Tax Break

Who said tax is boring?

Archive for the month “January, 2013”

They shoot horses, don’t they?

And how much tax do you think you will have to pay this year?

And how much tax do you think you will have to pay this year?

“It’s under starter’s orders – and they’re off!”  2013 has scarcely made it out of the stalls and two stories are already vying for a place in the Winner’s Enclosure at the annual Let’s-Knacker-The-Taxpayer Steeplechase.

First to gallop off the page and nearly knock out my eye was the disclosure by the Wall Street Journal that the Indian Government has come knocking  on Vodafone’s door asking when it can expect to receive the $2.5 billion owed to it. Readers will recall that, after a  long-running dispute between the telecommunications company and the Indian Government over a withholding tax issue, the Government fell badly at the final Supreme Court fence.  However, a minor setback like this could not deter the Trustee of the biggest democracy in the world, and the Lok Sabha promptly passed retroactive legislation (to 1961, to really put the boot in) to ensure the Government would still win the race. Following international uproar last year, it was widely thought that the Indian Government had backtracked, but this was evidently not the case. The parties are now said to be locked in negotiation to try to find a way out of the impasse. It’s anybody’s bet what the outcome will be.

Next, The Economist informed its readers that MMX, a Brazilian mining giant, had been presented with a $1.8 billion tax, fines and interest bill representing 90% of its market value. This was in the wake of similar demands sent to other major companies. Brazil, as everyone knows, has more types of tax  than Heinz has varieties of food. It is almost impossible to get tax reporting right but that does not explain the telephone number amounts the tax authorities are chasing. It appears that the only way of dealing with these claims is by spending 15 years in the court system by the end of which, either a convenient tax amnesty comes along or the companies gamble on a favourable court decision.

Darling! The postman just delivered our 2012 Tax Return

Darling! The postman just delivered our 2012 Tax Return

Whatever the case, the governments of India and Brazil – members of Jim O’Neil’s BRIC Quartet – are suffering from sunstroke. The other two – Russia and China – less exposed to  sun, sand and democracy (sorry, Comrade Putin) are faring much better on the taxation front. India’s government, immobilized  for years by geriatric dementia is a well-known basket case – although the elevation of its disastrous Finance Minister to the presidency and replacement by an old  favourite of the business community, was supposed to offer the start of a cure. Brazil, on the other hand, has been trying to feel its way forward and find ways to cut the number of taxes. Faced with various regional problems, however,  President Dilma Rousseff has, so far, felt herself unable to deliver. In Sao Paolo a couple of years ago, I sat through an interminable speech by former President Fernando Henrique Cardoso.  He admitted that he had been to blame for the carnival of taxes when priorities were to bring inflation under control, get  the country moving and keep the military in their barracks (I made the last one up – but I’d wager  he would have liked to have said it) – but now it was time to scrap the lot and become a normal country. Deaf ears.

What is sad is that, countries that are so critical to the sustainability of the world economy in the next half century, are using every opportunity to give prospective investors the heebie-jeebies. It would appear that, no less important than reasonable tax rates (I hear former French President Bling-Bling is thinking of moving to London – sacrebleu!) is certainty about the tax to be paid.

What is interesting, however, is that evidently none of this makes it into macro-economic modeling. Now I admit I am on dangerous ground here. My last day of formal macroeconomic study was a third of a century ago and, when I raised this point with  none other than the editor-in-chief of The Economist at a conference a while ago, he took one look at my disappearing hairline (I am being kind to myself) and politely commented that, while I was clearly a young man, macroeconomics had moved on since my university days. He did add, however, that he agreed there was something in what I said (which was probably because he was desperate to get past me to the coffee).

It was none other than his own Economist ( how much name dropping can I do in one post – President of Brazil, Editor of The Economist?) that ran an article last week on – you guessed it – macroeconomic modeling. It turns out that macroeconomists managed to get through the entire 20th century – Great Depression, Milton Friedman and all – without factoring Banks into the basic equation. In a world where everything left out was ceteris paribus (the term meaning “other things being equal”  makes me tingle with nostalgia), banks were assumed to just be facilitators between lenders and borrowers. Blimey! In reality banks have been upsetting the apple cart for generations and, what with their showing in the recent Financial Crisis, it is a relief that they are now being included as independent factors. But what about taxation?  Tax is obviously there – always the something minus “t” to establish numbers and multipliers. But the idea that taxes are, or should be, neutral was abandoned years ago. The destabilising effect of wacko tax policies needs a place at the macroeconomic table. What India and Brazil are doing with their strong-arm tactics is not only not “ceteris paribus”, it is “casus belli” and many other impressive Latin phrases I can’t quite think of at the moment.

Dodgy business

Dodgy business

2013 has a long way to go and a lot of fences to clear. Ever since my very  first audit assignment at a Betting Company I have had my doubts about Horse Racing. But India and Brazil are famous for their fair play in Cricket and Football, respectively. For all our sakes, let’s hope they get their eye back on the ball. Carpe Diem (that’s another one for you).

I did it their way

What a glass is for

What a glass is for

Less than a month after my rare downing of a beer in an English pub, I was at it again – this time in New York. Served an ice-cold bottle of lager, I looked around furtively for the glass. Then I remembered:  John Wayne didn’t do glasses.  Swigging from the bottle – a practice I have rarely resorted to since being weaned off formula milk in the winter of 1959 –  I leaned back in my seat and drank in  the glorious jazz performance at the world-famous Blue Note Club in Greenwich Village.

This was no ordinary night. 75 years to the day after Benny Goodman played Carnegie Hall and, with that groundbreaking event, brought jazz into the American mainstream,  we were treated to a selection of the music played that evening. The glassless beer and the gently syncopated version of my personal favourite  of the night – Gershwin’s “The Man I Love” –  brought home to me what I love about America.

It is the syncopation.  America is always offbeat, playing to an unexpected rhythm.  The American way is rarely anybody else’s way (unless that anybody is copying American culture).  Americans are unencumbered by European or Japanese mores. They derive conclusions from first principles. For better or for worse.

Don't worry. It runs on battery

Don’t worry. It runs on battery

Only in America could a college dropout, along with others of his ilk, conduct an Information Technology Revolution from his garage.  But what was truly amazing was that Steve Jobs managed it using medieval 110 volt electrical circuits. As recently as last week, I held my breath as I inserted the adapted two-pin plug of my laptop into the miniscule wall socket of my Manhattan hotel room, fully expecting the whole caboodle to blow up in my face. In the event, all passed peacefully although, when I later tried to remove the plug, the entire socket launched  out of the wall .

Then, in the country that leads the world in financial innovation, there are those one-size-fits–all dollar bills. Convinced that, if a thief could not estimate how much cash his potential prey was holding, he would not make a grab for it, the Americans decided – in contrast to just about every other country in the world – not to distinguish between the sizes of the various denominations of their banknotes. While there is no apparent evidence that America is less into aggravated theft than the rest of the world (this sarcasm is going to kill me one day), this lunacy drove me out of my mind the night following the jazz concert.  Desperate to make an exit  from a Comedy Club where I had been exposed to the cream of New York Stand-up (the sarcasm just killed me), including a famous comedian’s daughter (unfortunately for her, and us, she inherited his looks rather than his sense of humour), I fumbled in the dark for at least ten minutes looking for the right cash to pay for my colleague’s and my FOUR bottles of beer (no glasses) that had been, in addition to the tickets,  a condition of entry.  Mind you, I have to be thankful that it at least took my mind off the show.

However, for me the daddy of them all is the insidious Sales Tax. Upward of 140 countries in the world have adopted a form of Value Added Tax, a highly efficient indirect tax that is charged and refunded throughout the supply chain until finally being imposed on the poor consumer.  Not in America. Over the years, I have listened to CPA’s, businessmen, politicians and other otherwise intelligent Americans, literally rant against a VAT.  In a country that considers Socialism a word only fit for New York Comedy Clubs (where alcohol filled audiences inexplicably guffaw with laughter each time an expletive is uttered), they scream that, as a regressive tax,  it would discriminate against the weaker elements of society who tend to consume a higher proportion of their income. Yeh, right. Their real reason is that it would make it easier  for Washington to raise more taxes.

In the meantime, the majority of the States and their subdivisions charge Sales Tax, which is normally only charged at the point of supply to the consumer. At each stage of the supply chain recipients of goods have to produce a government exemption certificate to avoid being charged the  tax. There are a myriad of exemptions and, to make things more complicated, in the case of supplies made interstate, a seller without a nexus in the recipient State does not need to account for the tax at all. There is enormous risk of Sales Tax fraud (VAT frauds tend to be restricted to international transactions) as well as “cascading” – the possibility that sales tax will be charged twice (as, say, the sale and resale of a second hand car – though, I suppose, there the risk is not greater than it being paid once).

But none of that is what bothers me about Sales Tax. What bothers me about Sales Tax is that, in New York at least, they NEVER tell you what the full price of anything is. I get caught off balance on every single trip. I see something advertised  for fifty bucks. I use  my  mental calculator to compare it to the price back home and then when I get to the point of no return at the till, they slap tax on top. Then I see shirts advertised 3 for $99. By now I am wise to these Americans’ tricks and I  work out  the tax in my head concluding  it is still worthwhile. Arriving at the till, I am charged $99. Like a moron, as I  fumble with the dollar bills stuffed  in my wallet trying to piece together the required amount, I  ask why  the price is  not higher. There is no sales tax on individual items of clothing under $110, dummy.

He made a mistake calculating the tip

He made a mistake calculating the tip

I have a theory that the reason for Sales Tax not being included in the price of things is because, when people go out to restaurants, they can avoid complicated calculations of how much tip to leave by giving “twice the tax”.  My proof is that when they go into supermarkets, because they do not need to tip, there is no Sales Tax on the same uncooked food sold there. Simple, really.

I was in New York last week for 4 days. I stayed in the same hotel room throughout (despite fears that electricity was going to jump out and kill me in my bed).  I did not use the mini-bar or room service. My only “luxury” was 4 days of access to the internet so that, following the demise of my already geriatric Blackberry on Day 1 of my trip, I could stay in contact with my office. The bill ran to an incredible two pages. While every day was charged separately, as is the custom in many places, it was the  4 types of tax charged on each item that did it.  The good news was that they only charged me for 2 days of internet use (despite my very honest protestations). It seems that it is all a matter of priorities. It doesn’t matter if  they  screw up the billing– just as long as the sales tax is right. God bless America.

The 2012/13 Overture

Brezhnev was not the only superpower leader to have difficulties with Sharansky

Brezhnev was not the only superpower leader to have difficulties with Sharansky

In the ’70s and ’80s  there was a major movement worldwide to gently nudge the Soviet authorities to “Let my people go”. Mass rallies, protests and disruption of Russian cultural events were the order of the day from London to New York to Sydney. With the collapse of Communism, the ’90s saw the influx to Israel of   close to a million Soviet Citizens, by no means all of whom were descendants of Pharaoh’s slaves, while oligarchs started popping up in the unlikeliest of places, like the directors’ box of an unimpressive London football club.

I, therefore, found it quite dizzying when former French  actor Gérard Depardieu was spotted  bear-hugging former KGB officer Vladimir Putin on receipt of his gleaming new Russian Passport. Until last week, the only people who ever thought of moving into Russia had Christian names like Kim, Guy, Adolf and Napoleon.

The story hardly needs retelling. French bête noire  most recently remembered for urinating on the floor of a plane awaiting take-off in Paris, is so incensed by Mad Hatter President’s  intention to apply a humongous tax rate on the wealthy that he contemplates joining the rest of Peter Pan’s  lost (rich) boys in a Belgian town near the French border.

In what initially appears a stroke of tax genius, at the last-minute he diverts his attention eastward and makes a play for Russian citizenship. By moving tax residence to Russia he can swap the 75% (and then some) tax rate for 13%. Although France now has an Exit Tax for those perceived to be betraying the Fifth Republic,  the French/Russian Double Taxation Treaty refers in its nondiscrimination clause to nationals rather than residents implying that Exit Tax might not be charged.

Nice theory, but it ignores one critical factor. Depardieu is ethnically, if no longer nationally, French. Too rational.

Tailless amphibian

Tailless amphibian

Not satisfied with the  royal welcome that turned this tailless amphibian (use your imagination)  into a Russian Prince, Depardieu proceeded to chuck  his French citizenship into the Seine  while spouting nonsense about Russian democracy. The Russians, for their part, warmly welcomed their new comrade who had recently shown his Motherland credentials by appearing in a movie as Rasputin. Now, I know little about Russian history and, with all that has happened in the last hundred years,  I have great difficulty in keeping track of who is currently welcome on the podium in Red Square,  but  if there is one thing all Russia is agreed on, it is that Rasputin does not get a look-in.

In short, Depardieu just appears to have been on a typically French emotional bender that was planned as well as the Soviet economy.

Had he not been such an exhibitionist, he might have gone for one of the more traditional tax havens. Switzerland, with its lump-sum expense based system, is a particular favourite for sportsmen and actors while the UK, with its non-domiciliary status is excellent for those well planned in deriving income  outside the UK. Monaco and Andorra (wherever that is) tend to be more liberal in their residency requirements. The Channel Islands and Isle of Man offer a peculiarly British middle-class environment which would have surely suited our hero – they particularly appreciate Gauls who pee on carpets.

And if all he wanted was a new passport, for a suitable fee he could have picked up citizenship in the Dominican Republic or St Kitts, two countries even the French could have conquered had they managed to find them on the map.

As yet it is impossible to know what the unpredictable Comrade Depardieu will do. Does he really intend to sit out 183 or so days each year in Mother Russia?  Has a man who lives by the French language not realised that, whilst in Tolstoy’s St Petersburg Soirées, Pierre and his friends chatted happily in French, it is not only Napoleon who has moved on since then? Or, is he just attempting to become another of the modern world’s “Tax Tourists” who thinks he can swing  the residence tie-breaker clause in the  double taxation treaty by popping in for  an occasional  vodka while en route from London to Los Angeles? Fat chance, fat boy.

One can sympathise with Depardieu’s desire to make a break for it from France. Its economy is by all accounts (apart from that of its clownish Government) heading down a bidet’s drain. Rather than attempting to avert the crisis, the Government has adopted a policy of assisted national suicide while offering the wealthy the choice between the guillotine and exile.

Erstwhile French Icon

Erstwhile French Icon

However, it really is beginning to look like the Asterix star might live to regret his decision. One of the attributes of a tax haven is that it leaves the tax exile to get on largely unhindered with his or her life. While, as M Depardieu has proudly stated, Russia is undoubtedly a great democracy, it would be interesting to see what would happen if he chose to relieve himself on the floor of an Aeroflot airliner or, for that matter, not to turn up in court to answer a charge of driving under the influence, as was the case this week in France.

Beating about the Bush tax cuts

Keep it simple

Keep it simple

I believe it was  John the Baptist  who coined the  phrase, “In the beginning  was the Word”. Whatever your creed, words have definitely had a pretty serious effect on the world from time immemorial. For me, the mere mention of the word “War”, in all its mono-syllabic, animal-like simplicity, is enough to strike fear into my cowardly heart. Some years ago, speaking at a conference about Investment in France –  in the presence of the French Ambassador and other dignitaries – I put paid to any ambitions I may have fostered to advise French nationals by telling an apocryphal Churchill story. Asked why he considered his 1940 speech, “We will fight them on the beaches….”   his most effective of the war, Churchill  is reputed to have explained that it was because, with one exception, his main vocabulary had been ancient Anglo-Saxon –  short and bold. That one exception – from Norman French – was “Surrender” . Nobody (and I mean,  n-o-b-o-d-y)  spoke to me at lunch.

It is interesting that two words uttered in an obscure speech nearly a year ago by an individual not normally known for his oratorical prowess,  managed to grip the entire American nation  in fear. While Joe  Public calmly went about his daily business ignoring the real nuclear threats coming out of Iran and North Korea, any mention of Ben Bernanke’s “Fiscal Cliff” would bring beads of sweat to his brow as he  imagined watching helplessly while his wife, children, home and SUV tipped over the edge of a mountain into the abyss.

As became apparent to all doubters last week, there never really was a Fiscal Cliff. The witching hour came and went on December 31 and it was only a full day later that the House of Representatives “pulled the country back from the brink” (spare me). It was a full day after THAT that President Obama, back at his “I’m as cool as a cucumber” vacation pad in Hawaii,  had it signed  into law by “autopen” with retroactive effect from the beginning of the year.  But we Old World people should remember that this is the land of Hanna Barbera where cartoon animals (an elephant and a donkey?) can go careering, horns locked, off a precipice and belatedly realizing their predicament, raise dust in the air as they do panic bicycle-riding motions with their feet regaining dry land. Ever the miserable rationalist, I prefer to think of  the blinded Duke of Gloucester in King Lear being deceived by his son into attempting suicide by jumping over a harmless bump, rather than the White Cliffs of Dover as he intended.

With the Fiscal Cliff  receding from view, we are being told that  all that happened was that “the can was kicked down the road”. Holdonasecond! Where did the  road come from? For the last year America has been hurtling towards a precipice across virgin green fields and rock formations, with the nation ending up dangling over the edge. Now, all of a sudden, there is a road. On the edge of a cliff?  No – there has simply been one of those sudden scene changes that typify Hollywood action movies and Washington speechwriters.

An open tin can with a dangerously serrated edge is now bumping down the stairs of the Capitol heading for the Mall, where it will roll happily along until it veers right two months from now at the Washington Monument and comes to rest on the White House lawn.  Then, with Washington required to negotiate deeply wounding spending cuts, the President and Congress will have to come up with something new and scary. How about  “The Great Mowing”? Frankly, they are more likely to go for something less consistent but more direct. “Washington Chainsaw Massacre”  is the sort of thing that should really give Ol’ Joe Public the willies.

If the branches of government still can’t find their common trunk, “the can will be kicked back  into the long grass” eventually reaching the end of the Mall at the foot of the Lincoln Memorial, where President, Senators and Representatives will be reminded that “Government is for the people”. If the greatest political speech in American history doesn’t do the trick, nothing will.

Tea Party Caucus

Tea Party Caucus

Meanwhile, the US is floating irreversibly up towards the “Debt Ceiling” – a rather gentle phrase that conjures up Nash terrace houses with high ceilings, Chippendale furniture and heavy scarlet curtains (not to mention scenes from Mary Poppins and Harry Potter). In reality, if the Tea Party Republicans lose all radio contact with Mission Control and vote not to increase the ceiling, that  really could plunge the entire planet into crisis overnight as the US starts to default on its liabilities.

On January 2, the Fiscal Cliff behind him and free to pursue the Republicans on the Debt Ceiling, President Obama released the safety catch on his mouth and turned it to semi-automatic: “We can’t not pay bills that we’ve already incurred”. Apart from being a candidate for unforgiveably worst line of 2013, it was a brilliantly awkward double negative that indiscriminately strafed  House Republicans. Unlike his predecessor, Obama normally manages to  place one word in front of another, and I am tempted to believe the sentence  construction was intentional.

Metaphor, idiom and daft constructs aside, it is  clear that both sides have got it wrong in this debate. Republican reluctance to raise more tax revenue in an acute deficit situation is barmy while Democrat insistence on raising tax rates only on the higher echelons (even before they agreed to a raised $400k threshold from the original $250k) will hardly scrape the protective coating off the deficit.

NASCAR got a tax break - increased depreciation. Understandable really

NASCAR got a tax break – increased depreciation. Understandable really

Meanwhile, there can be no way out of the current dire situation until President Obama decides which items of spending are really important to him and then takes an industrial lawn mower (or chainsaw) to the rest. The Republicans could well be right that – if they have no choice but to agree to higher taxation – rather than raise tax rates, Congress should do away with the countless deductions that render the headline tax rate irrelevant. Even the Act passed this week quietly included tax breaks thanks to all sorts of weird and wonderful lobbies. Essentially, the Internal Revenue Code needs to be thrown over a cliff.

The only serious question remaining is that of timing. Americans, having watched aghast at the austerity-induced implosion of the Euro zone, know that they need to balance the situation carefully. Paul Krugman, guru of the Neo-Keynesians, misses no opportunity to reject any quick fixes. But that does not imply  that there should not be a medium to long-term plan. Obama needs to show leadership – and leadership is not just fancy lines on the teleprompter. The recent election was totally negative as was the spat over the Fiscal Cliff. Time to think positive Mr Obama. “Yes, we can’t keep kicking the can down the road”.

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