Tax Break

John Fisher, international tax consultant

Archive for the month “October, 2013”

Tax that must not be named

Big Brother

Big Brother

Standing in the Great Hall of Hogwarts one day this summer in the company of my youngest son and half of the picture-popping population of Japan, I was the only muggle who, when asked by the Warner Brothers Studio Guide which House I would want the Sorting Hat to direct me to, did not reply Gryffindor. To my offspring’s  immense embarrassment, I went for Slytherin which produced by far the most interesting characters in the Harry Potter pantheon.

As Halloween loomed ominously over the foggy horizon last week, I had reason to rejoice over my unconventional choice of House, as an old colleague dropped by the office to drain my brain over a cup of steaming coffee. He just happens to be the kid brother of Lucius Malfoy, Lord Whatshisname’s trusted lieutenant. (If any parseltongue speakers happen to be passing by this blog on the way to spying on something more interesting, I wish to state categorically that my old colleague is an exceptionally nice guy whom it is always a pleasure to meet. Any relative of Lucius Malfoy is a friend of mine – really.)

If you fancy scaring someone this Halloween and you happen to be passing through Washington DC, creep up on a member of the House Ways and Means Committee and whisper “V.A.T.” in his ear.

Washington does not like VAT. In a city that breeds acronyms with pride, VAT is a dirty acronym.

Republicans and, to a lesser extent, Democrats  will – while frothing at the mouth – provide an excellent list of reasons not to impose a VAT in America: it hasn’t proven itself; the tax is regressive (clobbers poor more than rich); it will lead to less spending in the economy and hence recession; it will lead to inflation; it is not transparent; it will encourage Big Government. They have a point – the point at the top of their wizardy Dunce Hats.

Obama's Healthcare Halloween Costume

Obama’s Healthcare Halloween Costume

If these politicians would strain their heads for a moment to see beyond  the Atlantic Seaboard, they might notice that VAT has been successfully adopted in around 150 countries (It will surprise American politicians that there are more than 150 countries. They used to think there are only 4  – America, Canada, Russia and Abroad). The tax is, on the face of it, regressive (wealthy people spend less of their annual income on consumption)  but this is countered by the freedom to introduce negative income tax for lower-income groups (or at least raise the threshold for paying tax) as well as the fact that VAT is effectively a lump-sum tax on wealth – over a lifetime even the wealthy tend to spend a large chunk of their dosh and so their capital (which is otherwise free of tax) partially goes on VAT. Moreover, governments often exempt transactions considered basic living expenses (food, clothing, stay at the Kensington Hilton). While experience has shown that the imposition of VAT leads to a one time increase in prices which could have an effect on demand, as part of a government’s macroeconomic policy that can be offset by decreases in corporate and income tax rates which boost the economy. There is little evidence of inflation as a result of VAT and transparency can be guaranteed by insisting on the VAT amount being included on price tags (which some countries have actually outlawed in supermarkets and retail stores because it confuses the consumer – just like the abominal sales tax in the US). As regards the fear of Big Government, VAT is a relatively efficient tax, the rate of which can be adjusted at a stroke – but while during the inflationary 1970s major increases did occur, nowadays – in normal economic circumstances – increases tend to be incremental (a recent exception is Japan, where the tax has been historically exceptionally low).

The real reason that US politicians do not go for a federal VAT appears to be none-of-the-above. The American political system is too populist for its own good. Because of the Primaries system in US elections Members of Congress have their eyes permanently fixed on re-election (especially in the House of Representatives with two-year terms) so that the Whips have limited power to rein them in (they also have nothing to offer them by way of patronage since they cannot serve simultaneously in Congress and the Administration).

Not-So-Sweet Nutcracker

Not-So-Sweet Nutcracker

To understand the contrast with Britain: my favourite Whip story comes from 1979 when the Labour Party was reduced to ignominious opposition by the Thatcher juggernaut. Newly elected Jack Straw (much later Labour Foreign Secretary) was confronted by the fearsome Walter Harrison. Without saying a word, the legendary Whip grabbed Straw by his privates and squeezed hard (I shall refrain from the graphic details as my kids read this). Shocked and in pain, Straw managed to gasp: “What did I do?” The reply from the blunt Yorkshireman was quick in coming: “Nowt, but think what I would do to you if you ever crossed me”.

Overall, the Americans do not seem to have much of a choice in the long-term. Even if they get beyond the current recurring gridlock, the dream to slash corporate tax rates while slashing the deficit will surely not be achieved without a VAT. As opposed to Japan, the US still has the luxury of controlling the printing presses of the world’s reserve currency. The threat of that position being taken by the Euro seems to have subsided by default (literally). Whether the Yuan, too easily controlled by an authoritarian government, could take its place is doubtful. But the party surely cannot go on for ever.

US politicians would do well to come to terms with a federal consumption tax before the burgeoning deficit consumes them. Wishing you all a gruesome Halloween.

Brave New World?

Does this guy really think all day about base erosion and profit shifting?

Does this guy really think all day about base erosion and profit shifting?

When, at 3 o’clock on the morning of September 30 , I flopped, bleary-eyed, into a chair  in a Berlin hotel room, activated my laptop and started to write about John Le Carre’s Cold War Trilogy, it did not occur to me that the ensuing post was to be the beginning of my (first) trilogy.

The story so far: A frightening woman chairing a British Parliamentary Committee in November 2012 breathes fire on representatives of Starbucks, Google and Amazon for planning their UK tax bills out of existence. She accuses them of immorality which, since cross-dressing and other fun activities are rumoured to be a staple of Westminster life, is a bit ironic.

Not as cool as the  OECD

Not as cool as the OECD

In June, the G8 leaders, bored out of their minds in some windswept corner of Northern Ireland, decide to call International Rescue but, instead of Scott and Virgil Tracy touching down on the adjoining golf course, they get Pascal Saint-Amans (pictured above), the sexy no-strings-attached   French Head of Tax Policy at the OECD (he replaced a not-very-sexy Welshman last year).

By the time of the G20 summit in St Petersburg in July there is a 15 point  OECD Action Plan in place, comprehensive enough to thwart the amoral designs of the most perverted of tax planners. What is more, just in case somebody manages to make it out of the killing fields alive, there is a rushed new draft on the transfer pricing treatment of intangibles as well as a plan for the automatic exchange of information, finally agreed to by the People’s Republic of China (that great champion of the right to privacy) on the eve of the subsequent September G20 summit. Meanwhile, the mob screams for the blood of multinationals and their advisors, most of whom do not look like heart-throb Saint-Amans. These days, life is good if you are a tax advisor with a death wish.

The big question is: What is going to happen next? This is a good question. Twenty years ago I would probably have ventured a straight answer; nowadays I am more reticent, which I suppose, by inference, means I am more stupid.

This was the moment to sell Imperial Bonds short. The markets failed to predict WW1

This was the moment to sell Imperial Bonds short. The markets failed to predict WW1

Some time ago a Dutch colleague sent me a copy of a fascinating book by Nassim Nicholas Taleb – The Black Swan. The basic premise of the book is that there are totally unpredictable events that have a massive impact on society and which are subsequently rationalised by that same society (why didn’t the useless US security services predict 9/11?). As a result predictions are nauseatingly inaccurate and using a broker for your investments is strikingly similar to paying the lady in the halter-neck evening dress sitting next to you to place all your chips on 21Rouge.

Predicting the future of the international tax world, therefore, comes with the disclaimer that none of what I am going to say will apply if: Rand Paul (son of Ron Paul, the serial presidential candidate who wants to turn the Fed and IRS buildings into luxury condos) is elected President in 2016; aliens build an intergalactic superhighway through the bit of Space currently occupied by Earth; the People’s Republic of China becomes the No.1 economic superpower and insists on corporate and individual privacy in line with Chairman Mao’s Little Red Book (totally upended edition); or the Messiah comes (it will only then be empirically clear whether for the first or second time).

The plans, if successfully implemented in their entirety, will lead to a fundamental realignment of the international tax area. The BEPS Action Plan, by targeting digital businesses, hybrid instruments, interest deductibility and transfer pricing at the same time as ensuring that tax planning, warts and all, is on public display at the local Tesco’s, will put paid to the magical sleight-of-hand international tax planning that attracted us all into this rural corner of the profession in the first place. The Revised Discussion Draft on Transfer Pricing Aspects of Intangibles will, by insisting on examining where value is created, substantially exclude all but serious MNE’s from shifting profits to lower taxed jurisdictions – such planning requiring the transfer of physical, living people who are actually going to carry out the functions to which they are assigned (shock, horror), as well as volume tax savings where the delta in tax rates may not be that great.

International Tax Advisors will continue to flourish – but in a much less exciting fashion. They will concentrate on tax efficiency rather than tax elimination – to the extent companies can move people, assets and risk between jurisdictions there may be genuine tax savings or deferral but, otherwise, planning will concentrate on not paying excess or double tax through inefficient structures. There will always be a need for companies to understand their tax positions in new foreign jurisdictions and all the signs are that compliance issues will continue to increase geometrically. In addition, there will always be Transfer Pricing (although, despite current protestations to the contrary, simple formulary apportionment will be used in all less material transactions).

Impossible goal? It went in

Impossible goal? It went in

The question that remains is how likely it is that the plans will be implemented in their entirety. The OECD and G20 have set ambitious deadlines for just about everything being complete by the end of 2015. While a lot of the issues have, in practice, been under consideration for some years, most of the deadlines appear ridiculous. Grown-up nations like Britain and France, while  publicly sponsoring and supporting the reforms, themselves offer tax incentives that will need to go; not all developing countries are on board; and, most significantly, unless they can substantially convince every sovereign country to agree to a Multinational Instrument that would change international tax relations without the need for the renegotiation of bilateral tax treaties, the whole thing could take decades. On the other hand, it is unlikely that public awareness of the issue will now evaporate and that governments will take it off the agenda. To get this to work some time in the next decade it needs thought (the OECD), goodwill (the G20) and brute force (the United States).

At the end of the day, as in so many difficult situations, it will be up to Uncle Sam to speak softly and carry a big stick. My money is on that. Croupier, spin the wheel.

Going Back To Sunday School

Don't mention the wall

Don’t mention the wall

If challenged to a game of Word Association, top of my list of responses to “Berlin” would not be “Morality”; in fact it would be hard-pressed to make it as high as the bottom of my list. Dietrich (The Blue Angel), Liza with a Zee (Cabaret) and  Political Movement with a Zee (every war movie between 1940 and 1965) – with their amoral associations –  are far more likely candidates, while Irving (White Christmas) would make a great wild card.

So it was ironic that the word on every speaker’s  lips at the  international tax conference I attended in Berlin last week was “Morality”.

As regular readers of this Blog will know, the last year has seen the wholesale politicizing of the noble art of tax planning.  Ever since Lady Margaret Hodge, chairing a British Parliamentary Committee, told Amazon, Starbucks and Google that insofar as they do not pay sufficient tax in Britain they are “not illegal, but immoral”, the world’s xenophobic political leaders have been taking their whips to “sinning” foreign corporations and their squeaky-clean allies, the tax advisers.

With all due respect, what a load of absolute tosh.

Funny - he doesn't look Jewish

Funny – he doesn’t look Jewish

To paraphrase one of my co-religionists: “I am a Company. Hath  a Company eyes? Hath a Company hands, organs, dimensions, senses, affections, passions? If you prick us do we  bleed? If you tickle us do we  laugh? If you poison us do we  die?”

Companies cannot be moral for the simple reason that they have no capacity to distinguish between right and wrong. An elephant  that does not poo all over the favourite chaise longue is not a moral elephant, it is a trained elephant. And if some brightspark turns round and says that a company is a pantomime elephant that is operated from the inside by regular homo sapiens, just as the two guys inside the elephant do not have the individual free choice to move in any direction independently, those company homo sapiens have a sacred responsibility to their shareholders to maximise profits – not to go to Church on Sundays. What they all have is the free choice to make a horrible scene and walk out – although, in the case of the elephant-fillers, it would be best to step out of the costume first. And if said brightspark still insists that the homo sapiens (known in human-speak as Directors and Managers) should at least reflect the morality of the company’s shareholders – I will have him begging for mercy.

You see, while regular Church-goers (and roughly the entire Western World until some time in the last century) may be Absolutist – having an absolute and incontrovertible view of what is right and wrong – society wandered a little off the Via Dolorosa in the run up to the latest Millennium and the name of the game today is Moral Relativism – all sorts of different and equally legitimate moral codes.

All this bellyaching – whether from national parliaments feeling they are being robbed or social protest groups with the same sentiment – can actually trace its roots to the vice of Self-interest, the morality of the Me Generation. Parliamentary Committees scream at multinationals for re-routing their Treasuries’ rightful tax-take while the very same Parliaments offer tax breaks to encourage foreign groups to re-route their activities in their direction. Social Protest groups invariably want someone else to pick up the tax tab – suggest to the average protester that, as a condition for upping the tax from big companies and fat-cats, he should pay an extra 10% tax on his personal income and you may wake up in hospital.

So, even if Morality can be projected onto companies by way of the actions of the directors reflecting the moral code of the shareholders – why should company shareholders be the only humans to voluntarily pay more tax than they legally need to? There is nothing in the moral code of the Me-Me-Me  generation that requires them to do so.

Of course, this does not mean that the international tax system is not broken – it is totally shattered. But the solution lies in the establishment and enforcement of new rules – not voluntary restraint. This, as I argued in my last post, is only likely to come about through the exercising of strong-arm tactics by the United States.

He was into morality - big time

He was into morality – big time

I omitted one obvious word association earlier – Isaiah. Isaiah Berlin believed that, while Moral Absolutism (an unbending system of morality such as is found in the major religions) was unacceptable, he did not go all the way to the other extreme of Moral Relativism ( Anything Goes – which, contrary to the assumption of some, was written by Cole Porter and not Irving Berlin). Berlin (Isaiah as opposed to Irving or Wall) believed in a middle-way – Pluralism – that did allow for certain universal values that he considered  were part of human nature. Empirical evidence suggests that paying more taxes than is legally required is not one of them.

Here endeth the lesson.

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