Tax Break

John Fisher, international tax consultant

Archive for the month “August, 2012”

Of mice and men

It is lucky the President didn’t ask himself what Dean Martin would have done

When challenged by an aide as to why he had changed his mind about invading the tiny island nation of Grenada, Ronald Reagan is reported to have replied “I sat back and thought: What would John Wayne have done?”

That was nearly 30 years ago and the protracted  7 week campaign was a huge military success for the world’s No. 1 military power dwarfing Britain’s earlier victorious 10 week recapture of a bunch of rock formations from the Argentinians.

The way irritating  little  tax haven islands have been  behaving lately it might be time for a refresher course in “Who’s Sheriff  round these parts?”

The Cayman Islands, as most people reading this blog will know, does not have much of a history of Direct Tax. In fact, it does not have ANY history of Direct Tax. As such it is among the OECD’s ultimate nightmare nations because, whatever is done to tackle Harmful Tax Competition, it is difficult to hammer a country that says it will not tax anyone.

Foreign workers arriving in Cayman Islands

Therefore, it was something of a surprise when Caymanian premier McKeeva Bush announced last month that his government would be imposing a tax on salaries known as a community enhancement fee. Surprise turned to fury when it turned out that only foreign workers would be required to pay the tax. What made matters worse was that the tax was cynically devised to encourage employers to replace a current compulsory pension contribution with a contribution towards the tax which would enable the Cayman Islands to compete with the Bermudian employment tax system while netting more tax. The lame excuse given was that they were under pressure from the UK (Cayman Islands is a UK whatchamacallit) to balance the budget – and this avoided the need for “painful” budget cuts. To cut a short story even shorter, last week the proposal was cancelled . What amazes me is the absolute cheek of it all. Here is a nation, whose main industry is the denial of tax to others – with a population of  55,000 there are 9,000 mutual funds, 260 banks and 80,000 companies forcing other countries to either borrow or cut public spending – that thought it could tax with impunity and still only inflict the pain on foreigners.

What happened the last time the British left

However, Caymanian chutzpah pales when compared to the Channel Islands. Famous for inventing the offshore industry as well as two breeds of dairy cow, Jersey and Guernsey government representatives have  been bleating rather than lowing  in recent months. In an interview with the Guardian newspaper, the Assistant Chief Minister and former Bailiff of Jersey even went as far as to threaten independence from the UK (how will the UK survive?) although he was quick to stress, in good old-time conservative banking fashion, that this would be “quite a long way down the road”. Given that the islands are the last remnant of the Duchy of Normandy, the rest having been lost to the French by King John (great name, lousy monarch)  800 years ago, “quite a long way down the road” could be any time not in the next 500 years. .

 Idle threats apart, what was the gripe? At the end of last year the British closed down an expensive VAT avoidance scheme that was causing extreme distortions in the distribution of goods. The EU  exempts low value products from VAT on import from non-EU countries. Although the Channel Islands are  UK Crown Dependencies they have their own governments and are not part of the EU. As a result British and other mail order companies were exporting their low value goods to Channel Islands subsidiaries who then sold them to UK and other customers without VAT. This gave a clear pricing advantage over local suppliers (the customers are invariably private individuals who cannot reclaim the VAT). Worse, they were also splitting much larger deliveries into small components to circumvent the VAT requirement.

More recently the Times newspaper uncovered a widespread direct tax avoidance scheme. UK resident wealthy individuals would be employed by a Jersey entity called a K2 which would charge for their services. Rather than paying them a large salary or dividend, the Jersey company would pay a small salary to be assessed to tax in the UK and give them a tax-free loan resulting in tax paid of around 1%. For some reason, British protests at this clear act of unfair play together with closing the VAT loophole got the government so riled that, despite being a camembert cheese’s throw from the Normandy Coast and the hands of any potential Continental European aggressor, they would like to consider going it alone (one day).

Guernsey was marginally less annoying when told that, while their zero-10 corporate tax system (everybody pays zero tax except financial institutions and local real estate businesses) was not considered Harmful Tax Competition, they would have to cease charging Guernsey resident shareholders tax on deemed dividends and await the real thing. This proved a minor blow for the Bailiwick’s budget balancing but the Treasury Minister accepted it; on the other hand he lamented that  external forces had forced their hand. What did he really expect?

“Mr Gorbachev, pour me another drink!”

The Channel Islands have Bailiffs rather than Sheriffs. Who cares? If they sent in John Wayne he would, as always, just play himself and sort them out good and proper. After all, it was thanks to his philosophy that Grenada became the law-abiding paradise it is today and that the Soviet Union fell apart.

House warning

Moving house knocked her out completely

The expression “Moving House” is the sort of English up with which Winston Churchill would, famously, not have put. In point of fact, moving a house is exceptionally difficult and,  other than in natural disasters, very rare. Believe me – I know. Every weekday evening for a year and a half I used to speed out of the office car park only to be halted by the horrendously slow traffic lights at the end of the street.  As a matter of habit, I would turn my head and observe the snail’s pace progress in arranging the moving of a couple of remarkably unremarkable houses a distance of no more than twenty metres to permit the widening of the road that was the raison d’être for the traffic lights.They spent millions upon millions to dig under the foundations and put a few 100-year-old houses on rails. Preserving 100-year-old houses of the German Templars in Israel, a country that boasts its fair share of genuine antiquities (just last week I stood in the middle of a sea-front Roman Hippodrome imagining chariots racing around me) was undoubtedly an act of folly. Indeed the houses were (and, if you swing your gaze twenty metres, are) reminiscent of  the sort of buildings on the other side of Berlin’s Brandenburg Gate that a United Germany has not yet got round to demolishing.

Precisely because houses are so hard to move they are exceptionally popular when governments are, like now, looking to replenish the national coffers with giant helpings of  taxes. After all, when was the last time you heard of a semi-detached in your neighbourhood disappearing overnight and turning up on a sand dune in the Cayman Islands? And what about all those nice tax planning devices to reduce profit or, indeed, induce losses? With real estate, even if you improbably find ways to avoid capital gains tax, there is always property transfer tax (under one of its many aliases) and annual property taxes that date from time immemorial when nobody worried about progressive tax rates and the redistribution of income.

Fortunately for the owner, his tax adviser could not find a big enough envelope

Britain and Germany are taking part in the latest game of “Plug the Deficit with Bricks and Mortar”. This week sees the deadline for public comment on the British Treasury’s Consultation Paper “Ensuring the fair taxation of residential property transactions”. The proposal is aimed at nuking the ‘enveloping’ of high value residential properties in corporate structures so as to avoid Stamp Duty Land Tax on sale and, in the case of foreign residents – exemption from capital gains tax. The SDLT to be paid by a non-individual buying a residential property valued at more than £2 million is a whopping 15% of the value of the property. Meanwhile, wrapping such properties in an envelope will – from 2013 – attract an annual charge of between £15,000 and £140,000. In feeling the need to justify the imposition of capital gains tax on enveloped properties held by foreign residents (virtually every other country in the world already charges tax on the basis of where the property is situated) the paper seems to miss several beats – but it does not really matter. What is pretty clear is that, if this proposal becomes law, the days of non-commercial corporate ownership of residential properties  are numbered and everybody is going to be paying 7% SDLT (up from 5%) which is quite a lot really.

The Germans are also at it. In between dealing with the woes of the Euro, they found time to come up with a series of proposals to close annoying  tax loopholes that have been costing them a cent or two. Buried deep and largely out of sight is a suggestion to clobber an almost ubiquitous device to avoid Real Estate Transfer Tax (RETT). The transfer of properties in corporate structures by sale of shares has been widespread in Germany for some years and has traditionally succeeded in avoiding the RETT. However, the indirect transfer of at least 95% of a property also triggers the RETT . To avoid this, Germans started establishing RETT blockers – entities that facilitate a split in ownership 94.9:5.1 and avoided the problem. Well, it looks like that one may be on the way out if the Bundestag and Bundesrat can get their act together when Mrs Merkel returns from her Italian walking tour in September.

Mutual Friend? Never mind. Even the greatest novelist of all time could have bad grammar days.

While abuses of language  roll on unhindered, this year the Oxford English Dictionary, to my absolute chagrin, ditched the word “Growlery” from the English lexicon. The most famous Growlery was the wealthy, benevolent and cheerful John Jarndyce’s private room at Bleak House where he allowed himself to be angry and depressed. There will be a lot of wealthy people in England shutting themselves off in rooms in their mansions angry and depressed over their frustrated property tax avoidance schemes. What a pity that they will not have a name for the room. Mind you, at least they will be able to think about “Moving house”.

Risks of the import/export/import business

The crooks used to die laughing

Back in the sixties when my all-time superhero,  Batman,  used to dress like he was going to a neighbourhood Halloween party, actors Adam West and Burt Ward would issue warnings to stupid children not to try any of their stunts at home. That was sound advice.

While they had the full attention of the little weirdos they might also have told them that, when they grow up, they shouldn’t try crime. Because, while stupid people might get a real kick (and “pow” and “splatt”) out of crime, when they get caught (and stupid people who think they can swing across skyscrapers with capes catching between their legs DO get caught) it really messes up their social life.

I reckon it is precisely these sorts of wackos who  go in for VAT fraud. VAT fraud is very tempting. As will be seen from my “VAT Fraud for Dummies” below, it carries the very real advantages over regular aggravated burglary of not involving physical violence and offering theoretically unlimited gains.

It’s a dog’s life sentence

The problem is that when you get caught, as happened to a gang in England recently, the judge tends to get enthusiastic when it comes to sentencing. One genius  copped a 17 year sentence last month. For any Americans reading this, British custodial sentences compare with American ones like dog lives compare with human ones – so for 17 years read 119 years (and for VAT read an indirect regressive tax designed to fall on final consumers and hated by every Yank who hates Barack Obama).

The most popular form of VAT fraud operates best in the European Union. This is mainly because the Europeans, as a matter of policy, trust each other. They trust the Greeks, the Italians and the Spanish just as much as they trust the Germans and the French – and that is official.

In describing “Carousel” fraud I will actively omit a few essential steps so that, just in case some fat con sunning himself next to a pool on the Costa Del Sol with a cocktail in one hand and his computer in the other is reading this, he will NOT be able to commit the crime of the century (and then get caught).

It starts in, say, France where a member of the syndicate (you need a lot of goons for this game which increases the risk of someone singing) exports mobile phones to Britain. It is almost always mobile phones or similar devices although carbon credits have recently joined the list. The French exporter does not charge VAT because, as an export sale, it is subject to zero rate VAT. In Britain – where VAT is not charged at the port because the British and French are in bed together in the EU lovefest – the VAT registered purchasing company  on-sells the goods with a profit to another British VAT registered company charging whatever rate of VAT Britain’s coalition government is charging that month (for VAT fraudsters – the higher the better – so bring it on, Dave). The first British company then conveniently forgets to pass over the VAT to the UK authorities and ultimately “disappears” with the VAT it has received from the next company which is its accomplice. So far, apart from breaking the law, nobody is better off. From here on, depending on the level of “sophistication’ of the perpetrators the goods may now pass through a number of “legitimate” companies in the UK charging and reclaiming VAT until they reach the final UK company that makes it all worthwhile (until they get caught). That company exports the goods to France issuing a zero rate VAT invoice (“There’s a hole in m’ bucket, dear Liza, dear Liza..”). Under VAT law, the exporter can now reclaim the VAT it paid to the company it purchased the goods from. The final upshot is that the first UK company has disappeared with cash supplied by the syndicate but ultimately “refunded” by the British government. Best of all, the whole process can start again with the French company exporting to the UK – so the same stock of goods can be sold several times and multiples of the VAT amounts “lifted”.

In the early days the tricksters used to, at least, play the game. There was a stock of mobile phones that moved around the market. Then somebody woke up to the fact that, unless you were really unlucky and got hit with an audit, nobody ever needed to see the goods – but to be on the safe side they packed up boxes in warehouses with bricks and a layer of phones at the top. Later, it appears that even the cost of the bricks and their transport between companies bothered them so many did away with the goods altogether.

You can’t put a round peg in a square hole

This is nicely reflected in how two such frauds were blown in recent years. A while back HMRC did an audit on a stock of mobile phones in England and discovered that their chargers did not have British square-pinned plugs and were hence unsellable in England. More recently, a case was uncovered because the invoices were for models of mobile phones that, due to a manufacturer’s delay, had not yet reached world markets. As I said above, these are the same stupid morons Batman and Robin were talking to.

You will be pleased to know, however, that the great bureaucracy, the EU, has not stayed silent. Several years into this mess (it is estimated that VAT fraud runs into the billions) the EU Commission  finally proposed two weeks ago that, for a limited period only, certain very specific categories of goods (including mobile phones) should be accounted for using the “reverse charge mechanism. This is a method whereby, broadly, VAT is not charged by the seller but is instead accounted for by the purchaser until the final sale to the consumer.

Could somebody tell her that she is supposed to be DOING the frisking?

This reminds me of  US airport security since 9/11. Every time I take my shoes off in a US airport so that they can check for explosives similar to those once concealed by a British citizen boarding a flight, I think of two things. Firstly, the only deadly thing about my shoes is the odour. Secondly, that there is a terrorist who has just walked through security with a cleverly hidden device chuckling to himself about the stupidity of Homeland Security in thinking  he would try the same schtick twice.

But VAT fraudsters are not terrorists with an ideology and a mission. They are greedy fools most of whom are lucky to be less stupid than the European bureaucrats sent to stop them.

World without borders

German parachutist infiltrates London Olympics

Blitzing Mannheim last Tuesday in advance of a meeting the following morning, I soon tired of the centre of town with its Water Tower, Paradeplatz  and street names like P3 and Q5. Settling  into my hotel room, I turned on the TV. Confronted by Mary Poppins dubbed into German – at least in British war movies they made the Germans speak English with a middle-European accent – I decided to chance my luck with the radio embedded in the dashboard next to the bed.

Where is the Turkish music?

The radio was an experience in itself, bringing back memories of the car radios of my childhood. By rotating a knob a red plastic marker glided along the horizontal dial – there were no pre-tuned stations. Trying FM first and fully expecting to be blasted by Beethoven or Bach at every stroke of the knob, the only music I hit upon was a Turkish pop channel. My opinion of Turkish music was formed in the era before public voting in the Eurovision Song Contest when Turkish singers were considered national heroes if they scored any points at all; evolution definitely rid Turks of the music gene. But it was medium wave where the fun really started. As I moved between wavelengths in the hope of colliding with the BBC World Service, I listened to the whistles and wooshes as stations slowly appeared out of the audio fog and then receded again into obscurity. It occurred to me that seventy years ago across that embattled continent many would have searched for Alvar Lidell broadcasting from London with the only reliable news of the day, as Goebbels’s propaganda machine churned out its incessant lies.

In fact,  as competitors from CNN to Sky to Fox entered the market, the BBC  always managed to retain its name as the world’s number one reliable news source in the broadcast media. A quarter of a century after leaving the borders of that green and pleasant land, the BBC is still for me, in the words of WH Auden, “My north, my south, my east and west”.

Bond Girl – born 1926

However, a foul wind may be blowing through the Beeb’s corridors. There was the mildest hint at the spectacular opening ceremony of the London Olympics last weekend. In a move that would have done justice to the Beijing Olympics four years ago, the allegedly Marxist director Danny Boyle managed to ignore the Empire (too insulting to some) and  World War II (too insulting to one) even though, thanks to the former, London is today the most truly cosmopolitan city in the world and, thanks to the latter, it was not difficult to find a site for the Olympics in East London since the Luftwaffe had done a pretty good demolition job seven decades earlier. Meanwhile, Boyle took  neatly choreographed digs at some British sacred cows – the Queen and the BBC among them.

Bond Girl – born 1925

Few non-Brits or those under 40 would have paid any attention to a flash of legendary BBC weather forecaster Michael Fish from 1987 publicly informing a woman who had called that day that she need not worry about a rumoured Hurricane on its way to Britain – you see, there had not been a Hurricane in Britain for some 300 years. Well, when I woke up the following morning and ventured outside, I discovered  that a tree had taken root in my neighbour’s roof and the street was littered with debris. Miraculously, the Hurricane – hitting around 3am in the morning – had killed nobody.

The BBC’s continuing fall from papal infallibility came home to me a few weeks ago when they ran an item on the news declaring that, according to a new study, at least $21 trillion of assets are being managed in tax havens. The item went on to explain that this was bigger than the US and Japanese economies combined and this tax black hole could solve lots of the world’s economic problems. We were told that the study was written by James Henry, former Chief Economist of McKinsey and Co for the influential Tax Justice Network.  And to make sure that the BBC would be viewed as thorough, they even interviewed a British tax expert who said that, while he could not disprove the figures, they seemed very big (rocket science collides with taxation once again).

His brain hurts

As an international tax geek this item was clearly of real interest to me so, hard-wired with my 20th century education that insists I independently check all facts, I went searching for the influential Tax Justice Network and this important study. Well, the website can best be described as the on-line equivalent of “Behind the wash basins at Waterloo Station”. Getting a real feel for who and what this organization purports to be was not easy (although I think I got there in the end). Most worrying of all, the study “The Price of Offshore Revisited” was not yet available. What was there (after a virtual treasure hunt) was a  brief press release which the BBC seemed to have quoted faithfully and mindlessly. Taking a look at the BBC website version of the item, I realised that the tax expert consulted as possible counterweight to the report, had clearly seen even less than the BBC. All he seemed to be saying was – “Blimey, that number is too big to make sense”.

I kept revisiting the site in search of “The Price of Offshore Revisited” until, last week – Eureka! – I found it , albeit off site. Mr Henry’s study was, indeed, interesting reading  and he is clearly a serious dude. While he arrives at some interesting conclusions, including that – in the absence of an offshore industry – emerging nations that are currently debtor nations would turn into creditor nations (which, Mr Henry, I don’t think would have a causal effect on credit unless, horror of horrors, exchange restrictions were imposed or, as you seem to discount, material sums found their way back as investment in the source country), his central thesis is something known to everyone – that the amount of tax being avoided or evaded in emerging countries would potentially have a major positive impact on their economies.

One-man balance of payments problem

I took something else away from this study, however. It is a regular chant of the Libertarians that use of offshores in tax avoidance (as opposed to tax evasion) schemes is highly moral since any diversion of funds from Big Bad Government to private hands will increase the efficiency of the economy. Even leaving aside the specific woes of emerging countries stripped of basic tax revenues it appears, according to the report, that money parked in offshores is generally invested in low-risk investments – if a wealthy investor wants to take risks he is happy to do that in the full view of his government (of which, he might be a member). So, while these trillions of dollars may serve to lower interest rates in the world economy they are essentially crowding out private investment by pension funds, insurance companies etcetera that need low risk investments while depriving the world of much needed risk capital – potential “creative destruction” that  Joseph Schumpeter declared so critical to the future of a free market economy.

Overall, the BBC, along with some American news companies that picked up the story at the same time,  did a pathetic job here and would have been well served to wait for the report. It is perhaps not a coincidence that the BBC has adopted an American term in recent years: “BREAKING NEWS”. As an expatriate who relies on the BBC, would it be too much to ask that it keep the News WHOLE?

Post Navigation