Tax Break

Who said tax is boring?

Archive for the month “September, 2012”

Left luggage

Hitler or just the bloody tyrant next door?

It was during the Bosnian War that the BBC’s Martin Bell and his colleagues developed the concept of Journalism of Attachment.  While war correspondents stretching back  to William Howard Russell a century and a half earlier had reported the good and evil of war, it was this new generation that took sides and, effectively, became unarmed combatants on behalf of  the chosen good guys.

I am, personally, not entirely comfortable with this approach since the arguments surrounding war are often complex. The future of world peace would be better served by presenting the stories dispassionately and letting the public decide. Having said that, at least the underlying morality of each situation is normative.  Judeo-Christian morality, that has finally evolved into what Judeo-Christian morality was supposed to be before nasty little men spent thousands of years distorting it beyond recognition, has little difficulty identifying the rights and wrongs of war and conflict.

But when Journalism of Attachment reached the battlefield of taxation  last week,  moral compasses went spinning out of control.

For many of you, this will be the first sighting of the Belgian ruler

The French left-leaning newspaper Liberation ran a story about Bernard Arnault, the founder of LVMH the luxury goods group who happens to be France’s richest dude. It transpired that he had applied for Belgian nationality  to add to the French one that came free of charge with his birth certificate. Apart from the affront to Liberation’s French sensibilities that one of France’s favourite sons wants to be associated with a country that many French view as nothing more than a playground for European wars incapable even of sporting its own King (Whateverhisname  is King of the Belgians – not Belgium), they smelt a tax exile in the making.

Reading the headline, I dusted off my 40 year old French textbooks to try and work out the meaning, but to no avail. The reason for this became clearer when the Economist informed its readers (I am one of them) that, allowing for poetic  licence, it meant “Sod off, you rich bastard”. Mr Arnault is using some of what defines him as France’s wealthiest individual to sue Liberation out of existence.

Now there is nothing strange in a newspaper having a clear political philosophy and taking a stand against anyone whose actions diverge from that philosophy. Newspapers have, after all, been recognized since as far back as the 18th century as the “Fourth Estate”  in  parliamentary (or, more generally, democratic) systems.

What is worrying in the case of Liberation is that the self-righteous outburst is not just the statement of an opinion, it is a critical (and probably the only) component in ensuring the success of the Government’s policy. Liberation has become a combatant in Francois Hollande’s ill-advised war on the rich.

The French budget, unveiled last Friday, included, as expected. a provision taxing earners of over €1 million at the incredibly punitive rate of 75% – put another way, it is telling top executives to work for the Treasury who will , in turn, give them pocket money. This was a significant Hollande campaign pledge along with other  Disneylike  fantasies . The concept is completely unworkable because France is unable to impose a meaningful exit tax on individuals escaping to other EU countries and some of those, especially Britain, have remarkably cosy tax regimes for tax residents who are not domiciled there. The only way to stop a brain-drain is to use moral pressure. Since modern governments are not good at the morality thing  (politicians are not high on the international ethics league table) and France’s dominant Catholic Church is having a bit of a moral crisis of its own, it falls on left-obsessed journals like Liberation to do the Government’s bidding. The big problem is that the moral issue here is anything but normative – there are widely differing views under the circumstances as to whether there is anything wrong with Mr Arnault leaving. Indeed,  Freedom of Movement is one of the EU’s central freedoms.

Hollande has been at pains to paint himself as Mr Normal after 5 years of Sarkozy who, it is implied, was abnormal. What the president does not seem to comprendez-vous is that, while France may be pleased to have a leader who LOOKS like a bank clerk , they do not want a leader who THINKS like a bank clerk. They like their presidents to be intelligent. Even a bit foxy.

The French President reading his watch strap

Mr Hollande seems to have had sufficient intelligence to restrict the tax hike to 2 years, but that could still be a critical 24 months when France is trying to get back on its feet. Top executives will delay coming to France (if they come at all) and some of those already there will do their utmost to leave – even if only for a few years. One weapon the French do have in their armory is their language. While monolingual Americans can strut the planet asking for a Big Mac and Fries everywhere they go, French who want to venture beyond Belgium, Luxembourg, Monaco and select bits of Switzerland without resorting to their phrase books will need to head for such desirable locations as Democratic Republic of Congo and Burkina-Faso.

Hitler

Perhaps the biggest irony in this story is that Bernard Arnault, as founder of LVMH, makes some of the best luggage in the world. Just as nations  rarely amass weapons for peaceful purposes, would  it be so strange if Mr Arnault were to consider using some of his suitcases for his personal use? In the meantime he is reported to have categorically denied that he is considering a change of fiscal residence.

Far East in deep water

Where’s the motto?

If the motto of the United States is “In God we trust”, the motto of Australia should be “No worries”. We northern hemisphere folk who, unlike our antipodean friends, have summer in the summer and winter in the winter believe that, come Christmas,  an Aussie’s problems boil down to finding room for another shrimp on the barbie while his guests luxuriate in the pool swigging cans of XXXX (a beer for illiterates, pronounced 4X).

Australian defences are ready

I was, therefore, shocked to the depths of my didgeridoo when, in the middle of last winter (real winter, that is) I was informed by a representative of one of the Australian State Governments that  her government invests an inordinate amount in defence. My first impulse was to ask whether they were expecting an airborne strike by New Zealand sheep, the idea being so ridiculous. When I was told that the concern was Chinese imperialism, I was still gobsmacked – China has never struck me as that way inclined. It occurred to me that they were probably just scaremongering  so that when Julia Gillard, the prime minister, travels abroad she has something more serious to talk about than Australia.

Well, as Harold Wilson once said, “A week is a long time in politics” and the last couple of months have shown that those Bruces and Sheilas are not as dangerously brainburned as they insist on making us think they are.

The South China Sea has been witness to a series of petty maritime incidents between various nations that are frankly reminiscent of what was happening in our northern neck of the woods exactly one hundred years ago.  With spats over lumps of rock with such unlikely names as Scarborough Shoal, Spratly and Paracel there have been faceoffs between China and Taiwan, China and Philipines, China and Vietnam, South Korea and Japan (the Chinese navy must have been on vacation that week) and, most recently, China and Japan. It seems that all the minnows have been tickling the dragon under its armpits (I don’t know whether dragons have armpits) to test how far they can go before being incinerated. Meanwhile, the Americans, bound to keep the peace in the region, follow developments closely and frighten the hell out of the rest of us with the threat of going in and really warming up the party. The overriding concern, of course,  is Chinese expansionism, but if World War III does break out in the Australian outback’s back-yard, the conflict’s roots will likely be traceable to a VAT hike. Read on.

Beware!

Earlier this month the Japanese government purchased two small islands in a private transaction (I can picture it now – “Have you met our new neighbours ? Delightful people . Very quiet. They are called Japan.”). This really narked the Chinese who think they own them and would have liked to move in themselves. There have been all sorts of demonstrations in China and one newspaper even suggested skipping diplomatic options and going straight for the nukes. Most surprising of all, Xi Jinping, the next leader of China, having forgotten to meet Hillary Clinton and various other fat cats over the previous two weeks,  came out of hibernation to berate his neighbours. The question everyone is asking is: “Why did the Japanese do it?”. The  question everyone should be asking is Why did Mr Yoshihiko Noda, the highly pragmatic Japanese leader, do it?”.

Rewind a couple of months. Faced with the impossible arithmetic of covering pension costs of an increasingly aging population (the Japanese are skilled at not dying), the effects of an earthquake and nuclear accident, and fearing a Europe-like crisis  Mr Noda announced that consumption tax (VAT to you and me) would be raised from 5% to 8% in April 2014 and 10% in October 2015. The Liberal Democratic (which means conservative) opposition could not object to this austere measure but, following defections from the governing Democratic Party, extracted a promise of early elections from Noda as the price for passing the legislation last month.  Noda, blatantly doing what he genuinely felt was necessary for Japan’s future, effectively committed Hara-Kiri and is expected to lose the election convincingly.

As this story was unfolding, the maverick Governor of Tokyo  – reputed to be something of a loose cannon – started moves for his administration to buy the abovementioned islands in an act of, what many have interpreted as nationalistic provocation. Hence, Noda stepped in to frustrate that gentleman’s plans and, ultimately, to try and defuse the situation with the Chinese by ensuring nobody actually set foot on the islands. Despite acute early reactions, there are indications that tensions are starting to wane.

It would be tempting to wrap up with “And they all (probably) lived happily ever after”. Had Noda not tampered with the consumption tax, they might have done. But he is now looking down the barrel of an election shotgun and is probably about to be blown away. And there’s the rub. One of the leading candidates in this week’s contest for Liberal Democratic Party leader, who would almost certainly become prime minister after the General Election, is Nobuteru Ishihara. His father, Shintaro Ishihara is a famous author who has lately made a name for himself as none other than…..the maverick Governor of Tokyo. Like father, like son? Interesting times. I am thinking of inviting my worried Australian friends to join us in the Middle East – even if we are a bit short on shrimps and XXXX beer, not to mention Christmas.

Pole position

Brilliant Belgian

Several years ago we went on a family trip to Holland. Sitting in the front passenger seat of the taxi taking us south from Schiphol, I tried to keep the driver’s attention while the kids re-enacted the Second World War in the rear of the van. Observing that signs on the motorway to Uit appeared over a distance of several kilometres  I suggested that Uit must be a very big town. The cabbie promptly asked me if I was sure I was not Belgian. I learned two things on that trip: firstly, that Belgians are to the Dutch what the Irish are to the English, and the Polish are to the Americans; and secondly, that “Uit” (pronounced “oot”)  is Dutch for “Exit”.

The Polish are always on my mind as hot lazy August melts  into cool vigorous September; the invasion of Poland on the first of the month in 1939 prompted the British and French – who couldn’t give a fig about the Poles but had to respect their pacts –  to declare war on Germany.

Stupid Irishman

Much as I have never shared the prejudiced view of the Irish concocted by  the English (I believe the last century produced more Irish literary geniuses per capita), I never bought the American take on the Polish. That was, at least, until I encountered their kamikaze tax laws. Fortunately – for them – the knock-on effects of the Euro crisis (lucky Poland is not in the Eurozone) lead the Polish government earlier this month to re-embrace life and announce proposed amendments to the tax law which should serve to bring their law safely back to earth and increase tax revenue.

The most prominent proposal is, at first sight, the least bellicose. Until now, limited joint-stock partnerships (SKAs) have been transparent for tax purposes which should not cause the average reader of this blog to blink. It is now proposed that SKAs should be corporate taxpayers which, while being  a far less common phenomenon, is by no means unheard of.  However, this change is mushroom cloud-sized.

French Polish

For several years, much foreign investment in Poland, especially in real estate, has been effectively tax free. Put in simple terms, investment funds that enjoy tax free status when they invest in securities, invest in SKAs. Despite being partnerships, the holdings in the SKAs are considered to be holdings in securities  while the SKAs do not pay tax because they are transparent. As such, foreign investors in such structures can walk away tax-free in Poland which is, frankly, a bit stupid. With the change in status of the SKA, this planning device will be completely annihilated. Poland will still be attractive as its corporate tax rate is a mere 19% (and unlike its eurozone colleagues it does not need to beg for bailouts). As long as investors are coming from countries with electricity, running water and a worldwide tax system, if they plan themselves properly, other than timing differences they should be no worse  off (or not much worse off) than now.

Talking of stupidity, today is the 70th anniversary of one of the major foul-ups-at-sea of the Second World War. On September 12, 1942 the British merchant vessel Laconia was torpedoed and sunk by a German U-Boat. At that point sea warfare was still “civilised” (it changed as a result of this incident) and, when the U-Boat commander realized he had hit a ship carrying civilians and Italian prisoners of war – as well as British and Polish servicemen – he brought the submarine to the surface. Many of the passengers were in life boats (the Laconia was an ocean liner launched a decade after the Titanic and the shipbuilders weren’t going to make that mistake again) and those in the water – many of whom were servicemen – were brought onto the deck or, in the case of civilians,  into the interior. The commander even called for other ships to come to their aid promising not to attack unless they were attacked and two more U-Boats and an Italian submarine  joined them. They then proceeded to start  towing the lifeboats towards the shore of Africa to meet up with Vichy French ships.  To ensure no mistakes, they draped Red Cross flags over the gun turrets of the submarines.

With Joseph Heller’s classic Catch 22 satire about the US Air Force still nearly 20 years away, on the morning of September 16 the flotilla was spotted by a US bomber pilot who could have been the prototype for Hungry Joe or Havermeyer. Radioing back to his base for orders he proceeded to use the Red Crosses for target practice as he attacked the U-Boats. The German commanders immediately cut the lifeboats adrift and submerged leaving all those on deck to drown. I pass no further comment on this incident other than to mention that among the dead servicemen was my father’s  brother, Joe. He was 29 years old.

And finally, on a more cheerful note, Happy New Year to all those who choose to celebrate it in the middle of September.

Composing tax laws

Remember the good old days before they invented healthy living?

Returning to the gym last weekend after a fortnight, literally, off the treadmill, my rendition of “I’m back” in a passable Austro-Californian accent failed to register any reaction on the face of the young lady manning the reception desk. Instead, she merely ordered me to furnish my annual medical certificate that covers them if I suddenly keel over pulseless on one of the bank of motorized zimmer frames lining the main hall.

Once up and running (or, to be more precise, walking in a sweat) I started fiddling with the “Personal Entertainment System” that my poor- man’s gym has in place of an Olympic-size pool. Surfing the channels of endless mediocrity, I was amazed to hit the one scene I could bear from the excremental Austin Powers trilogy. Powers, alias Mike Myers, is in 1967 Carnaby Street together with Heather Graham being serenaded by Elvis Costello singing “I’ll never fall in love again”. Costello is  accompanied by Burt Bacharach on the piano. Bacharach, of course, composed that song along with a disproportionate number of other hits of the 60s and 70s. Why was I  amazed? Because just that morning I had read Hal David’s obituary in the newspaper. Hal who?

The lyrics Costello was singing, along with those of countless other Bacharach songs stretching back over 50 years, were composed by Hal David. But as with so many other songwriting duos the lyricist went largely unsung. Take the words away from a popular song and  you have left the potential for a symphony orchestra masterpiece. Take the music away from a popular song and all you have left  is a  rhyme fit for a birthday card.

Bacharach, Warwick and David could afford not to fall in love again

Sweating away, I tried to imagine the scene of those two giants composing “I’ll never fall in love again”.

Burt: I’ve got this tremendous catchy tune. It just came to me when I was  jabbing a couple of stuck  keys on the piano. It is lively, happy, joyous even – maybe a song about the wonders of love. Come up with the lyrics, Hal.

Hal: I know what to do! I am going to write a totally depressing song about a girl who has been mistreated and jilted so often that she has given up hope about ever loving again.

Burt: That’s not what I had in mind, Hal. I think you are misreading the music.

Hal: Do you have any idea how hard it is to put musical ideas into words? You do your job and I’ll do mine. Now let’s get down to business. What’s the worst thing for a gal hopelessly in love?  Answer -when the guy never phones her. I can’t think of  a rhyme for that.

Burt: I know. Instead of ‘phones her”, say “phone ya” and that rhymes with pneumonia, which I just recovered from…Heck!  I don’t believe I just said that.

Hal: You are a genius, Burt. You should write the lines and let me jab the piano. In the meantime, have you got another zippy, cheery tune. I’ve had an idea about a guy who is always getting rained on and whose feet hang over the end of the bed. It will just knock them out.

“The law is a ass, a idiot!”

Apart from listening to my Burt Bacharach (no mention of Hal David) double album on the way to the office (I joke not), I did not give any more thought to this songwriting business until a call mid-week with a senior tax officer. For the last year, we have been trying to find a way around an absolutely non-sensical provision in the tax law that even the tax authorities admit is daft. We keep hitting a brick wall. “Find us a basis in the law  and we will try and help”, we are told, “But otherwise it needs a change in the law”.  On the other hand, when it is the other way round and the law appears to clearly permit an interesting tax planning device, the authorities wave treaty limitation of benefit clauses in our faces or General Anti Avoidance Rules and tell us “This was not the intention of the legislature”. It is not fair.

Tax law follows the songwriter principle. The legislature writes the music and the tax authorities the lyrics. The music is the spirit of the law – what the lawmakers were trying to achieve. The lyrics are the clauses of the tax code, often drafted by the tax authorities at the behest of the lawmakers and then enforced by them. The lyrics are almost by definition an inadequate (and sometimes utterly perverse) vehicle for conveying the spirit and must therefore take a back seat.  If anti-avoidance provisions instruct the tax authorities to protect against tax planning due to ingenuity or just plain bad drafting, then the authorities should similarly be required to ignore provisions in situations that clearly go against the spirit of the law.

Thousands of years ago Jewish law established the principle of “Sit down and do nothing” in circumstances where performing a positive act required by law (as opposed to all the Thou Shalt Nots which unfortunately remained inviolable) would result in an unacceptable result in the specific circumstances. Tax officers the world over are generally very good at sitting down and doing nothing and maybe it is  time to put that trait to good use. Drafting is often so imperfect, and getting to court where such matters may be solved so expensive and time consuming,  that tax authorities should be instructed, after installing suitable alarm systems, to simply not enforce aspects of tax laws that go against all logic. In other words, they should listen to the music and check that the lyrics really fit.

And my trainer said I will never look like Schwarzenegger

When Arnold Schwarzenegger first appeared in the Mr Universe contest in 1966 clad only in a pair of skimpy trunks and flexing his unbelievable muscles like many of the  dumbbells around him, few paid attention to the accompanying music. It was the theme from the film “Exodus” that described the amazing acts of heroism and sheer perseverance that, against all the odds, led to the establishment of the State of Israel so soon after the Holocaust. The lyrics at the time said he was an up and coming muscle-man. The music said he was going a lot further. Hollywood  Superstar, Governor of California – I wonder how the receptionist at the Gym would have reacted if HE had walked in and, despite his lousy accent, announced: “I’m back”.

 

One small step for Mitt

The Right Stuff

Neil Armstrong, who died last week, was one of my childhood heroes. It was not that I aspired to be an astronaut – I was a sedentary kid for whom “space” was what separated the sofa from the TV set – but  I knew how to recognize greatness when I saw it. There were  plenty of greats in the sixties – JFK, RFK, MLK , to acronymise but a few – each in his or her own way pushing the world’s envelope, inspiring an entire generation to reach for the stars.

Today, every time I lift my head from my office desk I look straight at a coffee mug I purchased  at Cape Canaveral several years ago. “Failure is not an option”, inscribed on both sides, was the motto of the Apollo 13 mission. The world held its collective breath for 4 days at the turn of that decade as technicians at Mission Control in Texas devised lowest-tech contraptions that they instructed the astronauts on the stricken craft to build  in the  vain hope of bringing them back safely to earth. Against all the odds, they succeeded. Heady times.

Of course there was plenty wrong with the sixties – the worst of all being that they were followed by the  seventies – but that generation always tried to go the extra mile and make a difference.

What do I know? Bob Kane seemed happy with Keaton and, after all, he was Batman’s creator

Before the obituaries to the modest Armstrong could disappear from the inside pages of the world’s newspapers, the headlines heralded the crowning of the pretender to the American throne, Mitt Romney and his valet, Paul Ryan. The contrast with the greats of the sixties could not be more striking. While the Romney and Ryan double act may have its moments of great theatre, this has to be the worst case of miscasting since cuddly Michael Keaton played Batman. The task of a US president is not to micro-manage USA Inc; it is to lead the nation and the  world, to inspire the generation to toil for a better future for all.

While Kennedy could capture the collective imagination with “I believe we should go to the moon” , Romney could have come up with “I believe we should go purchase 51% of the moon through a Martian SPV and a partial vendors’ loan, push down the debt and exit within 5 years”. While Reagan could bring down the Soviet Union with “Mr Gorbachev, tear down this wall”, Romney might have opted for “Mr Gorbachev, tear down this wall and let my firm put together a consortium to build a shopping centre and condominium complex”. And as for Boy Wonder Ryan, while Kennedy had JK Galbraith as his economic adviser and Reagan had Art Laffer, he has Atlas Shrugged, a work of fiction by Ayn Rand.

Paul Ryan’s vision of the White House circa 2050

This is an entirely Business/Economic ticket. While the GOP team may (or may not)  have some valid economic policies the job spec goes a bit further than that. Vision and national leadership are items that come to mind. Businessmen and Economists are not naturally cut out for these tasks. While Mr Ryan – who is, at least, consistent as opposed to his boss who is governed by ever-moving bottom lines – may have a point about the need to cut taxes for economic reasons, his violent aversion to “Big Government” is much more far-reaching. His desire to scale back government to the bare minimum precludes any administration from advancing the nation beyond narrow economic interests. Relief from poverty, foreign aid, sustainability and inspiring  national projects all require tax dollars.  You name it, it ain’t gonna be there. Ever.

No Mitt! You’re supposed to be going for the Washington job. It’s got a bigger upside.

Ronald Reagan and Margaret Thatcher were probably the most “free market” minded leaders in the last generation. Neither of them was economist or businessman. They both had visions for society – very positive visions at that – and both lead their nations well beyond the economic sphere – for better or for worse . Romney and Ryan, on the other hand, are one track. No inspiration. No hope. No government (or not much of it) and Every Man for Himself. A sad, sad state of affairs, especially as both men profess to being practicing Christians.

We were blessed a few days ago with a beautiful granddaughter. My prayer for her is that she grows up in a caring world that seeks to cure its imperfections and pushes its boundaries. Nothing suggests that Romney and Ryan are singing from the same hymn sheet.

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