Tax Break

John Fisher, international tax consultant

Archive for the month “July, 2012”

Art for art’s sake

Sprouts are not the only thing the city is famous for

Brussels sprouts are the ultimate passion food. You either love them or hate them. I last gobbled one down 41 years, 2 months 3 weeks and 1 day ago. Condemned to a childhood of Friday night dinners with the accursed things, I eventually developed a technique of swallowing them whole. Since my marriage raw sprouts have only once made it over the threshold but were quickly intercepted thanks to my hyper sense of smell; I managed to grab the pan off the gas in the nick of time just as they were about to go nuclear. Fortunately, my childhood experiences did not leave any mental scars.

How many opera singer’s body parts could you get in one of those?

While Shakespeare may have thought that music is the food of love, the only one of the fine arts that, in my experience, bears comparison to food is Opera. And the food in question is the Brussels sprout. Opera – you either love it or hate it. Fortunately, as a child, since opera tickets were not on sale for a shilling per pound at the local greengrocer, I was not dragged screaming through the streets to the Royal Opera House . In fact, my only first-hand encounter with this art form was a few years back when my wife persuaded me to attend a performance of La Traviata at the ancient Arena in Verona. Well folks, I made it to the end of the first act at which point I slipped out and spent the rest of the evening admiring an exhibition of vintage Fiat Cinquecentos across the piazza from the amphitheatre. Apart from the inanity of the plot and the fact that , even if you could understand the language in which they were singing, the words were  hopelessly unclear, a pair of far-too-old and overweight love-sick opera singers reminded me of two wide-bodied Airbuses making a noise similar to the twin Rolls Royce engines that power them.

“OK. I will ask one last time. Which one of you forgot to give the decorator a budget?”

Last week the New York Times ran an article about the Geneva Freeport – essentially a bonded warehouse specializing in the storage of luxury items. Vintage wines, expensive cars, gold bars and cigars are among the goods stored. But what caught my eye and ire was the extensive storage of works of art. The article stated that there is a wide belief among art dealers, advisers and insurers that there is enough art there to create one of the world’s great museums. When you take into account that there are a number of other such warehouses in Switzerland as well as Luxembourg, Singapore and Beijing – the mind really boggles. Now, I am no connoisseur of  Art but let me loose in the National Gallery , Louvre or Vatican and I (and, indeed, my children) come away feeling enriched. So why do famous works of art get stuck on warehouse shelves while opera singers are allowed to roam the world freely bringing misery to the majority of the population?

Not all books could take the heat

The Arts are often (but by no means always) divided into Literature , The Performing Arts and The Visual Arts. Literature has had a wide audience since the advent of the printing press although it took a while for the masses to take advantage of the invention by learning to read and governments to learn that they could not control what the masses read. The Performing Arts, particularly music and theatre (and bloody opera) have always required an audience and with the advent of the phonograph and its successors down to the IPod, not to mention cinema (which, along with photography also smacks of visual art),  have reached every corner of the globe. The Visual Arts – insofar as they include painting and sculpture – continue to constitute a particular problem – they cannot be copied and you have to seek them out.

But, at least historically, Art – in the sense of painting and sculpture – has  been located in museums or, at least, in private collections that a determined public was often able to visit and admire. Enter the pork belly approach to art. For many wealthy players Art has become a commodity – like gold, an asset to manage risk against an uncertain economy. When faced with import taxes and duties for bringing works of art into their countries of residence many prefer to “bank” them in places like the Geneva Freeport where taxes only apply when the items are removed and either taken into Switzerland or another taxing jurisdiction. Then there are the insurance considerations of keeping artwork at home or on public display – the Geneva Freeport makes life much cheaper.

If anyone is storing the 4th lion at Geneva Freeport – please note that Boris Johnson is buying

Now, if they could pack up an Opera Company and put that in a Freeport, I might feel a bit warmer towards the concept, but Opera Companies – like Brussels Sprouts – need tending and that is not suitable in a warehouse concept. Valuable works of art purchased on the open market should be available to the world. That is not to say that a free market in such treasures should not be allowed to exist but, rather, that they should be lent to museums and galleries. To encourage this, governments should institute, or extend existing, exemptions  from charges to import taxes and duty on items destined for public display while  museums and galleries should cover part of the insurance cost. The end result would be the same for the financial collector of art while replacing a dusty shelf in the Geneva Freeport with a lighted wall or plinth at the Uffizi in Florence or the Metropolitan Museum of Art in New York. And if that does not work, international organizations like the UN and OECD should seek ways to enforce public display.

Alright. Not ALL opera singers

The Geneva Freeport and its sister institutions need not disappear. Perhaps the vacated warehouse space could be converted into a refuge for over-the-hill opera singers who could compete with the foghorns of the ships on Lake Geneva and the engines of incoming planes at Geneva Airport while leaving the rest of us in peace.

French toast

Indignant Frenchman

The French are the masters of indignation. Staring at an offender from the top of his Gallic aquiline nose,  a Frenchman can turn any opponent to blancmange faster than a speeding escargot. You don’t cross the French.

Marking Bastille Day last weekend with a cafe-au-lait and croissant in the comfort of my salon,  my mind wandered back to Mrs Thatcher’s run-in with the last socialist president and his entourage at the bicentennial celebrations in Paris in 1989.

World leaders getting focused for photo shoot at 2010 G20 summit. Mrs Thatcher should be grateful Mitterand put her in the back row

Determined to be cast in the role of the wicked fairy at the feast, even before celebrations started she had told French journalists that the ideas  fought for in the Revolution were filched from the ancient Greeks and less ancient British. In gratitude for her kind words she was stuck in the back row of world leaders for a photo shoot and her car was only allowed to leave the Opera after that of the President of Zaire. It would not have been lost on Mrs Thatcher that, being France – the flag bearer of  “Liberté egalité fraternité” –  President Mobutu of Zaire was only allowed to leave after everybody else, although – to be fair – that may have been because he wasn’t even invited and chose to crash the party.

1812 is ancient history. Russian with French luggage

After five years of Sarkozic bling-bling, the French are back in their sanctimonious “We may not rule the world any more, but we will show you the moral high ground by finding someone to be indignant about” mood. Since the revolution it has gone: Louis XVI, the British, the Russians, the Germans,  Dreyfus, the Germans, the Germans, the British, the Algerians, the Rosbifs (British), the British. Having booted Sarkozy out of the Elysé Palace, over the last couple of months when he wasn’t being indignant at his serial concubines and children for tweeting each others eyes out, Francois Hollande has been frantically consolidating power in the National Assembly while downsizing his own and ministers’ cars and salaries.  Two weeks ago he was finally ready to resume the national sport with  the announcement of the new government’s budget which passed the Lower House last Friday. Bored with the British and with a morganatic marriage to the Germans , the new president went gung-ho for the hammering of the filthy rich.

This man has blurred vision

Hollande having been elected on the back of a promise of a 75% individual tax rate on people earning more than € 1 million, renewed that pledge immediately after the election. The Budget contains proposals for an  increased wealth tax, tightening of inheritance tax provisions and an additional 3% on most dividends. Taken together with the additional 5% surcharge on major corporate profits (a Sarkozian legacy) which makes France among the highest taxing jurisdictions on the planet, it is no wonder that there has been an exodus of French men, women and the undecided to that cultural backwater, London. Then there is the levy on oil inventory and the souped up Banking Levy (can’t you just see the executioner holding up the banker’s corpseless head as the guillotine’s blade is raised ready for the next happy financier?). Companies employing more than 20 people used to be entitled to give a tax exemption for overtime. Not anymore – why would a socialist president want to encourage the exploitation of the proletariat by the owners of capital, even if it was the proletariat that benefited?  One thing that did come out looking better  was CFC legislation – which is probably because Hollande doesn’t have a clue what it is. Meanwhile, transfer of tax losses between group companies will be subject to various restrictions. The general expectation is that rich-bashing  has only just started while various instruments of torture have been retrieved from museums and are being oiled for use.  An employers’ union leader, reacting to the Budget, suggested a state of “systematic strangling” which is more reminiscent of Spanish garrotting than the preferred method of disposal in France.

Despite the suicidal tendencies of several of the new edicts there is some light at the end of the tunnel. Indignation is not Fury. An indignant person still acts rationally and will calm down. Within five years the French Revolution had imploded. Within five weeks of election, Francois Hollande had received the report of the State Controller (a socialist) telling him what everyone else already knew – that to meet this year’s 4.5% and next year’s 3% deficit reduction targets as well as reducing the mammoth public debt standing at 90% of GDP,  tax has to go up or spending has to go down. And the Controller sided with the reduction of spending.

Pointless to try and come up with a caption for this

The Budget Minister said recently that the problem with public spending is that it is like “slowing down a supertanker – it takes time”. As a Frenchman he might have bettered the metaphor by saying it is “like starting up a Renault – it takes time” ,which is part of  France’s real problem. However, he also stated last week that the proposed 75% top tax rate might only be temporary until the deficit is brought under control. That is more like it mon cher. You are starting to talk like a pragmatist. Keep on like this and within a few years you will be able to go back to being indignant about the British. It is much more fun and gives British newspapers so much to talk about.

Tax and the C.T.

Wicked, cool and awesome!

Dan Brown’s “The Da Vinci Code” was an unlikely international bestseller. The Louvre, the Vatican and a French Church would hardly be expected to be up there amongst  the 1001 places  Joe Sixpack must visit before he dies. However, looking at what it did for interest in religion, can you imagine what a boon it would have been for tax advisors if, rather than the Da Vinci Code, Brown had woken up one morning and come up with “The US Tax Code”?

Instead, while trial lawyers have been glorified in American literature from Harper Lee’s Atticus Finch to Scott Turow’s Sandy Stern – and deified in TV series like Perry Mason and L A Law, tax attorneys have had to suffice with John Grisham’s “The Firm”. That book and spin-off movie did for the tax profession what the Taliban has done for Afghan tourism.

And that  just covers the lawyers. Tax accountants are only ever portrayed as semi-bald grunts in man-made fibre suits staring at the world through goldfish-bowl, grime encrusted spectacles.

Heeeeere’s Johnnie!

But now, thanks to the antics of  the most over-budgeted, long running reality show on Planet Earth,  that may all be about to change. “Washington D.C.” has finally gone tax.

Having watched patiently as Chief Justice Earl Warren tiptoed through the Civil Rights revolution of the sixties, Warren Burger handled both the Watergate scandal and Roe v Wade in the seventies and William Rehnquist put paid to Al Gore’s presidential hopes at the turn of the century – we have to say “Glory be” to Chief Justice John Roberts. A few short weeks ago Roberts pushed tax to centre stage. And with a newly emboldened President Obama stepping out last week to further the crusade, it must only be a matter of time before the tax profession is inundated with bright young things looking for self-actualization in their careers while Hollywood comes knocking at our doors.

I am talking of course about the Obamacare case and the Bush Tax Cuts. ” We get the Bush Tax Cuts. But Obamacare? Tax? WHAT ARE YOU ON?” I hear you politely ask . Well it turns out that the central feature of Mr Obama’s first (and possibly only) term in office – his Affordable Care Act (Obamacare)- was not about bringing a basic right of modern civilized society to the people of the United States – the right to be cared for when you are sick. No sir. The conservative Mr Roberts, in providing the swing vote in his politically divided court, surprised everyone by abandoning the standard right-wing “If they don’t know how to look after themselves, let them die” motto and confirmed the law on the grounds that the penalty that would be imposed on anybody not paying for health insurance is a tax. Fortunately, way back in 1913 – when William Howard Taft was still President and not yet Chief  Justice – Congress had the foresight to pass the 16th Amendment to the Constitution permitting a federal income tax; otherwise, to paraphrase Oscar Wilde “people would still be dying beyond their means”.

“If they would rather die,” said Scrooge, “they had better do it , and decrease the surplus population.”

I am from the old world and, while I genuinely love much about America, I fail to understand how they get caught in these idiotic outdated philosophical spiders’ webs. While individual liberty is clearly sacrosanct to the American way of life leaving little place for a Hobbesian social contract, do they not realize that Health Care is not just about the individual? What about dependents who either lose their financial support because it went on chronically expensive medical care, or lose their provider who skimped on the treatment. And it is no use waving Medicaid and Medicare as the safety net because you need to meet certain quite weird conditions to qualify.

Then last week it was the turn of the  Bush Tax Cuts. As everyone knows by now, thanks to a marvellous quirk in the US legislative system, various laws introduced during the W years include romantically named “sunset provisions” meaning that they have sell-by dates after which they have to be thrown out. Having already been extended, to cut a long story (which could be the subject of a Dan Brown book) short, if the president and Congress do not get their act together quick, come New Year’s Eve as the ball drops in Times Square, taxes will shoot up and fiscal spending will shoot down. America will then walk off what journalists are calling a “Fiscal Cliff”. Recently it has started to look like the Democrats and Republicans are so busy bashing each other that, similar to a Hannah Barbera cartoon, they will take their fight over the cliff edge and, only when they look down, take the country (and the rest of us) with them into deep recession. 

Are you on less than $250,000?

Barack Obama has called for an extension of the cuts but, in a clear electioneering move, only wants them extended for people earning less than $250,000 (which, for most people who are not American, is quite a lot of money). Everybody else would be sunsetted. The Republicans of course will have none of this – all or nothing – and even the democratic former Speaker of the House of Representatives Nancy Pelosi wants $1 million (I wonder how much congressmen earn?). As mentioned in a previous post, I am getting used to the concept that in America presidents do not have any real say over fiscal policy and just act as a vociferous lobby. However, I do wish that the gentleman in the White House would explain how he suggests implementing this quarter of a million bucks cut-off. The Bush Tax Cuts, contrary to popular belief, are not just about shoving up long-term capital gains tax rates and making dividends ordinary income. In addition to tweaking of personal tax bands and the top rate (which are irrelevant in this context) there are loads more provisions. What, for example, does Mr Obama intend to do about Alaska Native Settlement Trusts that allow tax to be paid at the lowest marginal individual rate? And what about Marriage Penalty Relief?

Meanwhile, as the world struggles with recession and America itself struggles in Iraq and Afghanistan, the United States House of Representatives last week spent 5 hours of taxpayers’ money (spread over 2 days) debating and voting to repeal the Health Care Act.  Nobody, but NOBODY, expects the act to be repealed in this Congress but we are already hearing Mitch McConnell, the pugilistic minority leader in the Senate warming up for a fight with Harry Reid, the Senate Majority Leader.

While they are at it, they could set in process the repeal of the 16th Amendment (I don’t think they can do that by themselves) and, as Ron Paul the Libertarian candidate for president would like, get rid of income tax as well.

At least HE knew he was a B-movie actor

Perhaps, on reflection, rather than seeking stardom for our profession, we should encourage everyone else to switch off their sets. Maybe if those immature children in Washington were aware that nobody was watching them, they would start to behave like adults. Fat chance. I think I will go for fame and fortune.

Rocket tax

Where is the Higgs Boson when you need it?

At the dawn of my career when I would flit from audit client to audit client, red and green pens at the ready, every accounting department would resonate at least once each day to the gravelly voice of Bonnie Tyler singing  “Every now and then I fall apart”.

Well, last week scientists finally proved (almost) that she was talking rubbish and people and things and the universe don’t fall apart. This is  because of something called the Higgs Boson. What really got up my nose were  all those goofy scientists, whose parents were too tight to pay for orthodontic treatment, coming down off Mount Olympus to explain to us mere mortals the significance of the discovery of the “God Particle” in a multitude of idiots guides, guides for dummies, table-tennis balls on trays of sugar and impossible cartoons.

Who, in heaven’s name, do these physicists think they are? It occurred to me that I should return the compliment, so if any scientists read this blog – this post is meant for you.

The cost to the American taxpayer was $170 billion.

Everybody knows that taxation is rocket science. It is full of equations and graphs that mean nothing to the scientist in the street but make people with doctorates in taxation feel that they have not wasted their lives.

The European Union is currently facing a major crisis among the countries that make up the Eurozone. As I have pointed out  in previous posts, the only way the Euro has a future is if the countries achieve fiscal unity, a significant level of political unity and there is cultural convergence. Following negotiations last week, the first two are looking increasingly likely in the medium term – but nobody is talking about the last. This is complex stuff and invites a plethora of  courses in Euro for Dummies. To try and make it simple, I will use the analogy of the Higgs Boson to explain.

It is no coincidence that the countries causing Euro problems are predominantly in Southern Europe (Greece, Spain, Italy, Portugal, Cyprus – Ireland is a special case). It is a fact of life that the weather around the Mediterranean is a lot more clement than in the North. There is incontrovertible empirical evidence to show that when the weather is good and you have a Mediterranean coast down the road, there is a desire to spend less hours in the office. The incontrovertible empirical evidence stems from my experience of having spent half of my life so far (hopefully only a half-life) in the smog of London and the other half with a view of the Mediterranean from my office window.

No escape – 24/7

As mentioned in my last post there is a widespread belief among tax professionals in “Tax Neutrality” – that tax should not affect the allocation of economic resources. One of the many divergences from this rule is the tax treatment of leisure. When people’s work income is taxed their desire to work diminishes and their desire for leisure increases. Ever since Corlett and Hague (1953) it has been recognized that, to rectify this disequilibrium, leisure should be taxed. However, since governments cannot tax something intangible, they should tax leisure “complements” while, possibly, offering tax relief for tax substitutes.

Getting difficult? Let’s shoot over to the Higgs Boson. Scientists have known for eons that atoms are made up of electrons and a nucleus. The nucleus is made up of protons and neutrons which, themselves are made up of quarks and lots of other bits and pieces. But it was not clear what gave all these particles mass – in other words what kept everything together. Peter Higgs (and others) developed a theory in 1964 that the missing ingredient was an invisible particle of force which came to be called the Higgs Boson. As particles went flying madly around they collided with the Higgs Field (made up of Higgs Bosons) which permeates the whole universe. Depending on the nature of the particles these were slowed down at various rates and success by the Higgs Bosons. Some particles, such as photons, are so aerodynamic, that they shoot through the Higgs field at the speed of light. The existence of the Higgs Boson was (almost) proven this week by crashing protons head-on in the 27km Large Hadron Collider spanning the Swiss-French border near Geneva.

Southern European compromise?

Now let’s imagine that the citizens of the Eurozone are particles and that tax is the Higgs Field. The workers of Northern Europe are slowed down by taxation, making them more interested in leisure but it takes such effort and money to create meaningful leisure in most of the miserable months of the year that they are not slowed down significantly. The workers of  the Mediterranean Basin, on the other hand, are slowed down totally by the tax because their leisure in outdoor activities such as the beach and  barbeques at the back of the house, is cheap. 

It follows, therefore, that for the Eurozone to survive – through, among other things, increased productivity in Southern Europe – leisure needs to be taxed. The way to achieve that is by increasing consumption taxes (VAT) and other charges on the products that complement cheap leisure. Examples would be charging for using beaches, banning outdoor cooking on weekdays, increased VAT on swimsuits (wouldn’t help much in parts of Greece) as well as deodorant (which would encourage people to stay in air-conditioned offices).

Sounds pretty horrible. Agreed. The alternative would be for the Southern European populations to behave responsibly. The prognosis is not good. It would require a quantum leap in behavioural patterns. In the meantime the Eurozone crisis is a case of an irresistible force (Germany) meeting an immovable object (Southern Europe).

Did you hear the one about…..?

Once upon a time timing was everything

Comedians  fear the moment in their careers when they lose their timing. Evidently not the Cypriots.

This week Cyprus proudly assumes the six month rotating presidency of the EU. Last week, after knocking on the doors of friends and distant neighbours to see if they could spare a dime, they finally asked the EU for a bail-out to prop up the banking system that has, understandably, been heavily exposed to that accident of comic timing, Greece. So far, embarrassing but containable.

However, at the end of May – fully aware that the EU presidency was just around the corner and that the bailiffs were approaching fast across the Mediterranean, the Finance Minister announced a new tax regime for Intellectual Property. Put in brutally simple terms, find an excuse for painting income routed through Cyprus as deriving from intellectual property – in the broadest sense – and they will tax you at the exorbitant rate of …2%. Never mind that they have one of the lowest tax rates in Europe. Never mind that they are begging for money from their colleagues. They are clearly grabbing some more of the zero sum international economic cake and biting off the hands that feed them.

Of course, just as Churchill explained the use of diplomatic language when declaring war on Japan: ” When you have to kill a man, it costs nothing to be polite”, they put up a smokescreen. Rather than offering 2% tax it was announced that an 80% deduction would be granted for investments of this nature, the headline tax rate being an already  rock-bottom 10%. Brilliant. Like the rest of us are really stupid.

“From each nation according to its ability to each nation according to its needs” – Marxist-Cypriot philosophy?

Now being the product of a daft and naive western liberal education, I would have said that the immorality of this scam was pretty slam dunk. Not so. If their past pronouncements are anything to go by, members of right-wing economic, and totally loony right-wing libertarian economic, fish (sorry, think) tanks would have jumped on the first carbon guzzling plane to kiss cheeks with the Cypriot president (who happens to be a communist which makes the mind really boggle) in gratitude for saving the world economy.

Why? I will explain.

In the good old days of the twentieth century, when there were barriers to trade, when international travel took so long you had to check luggage, when there were great recessions and depressions, when one world war followed another – newly socially concerned governments would fret over their sovereign tax systems. The received wisdom on all sides of the economic divide was that “tax neutrality”  – trying to make sure that taxation did not cause distortions in economic decisions – was a desirable goal. On the other hand, as with everything else in the real world, this policy was more honoured  in the breach than in the observance. Individuals were exposed to progressive taxation – a form of redistribution of income. Consumption taxes such as VAT were regressive in that poorer people spent a higher proportion of their income. There were Pigouvian taxes such as those on alcohol and cigarettes (and more recently carbon emissions) designed to compensate for social costs. And then, there was tax relief  to encourage savings. 

Another option

Overall, the attitude to tax neutrality for most nations was the temporal equivalent of the British approach to the Church of England – a good lamppost when you are looking for something to lean on. However, what was important was that electorates could vote into office  parties that promoted “Big Government” (like in Britain, France and Germany) “Small Government” (like the Americans like to  think they were doing) or “No Government” (like the Greeks didn’t realise they were doing). Thus, tax rates were free to be high, low or, if you happened to be living it up in the Cayman Islands , non-existent (go on – how many people reading this could pinpoint Georgetown on a map at the first attempt?).

And just as the Americans, Japanese and Europeans were starting to understand the Laffer Curve (the relationship between government revenue and tax rates) and were reducing tax rates in order to actually increase revenue, globalization kicked in.

Have a Tax Break. Have a Fair Trade Kit Kat

Of course for most people who don’t walk around with straggly hair, beards and open leather sandals (or happen to be the Commie president of Cyprus) ,  the liberalization of the world economy has been generally viewed as a good thing. Competition encourages efficiency and, as long as there are certain bells and whistles included such as the amazing Fair Trade movement aimed to help producers in developing nations, more power to the global elbow. Lower tax rates have also proved a boost – average corporate rates came down drastically across the world from the 1980’s onwards as noted above without destroying the ability of sovereign governments to determine fiscal policy.

Now an unaffordable luxury. Like the 12.5% tax rate

But then things started to get out of hand. Not satisfied with economic competition, countries started to go for tax competition. The star player in this game was Ireland with its 12.5% corporate tax rate that made them so successful in attracting American investment. Other countries followed and the race  to the bottom commenced. Meanwhile, both the OECD and the EU introduced various measures against harmful tax competition to try and contain the epidemic – but these inevitably led to ever cleverer schemes and enhanced competition. The result (leaving aside the Euro Crisis) is less ability of governments to choose between social welfare and survival of the fittest which, judging  by the nature of opposing major parties in many national parliaments, should be a major part of the democratic process.

However, reading the literature of such right wing organizations as the Cato Institute and the Adam Smith Institute you would think the turbo competition of nations like Cyprus and common-or-garden tax havens is an economic ideal. The theory, as is so often the case with right wing thinking as far back as Adam Smith himself , is simple (dare I say, simplistic). Governments will be forced to lower their tax rates which will increase Tax Neutrality, ensure that economic flows are not distorted and leave individuals in charge of their fates.

This is every bit as cynical as Cyprus’s latest game. What they are actually saying is that harmful tax competition, such as the utterly contrived Cypriot IP regime,  is good because it does away with “Big Government”. That is wrong. The question of size of government should be decided, as far as still possible,  at the ballot box and not by the underhand tactics of small nations.

So, the members of those illustrious think tanks should  indeed be flocking to the Cypriot president whose nation is, not for the first time, contributing to the hammering of Big Government. As a Communist, while he would presumably wail at the thought of the decimation of government , he should at least recognize  the concept of the ends justifying the means. What a joke.

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