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Who said tax is boring?

Archive for the month “May, 2012”

It’s peace and democracy, stupid

Bayern Munich 3 Chelsea 4

We accountants do not care much for the front section of the newspaper. If  a story cannot be reduced to prime numbers, it is not for  us. After a cursory glance at the headlines we skip to Section B to be hypnotized by the latest business and finance news followed by yesterday’s football, baseball and cricket results. Reaching the back page we take a quick look at the paper’s weather forecast and then commit its earthly remains to the nearest bin.

I am grateful, therefore,  to Nobel Laureate (Economics) Paul Krugman who shone a different – albeit obvious – light on the Euro Crisis in a recent New York Times article:

 “Failure of the euro would amount to a huge defeat for the broader European project, the attempt to bring peace, prosperity and democracy to a continent with a terrible history”.

I wonder how long they had to queue?

I am British, which explains why I have been in denial on this issue for so long. When Britain negotiated belated entry to the EEC  (the forerunner of the EU) in 1973 and promptly held a referendum two years later to decide whether to have the marriage annulled, the British Government talked lots about the importance of a Common Market. What they always avoided was the unhidden agenda of the six founding fathers – West Germany, France, Italy, Netherlands, Belgium and Luxembourg – of achieving political union: a United States of Europe. The Six had one thing in common – they had all, in recent memory, been overrun by  foreign troops. Britain, too, had been overrun  by foreign troops – Americans  – who were overpaid, oversexed and over here but, while this was hardly less traumatic (especially for the husbands dying for King and Country overseas), it did not compromise Britons’ fierce commitment to independence that has remained uninterrupted for a thousand years.

The  twenty other countries that have joined since 1973 generally fit the “We had better share some independence rather than risk our heads being kicked-in every 50 years” philosophy shared by the Six.

As has been clear from Day 1 (or, to be more precise, D Day) Britain has no place in the EU. It is a  bridge between the Old World and the New and should have  economic status not dissimilar to Switzerland – access to the Single Market is all that it ever really wanted.

With Britain out, political union could proceed and the Euro could thrive (I joke not).

Of course there will still be a few minor roadblocks along the way like: cultural diversity; getting over a history of regularly pulverizing each other; and Greece (World War 1940-45, Civil War 1946-49). But it was pleasing to recently see troubled Spain (Civil War 1936-39) taking  a leaf out of Germany’s fiscal notebook  (World War 1939-45, World Cup 1966).  The slow march towards the Common Consolidated Tax Base – a precursor to fiscal union, itself a precursor to political union – advanced another step.

It will be recalled that Spain is having a little trouble meeting its Teutonically imposed budget targets this year. It needs to raise more taxes.

So, following Germany’s lead a few years ago, the Spanish legislature invited the Interest Expense to step up to the executioner’s block  for a haircut.

While international tax advisers will be aware that Spain has been quite a paradise for the tax planning of interest expenses (double dips et al), it does look like it is time to put the castanets  back in their box and get down to serious business.

The rain in Spain falls mainly in the plain

To replace the old Thin Cap (3:1) rules which apply to shareholder finance, the Spanish have introduced a general net interest deduction limitation  of 30% of , basically, EBIDTA (a la Germany). To the uninitiated, who may find this as understandable as the programming language of their computer – I will explain it in English like wot it is spoken. Ladies and Gentlemen, hold on to your hats.

You start with the financial statements of the Spanish company (or consolidated tax group)  and open them at the Profit and Loss Statement. Using your eyes and a calculator you work out operating profit – earnings before interest, taxes, depreciation and amortization  (EBIDTA)  plus a few secret ingredients. If interest expense minus interest income arrives at more than 30% of the operating profit you start to sweat and move on to Stage 2.  In Stage 2, if it is a single company (as opposed to a consolidated group) the rules will only apply if financing expenses are derived from certain related party transactions. In addition, up to one million euro of net interest expense is always deductible. If you are wondering why Stage 2 is not performed before Stage 1, you are right – the accountant will now have to decide whether he can charge his client for the wasted hours on the EBITDA calculations. Accountants  sometimes do that sort of thing. Amounts not deductible will be carried forward for up to 18 years to be included in the same 30% limitation each year while, if the net finance expenses are less than 30% in a given year, they can be carried forward for up to 5 years.

What, sadly, the Spanish have omitted is a (brilliant) German  exception to the rule. For Germany, where an entity is in a consolidated group  even if  the 30% rule is breached, as long as the equity ratio (equity to debt) of the company is not less than 99% of the equity ratio of the consolidated group the rule will not apply. What is clever here is that they are effectively saying that if the German situation reflects a more conservative position than the international group as a whole – then it is fair to assume that the interest charge is not designed specifically to hurt Germany and should be allowed.

While, to paraphrase Neil Armstrong this may be “One small step for Spain, one smaller step for Europe” it is still a step in the right direction of unified policies.

It couldn’t happen to a nicer airline

Some years ago I flew Iberian to Spain and vowed never again (Iberian, not  Spain). Among the numerous insults I suffered on the flight (and I was flying Business – Heaven knows what happens in Coach), was when the young female flight attendant came round offering immigration cards and, smiling politely, I refused as “I am a British citizen”. “You still need an immigration card. Britain is not part of the EU” she growled. I smiled benignly and informed her that Britain had been part of Europe when her country was still a fascist dictatorship. They didn’t allow me on the Business Bus when the plane landed. I suppose old fascist dictatorships die hard.

Embracing the taxman

Memories

The most idiosyncratic teacher from my schooldays died last week. Feared by the new boys, persecuted by the middle school and respected by the senior pupils, he was the quintessential British schoolmaster of the mid-to-late twentieth century. Armed with a library of twenty aphorisms (I can, to this day, repeat every one by heart  including his motto: “I may be fairly strict but I am also strictly fair”),  he terrified us until we learned to terrorize him. Eventually, we grew up  just enough to recognise  his worth. Same process, different kids, year in year out.

OK! I won’t raise the retirement age

Times have changed. Teachers are no longer allowed to discipline the permanently wired ego-machines  that pass for human sprogs today. And if schoolmasters have their hands and mouths tied, what about managers? Upset an employee and you are the one frogmarched to the CEO to surgically attach your tongue to his rump and beg forgiveness. It doesn’t stop there. Presidents and Prime Ministers – once the austere shepherds of their nations – now scrape and bow to the whims of their electors.

The individual is King, Queen and Supreme Leader. If the Liberal philosopher J S Mill thought that your right to swing your  fist ends where my nose begins – that right now ends somewhere in the next street where I cannot see you.

However, tax authorities the world over seem to have miraculously escaped modernity. They continue to confront the assessee – essentially civil society in its entirety- from behind a brick wall. Ostensibly, it is not for want of trying.

The old methods are still the best

As far back as 2007  the Forum on Tax Administration of the OECD was presented by its Tax Intermediaries Study Team with Working Paper 6, soporifically entitled “The Enhanced Relationship” (I dread to imagine what the other 5 were about). In the tax world, if you want to be friendly you need an intermediaries study team to guide you.   The Study analyzed the desirability and viability of moving away from the “Basic Relationship” – the assessee is required by law to declare all his income and the tax authorities are required by convention to scare him senseless in case he is tempted otherwise. Drawing on models tried by the Americans, Dutch and Irish for increased cooperation between Tax Authority and (Large Corporate) Taxpayer the Team came up with Revenue and Taxpayer wishlists.

The Tax Authorities’ looked for transparency and disclosure (what a surprise) while taxpayers who – let’s face it – are a bit more savvy, craved commercial awareness (amen), an impartial approach (be fair), proportionality (use common sense), disclosure and transparency  (if you want me to scratch your back, scratch mine too) as well as responsiveness (hello?).

Of course, as it turns out none of this had anything to do with touchy-feely 21st century existentialist (and post-existentialist) civil society. All that was really happening was that the Tax Authorities were looking for a more efficient way to collect taxes and large corporate taxpayers were looking for a more efficient way not to get screwed. Emotional bear hugs were not for the Tax Forum.

Indeed, speaking last November at a convention of American CPAs, Douglas Shulman, the IRS Tax Commissioner, reviewing the IRS’s Compliance Assurance Program stated:  “Any corporation that meets the program’s requirements and wants to enjoy the benefits of open, cooperative, and transparent interactions can now apply”. Thank you Mr Shulman – that speech really makes me want to embrace you and I am supremely impressed that in a country of over 300 million citizens and a monumental number of corporations an entire 140 corporations took part in the CAP in 2011!

So, given the fact that there does not appear to be any real attempt to break down the wall in the US (as well as a host of other countries) the contents of an article in last week’s International Herald Tribune about the trials and tribulations of “accidental” Americans should come as no surprise. With the IRS’s FATCA witchhunt hotting up, American passport holders who have never lived in the US but received citizenship by accident of birth, are running in droves to US Consulates to renounce their citizenship. While it is not clear to me how this solves the problem of past non-reporting, one case mentioned caught my eye. If it was not so tragic, it would be funny.

Roy, a 37 year old lifelong Canadian citizen and resident has US citizenship through his mother. Due to concerns over a savings account in his name, his mother took him to the US Consulate in Calgary to renounce his citizenship (It will be recalled that the US is substantially the last nation on Earth to tax according to citizenship rather than residency). There was one problem – Roy is developmentally disabled. The request was refused because he lacked “the legal capacity to form the specific intent necessary to lose US nationality”. In other words, he does not understand the concept of citizenship.

Her tax adviser shot himself

It strikes me that the only body lacking legal capacity in this story is the US government. Nowadays, only a resident, a regular business visitor to America or a moron  would want to maintain  US citizenship  – the tax downside is too great. A more sensible approach would be for the US government – in cahoots with the IRS – to have people “Check-the-Box” (a wonderful IRS fiction) on Organ Donor Cards or the back of Cornflakes packets  or, more likely,  one last tax return resulting in their US citizenship being viewed as transparent and, therefore, effectively annulled.

Gotcha!

In the meantime the Occupy Wall Street movement should start an offshoot and encourage everyone to “Hug a Taxman”. You never know, it might thaw them out a little.

The Euro – a mental exercise

Polish ex-president demonstrates best tool for unblocking an S bend

Zbig does not understand what the fuss over austerity in Europe is all about. He fails to comprehend the fall of the Dutch government, the elevation of a socialist to the presidency of France, the  inconclusive election in Greece, bailouts and quantitative easing.  All he can say, with his utterly limited command of at least 10 European languages, is that the European Union is “good”.

Whenever he finds himself a bit short of  work Zbig chucks his monkey wrench into his volumnous bag of tricks and heads for the next member state and fortune.  An optimistic chap, his education evidently did not include Steinbeck’s masterpiece “Grapes of Wrath” about the hardships of American migration during the Great Depression or, for that matter,  AA Milne’s “The House at Pooh Corner”. Noticing that children’s classic in the bathroom of one of his clients, he casually asked the lady of the house if it was the only book they had on plumbing.

“Next stop, Berlin!”

The media is currently obsessed with the woes of the Euro.  Faced with the inability of some countries to service sovereign debt 25 of the 27 members of the EU entered into a pact, under the extremely persuasive eye of Angela Merkel of Germany, to slash  deficits. Meanwhile rescue packages were put together where required and the European Central Bank eased credit.  The  austerity resulting from the contractionary fiscal policy has been roundly condemned by much of  the economics profession and is being clearly rejected by the electorates of countries with the chance to choose.

With only an undergraduate degree in monetary economics, when the Euro was first mooted my inital reaction  to the plan was “This is mental but I am sure that better men than I know what they are doing”. IT WAS MENTAL.

Don’t tell me what to do!

Now our economic gurus are telling anyone willing to listen (which is  just about everyone except Angela Merkel who is the only person who needs to listen) that prudent northern Europe needs to expand demand and encourage inflation to compensate for the inability of countries like Greece to devalue their Euro against everybody else’s Euro. A few days ago the Germans gave the first indication that they might be prepared to budge on this.

At the same time they place faith in the ability of workers to migrate freely between states thus solving the chronic unemployment problem in distressed countries. While Zbig, working with his hands in a pretty homogenous Europe-wide market for pipes and washers,  can get by with a few necessary words in whatever language he happens to be being paid in – for most people migration is hardly an option. Language barriers, recognition of qualifications, home ownership and pension rights are just some of the factors that put paid to serious mobility.

As it appears to be silly season for macroeconomics, I thought I might throw in an idea of my own. I am aware that it is full of holes – indeed, when I briefly spoke to the editor of  a respected financial newspaper last summer, he gently advised me that, although I was clearly a young man,  economics had moved on a bit since my student days.

If they want to save the Euro, it is time to employ some highly unorthodox tax policies “for a limited period only”  that go against everything the EU and OECD believe in (which is probably as  good  a reason as any to employ them). The following idea might provide a short-term solution to the mobility problem.

Greek workers demonstrating their flexibility

Countries with official unemployment above a certain level should be allowed to ring fence job-enhancing investment from low unemployment EU countries from taxation.  Thus, for example, a German company could invest in a factory in Greece starting  2012 or 2013 employing 800 workers and would get a tax holiday in Greece for, say, 10 years. At the same time, to ensure that the tax is not simply shifted, Germany would apply tax sparing (a credit for notional tax paid in Greece). Investing companies would have to prove that their existing employment numbers in other EU countries did not drop as a result of the new investment. What the Germans should like is that it does not involve them directly dipping their hands in their pockets and, as long as the OECD can imagine the EU as one country – there is no issue of unfair tax competition.

As a result of investment and increased employment in distressed countries demand should be enhanced, leading to optimism and recovery. In the meantime economists can keep pushing for the European Central Bank to continue printing Euros (quantitative easing) and German expansion  while citizens sporadically revolt against draconian deficit reductions.

With the spread of English as the international language across the globe (even the French, Russians, Japanese and Chinese have learnt to play the game) when all is said and done mobility may one day work in the EU. But there is one country that still seems to insist it hasn’t lost the language war – and that country is quite important.

In those days there was always someone who spoke English

A few weeks ago I had to join a conference call with a foreign colleague and his client in Germany. When I called the conference number the taped instructions were entirely in German which, I confess, I did not understand. Mildly frustrated by the experience of getting nowhere and surrounded by my bemused team I started jokingly shouting at the phone. Exasperated and beyond hope, I eventually hit the hash button and, to my utter surprise, was connected to the call.  At that point, the prerecorded call identifications started – first my German colleague, then his client and then……..a bellowing “Speak English!”  I don’t think they understood.

Turning left at the end of the world

Australian prime minister leaving lunch meeting?

A few years ago the president of one of those numerous archipelagoes peppered across the Pacific Ocean made an accusatory statement about Australia that threatened a diplomatic incident. Listening to an interview on the BBC with the then Australian foreign minister my mind was tuned to expect a suitably circumlocutory diplomatic reply. “Frankly, he is talking a load of crap” was the actual response – the minister probably calculating that the Polynesian ruler would be too busy eating his mother-in-law to be bothered to take the matter further.

Mature Australian

 

The Aussies are a truly wonderful species – they say what they think and they do what they say and to hell with the consequences. In fact,  despite my buttoned up Britishness, some of my best friends are Australians and I can always expect to be sent home laughing at some outrageous statement that I could never have got away with myself. What I would not expect is to be taught a lesson  by them in the fundamentals of taxation. But that is exactly what is happening at the moment – and they are acting in a far more mature manner than their counterparts in Europe and North America – which, to be fair, is not saying much.

As of the beginning of July Australia is introducing two new taxes, neither of which are particularly loved by Labor prime minister Julia Gillard but appear important to her coalition partners, the Greens (that is the Green Party rather than Mr and Mrs Bruce Green of Wallamaloo Street, Perth). The Mineral Income Rent Tax (30%) which will apply to sectors of the hugely profitable mining industry is designed to redistribute wealth while the Carbon Tax is designed to substantially cut greenhouse gases. The Carbon Tax, initially fixed at a fairly random A$23 per tonne of carbon emissions will morph into a Cap and Trade system in 2015 allowing the market to decide the fair price while limiting overall emissions. As both taxes, especially the carbon tax, are regressive – they affect lower income people most because they up the price of basic goods like electricity – much of the revenue from the new taxes is to be funneled back to consumers by direct monetary grants and tax breaks as well as assistance to farmers and industry to meet lower  emissions targets.

But what really caught my eye was the expected effect of all this on this week’s Budget speech to be delivered to Parliament by Wayne Swan (not – as you might think – a gyrating contestant in the latest season of America’s Got Talent, but Australia’s Finance Minister and current holder of Euromoney’s Best Finance Minister Award).

There has been a lot of lobbying for a significant corporate tax rate cut to be partly funded by the revenue from the two new taxes. Currently at the unfashionably high rate of 30%, the recent Henry Tax Review recommended lowering the rate to a more competitive 25%.

Can I interest you in a factory in Dublin with 400 employees?

No way, mate! The government is determined to push the country into budget surplus in the next financial year, so the rate is going to drop all the way to…29% and to hell with any whinging possums who don’t like it. Here is a case of fiscal responsibility (Greeks might like to look that up) coupled with a gutsy position that racing to the bottom in tax rates is not some Holy Grail. The concept of competitive tax rates is problematic. While competition may be healthy in predominantly all sectors of the economy – that is not what taxes should be about. Taxes are about funding what is needed outside the scope of the market to maximise the lot of civil society as a whole. The fact that corporate taxes have been abused by countries from Ireland to the Baltic States – especially in their lust for the refugees from the American system – does not turn tax competition into a moral goal, let alone an ideal. The race to the bottom should not be confused with the Laffer Curve -seeking the rate at which government revenue is maximised is what fiddling with the tax rate should really be about.

The tax world needs more Australias. Amen.

Princess Alexandra showing Miss Goolagong what ladies ought to wear for tennis

Of course, Australia is not perfect. It did a pretty good job in the, not so distant, past of  making the indigenous population miserable – including forcibly removing children from their families which was heinous. When then prime minister Kevin Rudd made his famous apology in Parliament to the Aborigines in 2008 it took me back to the Wimbledon of my youth. In 1971 the Center Court rang to the Umpire’s call “Game, set and match to Miss Goolagong” as that exotic young lady took the Women’s Singles title. When she won it the second time ten years later, I had a creeping suspicion that she would take out a duster and can of silver polish to clean the winner’s dish – “Game, set and match to Mrs Cawley” was just too Australian. G’day, cobbers!

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