Tax Break

John Fisher, international tax consultant

Archive for the month “March, 2013”

It takes two to tango

Clothes maketh the man?

Clothes maketh the man?

Apart from the snow-white attire, it could have been, quite literally, two Old Joes getting together for Saturday lunch and a chinwag. Joseph Ratzinger and Jorge Bergoglio made history at the Castel Gandolfo outside Rome last week when, for the first time in at least 600 years, two popes met face to living face.

Watching their rather wooden performances before the cameras (neither of these gentlemen was groomed for Prime Time), it was the awkwardly staged prayer session  that caught my attention most. Here were two highly influential individuals who, despite their united front,  personified diverse spiritual and temporal states of the world.

Theologians have debated the contradiction inherent in God’s attributes of Justice and Mercy for Millennia. Here was the austere Pope Emeritus Benedict XVI, an aloof intellectual who had made his career looking for Truth through reconciling religion and science, praying with Pope Francis I who, despite his Jesuit background, has an emotiocentric approach to his calling. While Benedict XVI was more at home clinically wrestling with the scientific discovery of the God Particle than confronting the unfolding human tragedy within his own Church, Francis I (why do they insist on calling him “The First” ?) is more at home with the Sermon on the Mount. To anybody other than a dogmatic Christian, the meek inheriting the Earth might make no moral, rational or logical sense, but it does make people  feel good (especially if they are meek).

Then there is the temporal contrast. The German Pope, from the Northern Hemisphere and Northern Europe, for whom rules, discipline and tradition are sacrosanct, and the Argentinian/Italian (his father emigrated) Pope from the Southern Hemisphere and the Mediterranean basin of Europe, for whom life is too short to get caught up in the red tape so it makes more sense  just to hug and be friends.

The Euro crisis  involves both the trade-off between justice and mercy and a clash of cultures between Northern and Southern Europe. It was interesting to note how the citizens of Ireland coolly accepted their  fate (and, with a recent successful bond issue, the country is well on its way to recovery) while the Greeks and Spanish  kicked back with emotional protests.

All these guys pale into rational insignificance when compared with Cyprus. Cyprus is not in severe financial difficulties –  it is bankrupt. There is little room for useful restructuring.  Justice, mercy, logic and emotion will not help the country that has become Europe’s biggest basket case as it careers headlong towards Purgatory.

There has been a mixture of rational and emotional reporting on the Cypriot crisis over the last few weeks. It all started with negotiations for a bail-out package with the Troika – the European Central Bank, the IMF and the EU Commission.

Cyprus’s banks had invested rather too heavily in Greek banks and, when  the EU Council of Ministers decreed, as part of the Greek bail-out in 2011 that private investors would need to take a 50% haircut the then Cypriot Finance Minister  – who was present at the meeting – didn’t seem to realize that he needed to object so as to save his own country from bankruptcy. This speaks volumes about Cyprus which, quite incidentally, had a  genuine communist president at the time (even Russia and China had already given up on that nonsense).

Did someone mention haircut?

Did someone mention haircut?

With a new conservative government installed in January that was reputed to be capable of walking and chewing gum at the same time, a deal was negotiated whereby all depositors in Cypriot Banks, including the average Joe with deposit insurance up to €100,000,  would take a haircut – defined for some reason best known to the parties involved as that dreaded word “Tax”. The universal haircut is understood to have been the suggestion of the Cypriot Finance Minister. Now, at this point the Troika should have woken up and remembered from 2011 that the Cypriots do not have a very good track record on these financial things. Instead, they did not seem to realize that – by exposing insured deposits – they were risking a run on every slightly dodgy bank in the Euro-zone. This speaks volumes about the ECB, IMF and EU Commission.

In the event, when the news hit Cyprus all hell broke loose and Parliament threw out the proposal. Although the Cypriot people and much of the world’s popular press took a tear-jerk position on this (the BBC interviewed eloquently irate retired British expats living on the island with authoritative Home Counties accents) the Parliament’s decision gave the EU a second chance. The Cypriots, on the other hand, were left  needing to find €5.8 billion in order to be eligible for a €10 billion loan.

The deal that has now been reached is that small depositors (up to €100,000) will be protected while Cyprus’s second largest bank will be wound-up and its largest bank restructured. Although not yet clear, apart from shareholders and large creditors of the bankrupt bank being more-or-less wiped out, the haircut of large investors in the Bank of Cyprus is likely to be up to 60% with compensation in the form of worthless shares. In the meantime, as banks reopened a few days ago, draconian capital controls are being enforced to prevent a run on the entire system.

The result for Cyprus is that, with the restructuring of the banks, its offshore financial business – which is fundamental to the economy –  has been effectively eliminated. Much of the money invested in Cypriot banks is thought to be Russian laundered funds such that a Russian investor who sent a bed sheet to the Cypriot Laundry can now expect to get back a pillow slip (if he is lucky). He will not be a happy investor which may make the average Western European citizen smile, but this probably means an end to the Cypriot economy as we know it, which also means that the average Western European citizen will soon have the smile wiped off his face. It seems the only hope for Cyprus is reunification with the Turkish north paving the way for increased tourism and successful exploitation of the gas found off its coast. Confidence is so high in Cyprus that those English residents with clipped accents mentioned above will take comfort in the decision of the British government to divert their State pensions into UK accounts.

They never had this trouble when the Church was in charge

They never had this trouble when the Church was in charge

It is tempting to think that there could have been another solution for Cyprus involving, perhaps, a less onerous bail-out. Rationally and in the name of justice there was not. It is a country that built its future on, at best, legal offshore financing that is going out of fashion and , at worst, Russian money-laundering. But what about emotionally? Could, and should, the Troika have turned a blind eye and advanced more funds?Didn’t someone once say “Let he who is without sin cast the first stone”?

What a clever big country!

Clue: 8 across

Clue: 8 across

If you worked in the financial sector in the 1980s, odds-on you were classified  as either a YUPPIE (Young Upwardly-Mobile Professional), a  DINKY (Dual Income No Kids Yet) or a LOMBARD (Lots Of Money But A Right Richard Nixon).

As I fell short on at least one letter of each of those acronyms I escaped classification, but that did not mean that I did not have to occasionally endure those trademark Sunday Brunches. Habitually up with the lark,  I had invariably already partaken of my bowl of weetabix topped with a sliced  banana by the time I faced the crystal  glasses and  cold, nauseating gazpacho soup.

I could cope with the pretentious conversation as well as the ubiquitous brushed cowhide Filofaxes that everybody  organized their busy lives with.  Where I drew the line was when the ever-present  pet dog lost its place to the ever-present pet toddler. Assailed with the achievements of these budding  John Pierpont Morgans, the ultimate ignominy came one day when (I don’t think it was at Brunch – perhaps a candle-lit dinner) one little fellow plonked himself down on his potty in the middle of the salon. Minutes later, his gushingly proud mother  showed round the contents to the gathered assembly, encouraging us to swoon over her child protegé for, amazingly, succeeding in not soiling his clothes or the carpet (and “swoon” we definitely did).

The guy on the left wanted to know how to make it to 5 years

The guy on the left wanted to know how to make it to 5 years

One of the big news items last week was the premature claim that Pakistan has finally been potty-trained. For the first time since midnight on August 15th 1947 a Pakistani democratically elected government made it to the finishing line of a 5 year term, and the Prime Minister was gushing with sanctimonious pride. What is more, the world press were joining in the celebrations making encouraging noises.  It was not important that two months ago the Supreme Court had instructed that the prime minister be arrested for corruption  and, after being ignored, had reluctantly backed down. It did not matter that he had only become prime minister in June last year after his predecessor was judicially disbarred for continually ignoring the Supreme Court’s instructions to ask the Swiss authorities to reopen an investigation into the President on possible corruption charges.  There was no mention that the President himself is the bereaved husband of a former prime minister who was silenced for ever in the run-up to those last elections, not to mention being the son-in-law of a former president who ended up at the end of a hangman’s rope.

Then there are all those small embarrassments of the last five years like the Americans unexpectedly finding the World’s Public Enemy No 1 (clearly not Pakistan’s Public Enemy No 1) down the road from the capital. And what about that poor, mentally challenged Christian girl who was framed under the Blasphemy Law (though, thank heavens, the same world press that are now hooting encouragement got hold of the story and the authorities were forced to act to save her).

Pakistan is hot on law and order. Take the Blasphemy Law. It carries the death penalty. Meanwhile, the authorities announced last month that any wealthy individuals known to be guilty of Tax Evasion will be subject to extreme punishment – they will not be allowed to travel abroad. Furthermore, in order to up the number of current taxpayers from 800,000 out of a population of 180,000,000 a tax amnesty is in the works requiring payment of around a measly 1% of the value of previously undeclared assets. Following that, the Electoral Commission announced that individuals will not be allowed to stand for election to the new parliament unless they file tax returns for the last three years as well as other tell-tale information for public inspection. According to one Pakistani newspaper, 70% of the members of the outgoing parliament have never filed for any taxes (you have to hand it to them for chutzpah). In fairness, it is much easier for a system rotten to the core with corruption to target insults to Islam rather than tax evasion.

French Ambassadors to Britain do not have to dress like this to prove they are stupid

French Ambassadors to Britain do not have to dress like this to prove they are stupid

Despite last week’s milestone, Pakistan clearly still has a long way to go. At a dinner party in London around the turn of the century, the late Daniel Bernard – French Ambassador (who else?) to the Court of St James –  referred very unfairly to my adopted home as “that sh***y little country”. I wonder how he might have referred to the considerably larger Pakistan. While the news trumpeted by the prime minister is indeed encouraging, it will be a long time before it will be able to lay claim to being fully potty-trained. In the meantime, the more mature countries of the world will presumably continue to ooh and aah every time it makes a little progress and continue to hold their noses every time it doesn’t.

Of the people, by the people, for the people

Different price. Different taste.Same effect.

Different price. Different taste.
Same effect.

In the early days of my marriage an ageing, newly acquired  relative informed me that – other than the price – there was no difference between Johnnie Walker and Tesco’s no-frills, own-brand blended whisky. The market survey was not long in coming when, the following weekend, a visitor involuntarily sprayed the contents of a freshly imbibed  glass of the stuff over our new tablecloth. In a similar vein, democracy, when stripped of all the fancy packaging, has been described as “two wolves and a sheep discussing what to have for lunch”. On the face of it, that is indeed Democracy – but it would make the average paid-up member of modern society throw-up his lunch  over a friend’s tablecloth.

We have come to think of Democracy as a one-size-fits-all commodity manufactured somewhere between the 49th Parallel and the Rio Grande, which can be exported by friendly persuasion or armoured convoy and lead Man back into the Garden Of Eden. Long forgotten are the words of that greatest of democracy’s defenders, Winston Churchill: “Democracy is the worst form of government except all those other forms that have been tried from time to time.”

Now, just as there are loads of 50-something Plain-Jane Marilyns wandering the planet, whose parents thought that something might wear off if they named them after Norma Jeane, some of the ugliest nations on Earth carry titles like the Democratic People’s Republic of Korea (North Korea) and Democratic Republic of Congo (Rape Capital of the World).

Benign dictator

Benign dictator

Democracies in point of fact come in all shapes and sizes. The “Liberal” type we tend to like owes its popularity less to democratic principles and more to the sanctity of  personal freedom. John Stuart Mill, the author of “On Liberty” and one of the fathers of modern Liberalism,  considered that a benign dictatorship could, in theory at least, deliver the same positive effect as a democratically elected government.

Which brings me to my point.

Democracy, in its various forms, has been an incontrovertible success in the development of modern society when compared with all the alternatives. But, that does not mean that , when you drill down, democracy, in all its current forms, is an unequivocal success in all respects. Take the economy. If you had a spare $10,000,000 to burn which of the world’s two largest countries would you choose to invest in – China or India? If you were trying to sort out the mess of the Eurozone (which democracy probably caused in the first place) would you have left Mario Monti in charge in Italy or gone for the current headless chicken of a Parliament? If you wanted to tame the unforgivable US deficit, would you establish a steady 10 year plan or join the Broadway Farce that is Capitol Hill today?

With the exception of India, whose problems are probably more to do with geriatric governmental  incontinence than an overdose of democracy (though the Chief Minister of West Bengal is giving New Delhi a good run for its money), there is a real democratic economic crisis arising from the short-termism of politicians. Similar to the problem with Stock Markets, where company managers have to deliver short-term returns to public shareholders at the expense of long-term strategy, governments – from the moment they are elected – are looking at the next election four of five years hence.

In the case of Stock Markets, a recent study suggested that public companies should have different classes of shares with voting shares held by a Trust that would not be affected by short-term issues. Perhaps it is time for governments to be effectively bifurcated. Governments would be elected (or not) just like now, but economic policy would be placed in the hands of an Economic Assembly. Members would be elected for a single, say, 10 year period with 20% of members being up for election every two years. The Assembly would be in charge of budgets and taxation and would make its informed decisions on the basis of requests from the Government. If that sounds far-fetched, think of Monetary Policy. Once upon a time, Central Banks of most countries were controlled by the Government. Today, the norm is for a Central Bank to be independent, charged with controlling inflation and encouraging full employment. And those guys are not even elected.

Make no mistake. I support democracy. It is just that, like Marilyn Monroe’s dress at JFK’s 45th birthday party bash in 1962, it needs to be carefully stitched to make it fit.

Did somebody mention the Renaissance?

Did somebody mention the Renaissance?

Having said all that, one of my favourite quotes of all time came from Harry Lime in The Third Man: “Like the fella says, in Italy for 30 years under the Borgias they had warfare, terror, murder, and bloodshed, but they produced Michelangelo, Leonardo da Vinci, and the Renaissance. In Switzerland they had brotherly love – they had 500 years of democracy and peace, and what did that produce? The cuckoo clock.”

Roman Circus

Didn't anybody tell them that the Messiah will have a beard?

Didn’t anybody tell them that the Messiah will have a beard?

“He is not the Messiah, he is a very naughty boy”. Thus spake Mandy Cohen, mother of Brian, to the ignorant  mob besieging her home,  rejecting  their mindless veneration of  her son. Her statement would have been appropriate at many points in history – the world has had no shortage of false messiahs. The human condition demands hope. When collective hope is lost, up pops an improbable saviour  promising salvation. Same plot, different protagonists.

Once upon a time they could plug into religion for a narrative (the occasional halo-wearer  still raises his angelic head in third world countries as well as American States south of the Mason Dixon Line) but in the cynical, secular modern world despair has to seek new panaceas.

Nowadays, the Hosannas are reserved for General Elections. The Eurozone crisis and its aftermath of German imposed austerity led to hope-inspiring changes of government in, among others,  Greece, Ireland, Spain and France (alright – maybe not France).  However, after a period of technocratic rule it was left to the Gigolos of Europe to take the Faustian route and threaten to bugger the entire European enterprise.

Having rid themselves in 2011 of an administration that seemed to govern from the loins, the Italians went on to remarkable things under the unelected  Mario Monti. Then, just as things were starting to straighten out, the former prime minister awoke from a court-case-induced coma and brought down the Government.

Now, in any normal country the expected result in the ensuing election would have been an outpouring of support for Mr Monti and an AC Milan football kicked up the buttocks of that venerable team’s chairman. But not Italy, a country where they strive to walk on water.

Rather than take the whole thing seriously Italian voters decided, as one man, to kick off their shoes, pass round a  communal joint, lie back  and inhale their way out of reality. Hallelujah!

Every Brit knows what a bidet is for

Every Brit knows what a bidet is for

The good news was that ex-King Bunga-Bunga did not win. The bad news was that neither did anybody else. A full 25% of eligible voters stayed home to watch Bunga-Bunga-owned television and Bunga-Bunga-owned football, while, among those who voted,  25% went for a Billy Connolly lookalike (but not soundalike) “comedian” with knock-out lines like: “Did you know that the British think a bidet is a bath for a violin?”  Duh? The retro any-left-wing- port-in-a-storm Pier Luigi Bersani with 29% scraped only a smidgen more than his nemesis, while Mario Monti, whose only crime was that he had both feet  planted firmly on the ground, picked up a pathetic 10%. His job in the new parliament is expected to be holding up the laugh prompt card.

The Italians proved once more what we have known for years. They do not like taxes and damn the consequences. One of the central features of Berlusconi’s campaign was the repeal and refund of the hated IMU tax that Monti imposed on second homes. Ironically, the expected take from that tax is only €4 billion each year. Meanwhile, anybody who managed to control his tears of mirth long enough to read Beppe Grillo’s blog would know that, while he does not object to taxes in principle, he doesn’t like the ones everybody is talking about at the moment – which is populist poppycock (unless that was supposed to be another of his side-splitting jokes).

If truth be told (and, as this is Italy, why the hell should it?) most responsible macro-economists groveling in search of a Nobel Prize today think that the policy of raising taxes in response to the Eurozone crisis is misjudged. On the other hand that does not justify the  complete abrogation of responsibility by an entire nation to behave like adults (and not just consenting ones). Italian taxes are extremely high. The problem is not the tax rates but the fact that so many residents do not pay their fair share. Like red lights in Rome (of the traffic variety), taxes are a suggestion rather than an order.

Italians rejected Monti, not because he put taxes up but because he came up with clever ideas to catch those not paying them. The Redditometro which, from this month,  enables the authorities to estimate what taxpayers should have declared based on databases of expenses and complex formulae,  is a particular turn-off for the fun-loving population. And what about those cash-strapped citizens who live in fear of the knock at the door of the family Ferarri.

The Italians would rather just lean back and wait for the Messiah – these days a frumpy, middle-aged lady in Berlin who is going to be placed  under steadily more pressure as she faces her own re-election battle later this year.

The Italians never could get the hang of the walking-on-water thing

The Italians never could get the hang of the walking-on-water thing

Of course, Italians and their politicians are not the only ones to make fools of themselves (although nobody can deny that  they are exceedingly good at it). The current political and religious goings on in Rome reminded me of a story from the 1960s when George Brown was British Foreign Secretary. To call a spade a spade,  it was universally known that Brown had a little problem with drink – he could never get enough of it. At a diplomatic ball he eyed a stunning black lady in a striking purple satin evening gown. Plucking up the courage, he ambled over and asked her to dance. “I cannot dance with you for two reasons’, came the curt reply. “Firstly, I do not dance. And, secondly, I am the Archbishop of Lagos”.

Perhaps, if every time Italians had to elect a government they were locked in a room with murals covering the walls and ceilings and not let out until there was a clear victor, they might take the whole process more seriously. On second thoughts, there is more chance of the coming of the Messiah.

Men in Sepia

Nurture or nature?

Nurture or nature?

When larger than life Oscar winner Orson Welles was asked why there had been a self-destructive theme running through his career, he replied that he was like the scorpion who begged the frog to carry him across the river on his back. When the frog hesitated, fearing that the scorpion would bite him, the scorpion explained that, were he to bite him, they would both drown. Half way across, of course, the scorpion bit the frog. As they were going under, the frog asked “Why?”. “Because it is my nature”, replied the scorpion.

I realised last week why I am a tax advisor. It is “because it is my nature”. I went with two of my kids to see “Lincoln” and spent much of the, sometimes tedious, two and a half hours practicing one of my oldest hobbies – looking for continuity errors.

I got into this life-long obsession in 1969 when I noticed a modern skyscraper block in a scene from the World War I extravaganza “Oh! What a lovely war”. I eagerly pointed this out to my ever-indulgent grandfather who had participated in the tail end of the First World War and had taken me along to the film  for company. He could have said to me there and then: “When (if?) you grow up you are either going to be a tax adviser dedicating your life to finding loopholes in the law or a cynical social misfit, or both.” In the event, he just suggested kindly that I keep my voice down because some of the other patrons were staring disapprovingly at us.

Now, in contrast to that Oscar-winning travesty from 2011:”The Kings Speech” which – while George VI and Logan incontrovertibly existed – galloped roughshod over  history, Mr Spielberg seems to have taken his subject quite seriously. With sepia and grey alternating as prime colour and an abundance of talking heads and paucity of action, it gave the impression that the great director was trying to tell it as it was. Well, almost. Having successfully avoided, for a full 140 minutes, that awful melodrama reserved for Egyptian Soap Operas and Hollywood Blockbusters, Spielberg finally succumbed to his Hollywood urges. As Lincoln dropped his gloves on the table and sauntered out of the White House en route to Ford’s Theatre (SPOILER ALERT: if you were off sick the morning they taught American History at High School, the following information could seriously affect your enjoyment of the movie and life in general), the camera focused in on his misty-eyed black servant sadly watching him leave. He was going to the Theatre, for heaven’s sake, not – as far as anyone other than John Wilkes Booth knew – to his own funeral.

Daniel Day-Lewis he wasn't

Daniel Day-Lewis he wasn’t

My interest in Lincoln perked up when Tommy Lee Jones thundered onto the screen. Fully expecting him to end the film fighting off aliens blitz-bombing the Capitol, I was immediately confused by Thaddeus Stevens’s Republican credentials. There was no way that Al Gore’s college roommate and nominating speaker at the 2000 Democratic Convention was going to play one of Satan’s Own for any amount of Hollywood cash. Of course, this being America (and America being Hollywood), I soon understood that back then the Republicans were the good guys and this old curmudgeon was a super-liberal for his day.

What the movie did not consider important to tell us (possibly because it’s title was “Lincoln” rather than “Stevens”) was that old Thaddeus was one of the most important politicians in US history. As chairman of the quaintly named House Ways and Means Committee, he presided over the birth of two of the most important tax headaches of the American condition.

Taxation of Americans on the basis of citizenship rather than residency, an approach only shared today by Eritrea (whose capital, Asmara likely resembles the DC of Spielberg’s movie) was a civil war atrocity as was the first real US Estate Tax (although, it may be argued, that the atrocity in the latter case has been committed by successive generations of tax advisers).

What is clear is that neither measure has brought in much money to the  US Treasury. Expatriate Americans who report their income often have little income tax to pay while expatriate Americans who do not report their income are often turned into unwitting fugitives. Estate Tax (the current version of which  dates back to the First World War) nowadays only affects couples with more than $10.5 million in assets on death and people with that kind of spare stardust usually sprinkle it liberally into the hands of tax accountants and lawyers who magically make the problem go away.

An old favourite, the Dynasty Trust, which helped families like the Rockefellers shelter their assets from multi-generational Estate Tax  is still around, albeit with less spring in in its generation-skipping step than in John D’s day.

All you need to know now is what President Tyler looked like

All you need to know now is what President Tyler looked like

Somebody who might have gone for a Dynasty Trust had he not died a few months before the first Estate Tax came into force in 1862, was the 10th President of the United States, John Tyler. Tyler, who had 15 children, left the White House 16 years before Lincoln took up residence there. The reason I mention him is because, almost beyond belief, as of last year  he still had two living grandchildren (one of whom – at around 85 years old – looks remarkably like him).

Apart from that nonsense at the end, Lincoln is, by all accounts, a good film. I am now eagerly awaiting  a blockbuster about B-Actor President Ronald Reagan. Whoever directs it will be able to let his or her hair down and use every Hollywood cliché and device in the book without risk of criticism from a discerning public. My beloved grandmother, who did not attend war movies with her husband and grandchild (we also saw “The Charge of The Light Brigade” together), really could not stand Reagan. I can still see her talking with derision about the comment he made to Nancy when he met her as he arrived at the hospital after being shot: “Sorry, honey, I forgot to duck”.

One day the late Reagan may win the Oscar that eluded him in life. It is just that, when they announce “And the winner is…Ronald Reagan” the Academy Award will be for Best Picture rather than Best Actor.

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