incredibly late with an unpaid tax bill of  a whopping 1.26 billion euro –  a real achievement given the fact that its owner is none other than the Greek government.

The now famous aerial inspection of houses with undeclared swimming pools, reported as carried out at great government expense by helicopter surveillance when the same result could have been achieved on Google Earth, has at least caused economic growth in the form of an increased demand for camouflage material. It has not been reported whether swimming pool owners have been  paying cash for these purchases.

 Meanwhile, while various officials have been forced out for either having their palms greased or turning a blind eye to the actions of others, the government came up with two quite ingenious methods of improving collection. Firstly, the new and much hated (along with every other) property tax is to be collected through household electricity bills. Non payment would result in disconnection from the National Grid and, in winter, death from hypothermia. Secondly, there is some madly complex , novel system using a smart card that enables the authorities to track a taxpayer’s payments. In keeping with Greek tradition, use of these cards is voluntary although it is not clear why the authorities don’t just start by looking up the names on that tax dodger list  in the telephone directory and go knocking on their doors.

The brochure said "clothing-optional"

Alongside tax collection, privatization and reduced salaries, Greece has also been told by the EU and IMF to revamp its tourist industry. Knowing the Greeks’ record on compliance, left to their own devices, this will probably result in a new set of floodlights for the Acropolis and creation of more , euphemistically titled, clothing-optional beaches  where German tourists can get an all-over tan while they are being burnt at home by the forced write-off of Greek sovereign debt.

A Greek tragedy – the gods’ revenge

If you were Angela Merkel, would you take them seriously?

The scene: a windswept precipice at the very edge of Europe overlooking the Aegean Sea. A little man in a business suit stands nervously  behind a robust middle-aged woman dressed in what appears, in the failing light, to be a teletubbies jumpsuit. Both are a safe distance from the cliff-face.  She is evidently in charge. Two nondescript blacksuited men stand dangerously hunched over the precipice.

“Mario, Jose – pull him up a little – schnell!”, barks the boss at the two bent-over goons as it becomes clear to the innocent bystander that each is holding a trousered leg of a person suspended vertically over the edge and staring down into oblivion.

“Save me, please!” , calls the hapless victim in a distinctly Greek accent, his suit jacket flapping about his topsy-turvy head. “What do you want? We have agreed to a cut of 22% in the minimum wage and a freeze for three years, no salary increases, a cut of 150,000 government jobs. What else can I do? All this austerity will destroy us. We need Keynesian policies that will expand the economy – increased expenditure by the government, reduced taxes and quantitative easing of money.”

The little man taps the boss nervously on the shoulder and whispers: “Angel, we have to keep him alive otherwise we are not going to save ourselves. Greece must stay in the Eurozone for now, or default will be total and there will be a knock-on effect to Portugal, Spain and maybe even Italy.The Euro will be finished and our dream  of a United Europe will be in tatters. Let’s bring him up before he pulls the ECB and European Commission down with him”. She swats him off “If you can’t stand the heat, get back in your haute cuisine kitchen, Niko. Leave this to me.”

Greek Tax Authority - Please Give Generously

“Lucas. I want so much to feel your pain. Your people have  been so naughty. All those lies about deficits. All those broken promises. Why do you talk to me of Keynes? He is dead – long term. We politicians believe in free market classical economics, the Chicago School – Al Capone, George “Bugs” Moran, Milton Friedman, George Stigler. We might let you off this time but it is not going to help if you don’t reform your public sector, revamp your tourist industry AND – LISTEN CAREFULLY – CONVINCE PEOPLE, INCLUDING THE MEMBERS OF YOUR GOVERNMENT  THAT PAYING TAXES IS NOT VOLUNTARY.”

“OK! OK!  Just save me!” cries Lucas.

“Sacre bleu, I can’t take this anymore!  We must save him”, pleads  Niko.

“You galling man! Of course, I am going to save him. But he has to be fooled into agreeing to die slowly and painfully over the next ten years instead of a quick end now. Boys, pull him up! I think he has learned his lesson, but next time it will be the cement shoes “.

The sovereign debt crisis, as it relates to Greece, is turning into a tragedy. The country is clearly between a rock and a hard place.  If it defaults on its debt (which thanks to last Thursday’s agreement and last night’s Greek vote will probably not happen this time) it will likely exit the Euro, resulting in exchange rate chaos as the Drachma goes into free-fall from Day 1 and inflation rears its ugly head. There will be wide-scale business failures as corporate debt denominated in Euros becomes hyper-expensive and the public and private sectors will  face closed doors to credit markets.  On the other hand, by accepting the onerous conditions of  the European Central Bank, European Commission and International Monetary Fund , it is starting to look like the Post World War I Treaty of Versailles all over again when Germany was pinned to the wall by the victorious allies and forced to make reparations that pushed the country into crisis. If saddled with its current debt and required to go the whole way on this (albeit including a haircut for private investors) the Greeks really could become the long-term hewers of wood and drawers of water for Europe.

John Maynard Who?

For all the righteous indignation of European leaders towards Greece’s dishonesty over its statistics and its diabolical record on tax evasion, a line in John Maynard Keynes’s General Theory (his masterwork) is particularly apt: “Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist”. Although largely discredited in the 1970’s and replaced by the theories of the Chicago School, a modified Keynesianism has made a comeback since the turn of the century – but the politicians are, in computer terminology, “not responding”, preferring to harp back to earlier, widely discredited, laissez faire policies which have little chance of working in the current circumstances. In the past, Keynesianism scored some great successes and, indeed, in the 1950’s British Prime Minister Harold Macmillan was able to boast: “You’ve never had it so good” although it was not entirely clear whether he was talking to the general public or his older brother Dan who had been Keynes’s first love at Eton.

The Greeks could do with a few new ideas

A sanity check suggests that, hopefully, this is one big international confidence trick – the plan being to string Greece along until it gets its house in order while allowing time for Portugal, Spain and Italy to climb totally clear of the danger of default.  Once Greece has made itself more competitive by reforming its public sector, revamping its private sector (significantly, tourism) and ensuring that the tax collection system works, debt will be forgiven, credit lines will be opened up and Greece can get going again.  Wishful thinking? Perhaps, but don’t go out and buy the cement shoes just yet.

When Harry met Fabi


I've got a bone to pick about my account

As a devoted Tottenham Hotspur fan, I was delighted to hear yesterday that manager Harry Redknapp had been cleared of all charges of tax evasion by a unanimous decision of the jury in his trial at Southwark Crown Court.  This opened the way for him to be eligible for the job of manager of the England national team which happened to become vacant a few hours later following the convenient resignation of the present incumbent who suffers from an acute lack of being English. The Italian Fabio Capello  endeared himself to me following England’s 4 – 1 rout by the Germans at the last World Cup, with the statement, “I no understand this decision”. And your players no understand you, mate.

While I admit to  knowing a thing or two about tax, I admit to knowing absolutely nothing about amounts of money – received for varying reasons depending on who and when prosecutors asked – being left or forgotten in a bank account in Monaco under the name of a person’s beloved dog. However, I do know that Harry was innocent of whatever they charged him with, because the jury said so unanimously and the referee’s decision is final.

Harry would be a fitting successor to Fabio Capello – who, as inferred above, never quite mastered the English language despite its Latin roots –  since, by Harry’s own admission to the police,  “I can’t write. I never wrote a letter in my life…I write like a two year old and can’t spell”.  At least the players will not feel that too much has changed and  can get on with their goal of continuing to not win anything since 1966.

But I do pray that  nice Mr Bernstein, the chairman of the Football Association, leaves Harry alone until the end of the season so that he and Spurs can outflank that 22 man juggernaut Manchester United City and claim the Premier League crown for the first time in (just) over half a century.

And, by the way, Rosie – the bulldog with the bank account – was not available for comment as she has departed for the Dogs’ Home in the sky and, in any event, did not speak English (which would, however,  not have barred her from applying for the England job).

Hard times, great expectations

Mid-Atlantic. 35,000 feet. Dead of night. Everyone around me fast asleep. My seat bathed in the eery glow of one small lamp. Chapter 22: “A Gritty State of Things Come On”. The height of the novel. I turn the last page and briefly scroll my eyes to the bottom of the text. The final full stop stares back at me. Back to the top.

Reading slowly. Savouring. Reflecting. And then, inevitably, the last paragraph, the last sentence, the last word, the last full stop and it is all  over.

I am emotionally exhausted. I want to wake the stranger next to me but these days you get shot for less on an American plane. So I ask the flight attendant for a whisky and settle back in my seat staring into the black nothingness of the cabin. Thirty-five years since I first met Pip and Magwitch in the Kent churchyard and fourteen and a half novels, scores of adventures and hundreds of amazing characters later,  I take leave of a precious friend, never met. Charles Dickens, born two hundred years ago this week, dotted that full stop and promptly took the mystery of Edwin Drood with him to the grave.

It is apt that the bicentennial should fall in a year where large chunks of the developed world are being forced into austerity, and movements for social justice and a fairer distribution of the tax burden are popping up everywhere (and  in the case of the tax burden, in particular, everywhere where Mitt Romney shows his face).  Dickens was a campaigner for social justice and many of his novels dramatize the major issues of the day.

Dickens was right. They shouldn't have lowered the stamp tax

It is, therefore, ironic that Dickens says very little about taxation. Beyond the occasional jibe at tax collectors and the mention of property rates, the only novel  in which they take a battering is Tale of Two Cities, where criticism is heaped on- you guessed it – the French. Indeed, in his only lengthy monologue on the subject – a letter to his  friend Macready in 1852 – he defended the much hated  stamp tax on newspapers, fearing the mushrooming of a gutter press that would compete for readers with the likes of  The Times, The Economist and – that bastion of Victorian propriety – The News of the World.

So how did the man who demonized the Workhouse in Oliver Twist, lambasted the Debtor’s Prison in Pickwick’s Papers and Little Dorrit, and heaped compassion on destitute Joe the crossing sweeper in Bleak House, steer so clear of the social injustice of the tax system that seems to bother all men of conscience today?

The answer seems to be quite simple really –  despite only relatively well-off men being enfranchised, the distribution of the tax burden was remarkably fair.  For much of the nineteenth century most revenue came from property  and excise based taxes or stamp duties as well as gradually falling import tariffs. The Poor Rate , Land Tax, Window Tax (levied on the number of windows in a house above a certain minimum), and excise taxes on luxury goods fell infinitely more heavily on the rich than the poor. Furthermore, in 1842, the reintroduction of a temporary income tax (still temporary 170 years later) had a threshold that left huge swathes of the population outside its clutches.

The problem, put in 21st century terms, was that, as Britain moved towards a free market system in the course of the 19th century which included a commitment to lower taxes while seeking  a balanced budget, a massive cut in public expenditure on the poor was inevitable. The issue came to the fore in 1834 with the reform of the Poor Law that saw a reduction in the Poor Rate tax charged and the concentration of poor relief almost exclusively on the dreaded Workhouse that was to be the utterly unpleasant refuge of last resort. This  replaced a system that included less horrific workhouses for the orphaned, old and infirm while maintaining Out-Relief  for  able bodied men, thus keeping them in the workforce.  Hence, Dickens’s broadside on the Workhouse three years later in his second novel, Oliver Twist; his problem was with the fabric of society rather than the pursuit of specific economic solutions.

On a recent vacation in England with my two youngest sons, I ordered tickets for the revival of Oliver!  But  we had to stop off somewhere on the way. Hailing a black cab, I asked the driver to take us to 48, Doughty Street which, judging by his smiling  “No problem guvner, jump in”  was, as I would soon discover, chiefly significant to him for the major roadworks blocking the junction with Guilford Street necessitating an extra five quid on the meter. The ride was worth every penny as he abused, in updated Dickens fashion, every perceived maniac on the road, even offering a “Sorry boys” to my children for words which, had they been checked on the worldwide web, would have invited all sorts of inviting pop-ups.

Lionel Bart made a better job of the plot

Arriving  at Dickens’s home, for many years now a quaint museum,  I took the boys to the study window overlooking the timeless back-garden and showed them what Dickens would have seen as he brilliantly conjured up Fagin, Bill and Nancy – just standard grass, shrubs and trees. There was a lesson there, which was further brought home at the outstandingly original staging of Lionel Bart’s musical at Drury Lane a few hours later. If you want to succeed, be innovative. It was true of the industrial revolution in the 19th century; it is all the more true of the information revolution in the 21st. Therein lies the hope of  today’s austerity-stricken nations. Happy Birthday, Mr D, wherever you are.

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