Tax Break

Who said tax is boring?

Archive for the month “April, 2014”

Whole in one

"YOU are teaching ME the Old Testament?"

“YOU are teaching ME the Old Testament?”

“I said: ‘Remember Lot’s wife. Never look back.’ I don’t know whether Henry had read the Old Testament or not, but I had, and he got the point.”

Thus spake that most Nietzschean of US Presidents, Richard Milhous Nixon, to Sir David Frost  back in 1977, mocking his former Secretary of State’s qualms about invading Cambodia. Knowing, as we now do,  Mr Nixon’s eloquent way with words, we can make an educated guess that what he actually said was: ‘Remember Lot’s ******* wife’. However, Mr President, we too got the point.

No fire and brimstone raining down on this house

No fire and brimstone raining down on this house

But for Nixon’s conceit, he might have realized that, born into an Orthodox Jewish family, Henry {Kissinger} would have learned the story of  the Pillar of Salt in the Hebrew original  long before studying   “Fun with Dick and Jane” or its German equivalent (and Dick and Jane did not have nearly as much fun as they had in Sodom and Gomorrah).  Posterity does not record whether Kissinger retorted by congratulating his boss on his command of the early chapters of Genesis while asking whether the paranoid President had ever made it as far as the story of King Saul.

Had Nixon’s line come up at the impeachment of President Andrew Johnson a century earlier, it would have been reasonable to  assume that everyone hearing it would have immediately understood its context without the need for mentioning not to look back.  A third of a century on from the  interview and Generations X and Y would now most likely miss the point entirely until saved by that artificial memory facility, Wikipedia.

An increasingly secular world has substantially lost its Biblical “lingua franca” and, even allowing for a huge dollop of atheism, as we celebrate the 450th anniversary of the birth of  the Bard an increasingly prosaic secular world has lost its Shakespearian “lingua franca” too.

Who has time to read the Bible?

Who has time to read the Bible?

Which brings me to the single question that frames Generations X and Ys’  deeper thinking: “Who cares?” or, to be more precise, “Who gives a ****?’ (and that is as precise as I am going to be). Well, boys, girls and those of you Xs and Ys who have yet to decide what you are, apart from the ability to communicate in something more elegant than two syllable grunts, such universally shared texts allow  sometimes complex thought processes to be shared in a flash.

Reading the OECD’s relatively tame  “Public Discussion Draft: BEPS Action 1 : Address the Challenges of the Digital Economy” published a few weeks ago, it occurred to me how important this lingua franca thing is and how, until now, I may have been barking up the wrong tree in advocating a complete recalibration of the international tax system.

As readers know, the OECD in conjunction with the G20 (or G19 as Russia is currently standing outside the Headmaster’s office) is pursuing an ambitious goal of straightening out everything that is crooked on the international tax scene. One of the biggest challenges is dealing  with the Digital Economy because, in the succinct words of  the milkman philosopher Tevya in Fiddler on the Roof: ‘It’s a new world, Golda’. In my heart of hearts I continue to believe that there needs to be a fundamental change in the basis of taxation including abolition of company tax. However, the Draft, which impressively analyzes the components of the digital economy, while opening the door to substantial changes on such issues as the definition of a permanent establishment, reduces the issues for treatment to the well-worn existing norms of international taxation.  That, after all, may be no bad thing.

Nobel Laureate Daniel Kahneman in his book “Thinking, fast and slow’  talks about “expert intuition” – a Fire Chief who senses exactly when to leave a burning house before it collapses or a Chess Master who can instinctively advise the next three moves in somebody else’s game. It turns out that this comes from enormous practice and experience  and not some magical eureka moment- a combination of System 1 (automatic) and  System 2 (conscious) thinking. This allows for quick, highly complex, thoughts.

When an experienced tax advisor is asked to analyze a situation of, say permanent establishment status, he or she will often intuitively know the answer immediately and then spend the next 25 hours (at premium charge-out rates) proving it right. The terminology is then used as  a lingua franca between members of the tax advisory team who can concentrate on producing a holistic answer based on the initial “findings”.  If the system were to be fundamentally changed we would, at least in the short to medium term, lose that hard-wired expertise and be forced into fully conscious thought processing taking one step at a time.  Apart from the additional hours required to deal with new situations (Yippidoo!), there would be significantly increased risk of  not catching the full picture. Insurance claims would increase (along with the number of disclaimer lines on memos and opinions).

And if you think the above is a load of nonsense, an experiment I and my colleagues were once subjected to (spoiler alert: If you like making a fool of yourself in public, do not read on) involved watching a video of a white-clad team and a black-clad team passing basketballs. We were told to count the number of passes made by the white team.  Concentrating so hard on the number of passes, we all failed to notice the pantomime gorilla walk across the middle of the screen, stop, beat its chest, and carry on.  In tax advisors’ parlance that gorilla could have been VAT, disallowable interest or a host of other tax planning side dishes that today would serve themselves up as expert intuition.

I still believe that one day the system will need to fundamentally change, but – just as  St Augustine (with whom President Nixon was doubtless better acquainted than was Kissinger) beseeched his Creator: ” Give me chastity and continence, but not yet” – I would rather wait a while (preferably, until I  retire).

nietzsche-is-deadIn the meantime, while reading of the Bible may be at an all-time low, new-release Hollywood blockbusters like “Noah”, “Son of God” and “God’s Not Dead” may get the lingua franca going again. Mind you, judging by the wholesale reworking of the Noah story, I hate to think what they would do with Sodom and Gomorrah.

Two deaths and a funeral

Taken too soon

Taken too soon

Last week news of two deaths brought sadness to members of my family. My lawyer son was devastated by the premature demise of  Adrian Mole aged only 47 1/52, cut down in his prime when his greatest years of mediocrity and failure lay before him. As Mr Mole was nearly 10 years younger than me I had never had the opportunity, as I picked at the acne spots on my unseemly teenage face,  to take comfort in the confessions he committed to his candid teenage diary: his obsessive love for the unattainable Pandora Braithwaite, his dismissive opinion of his utterly abominable dysfunctional parents and so on and so forth.

My own grief was reserved for Adrian’s creator,  Sue Townsend, who died on April 10 at the untimely age of  68 1/52.  Sue Townsend was one of a handful of this generation’s genuinely great comic authors. Her forte was social and political satire and, I admit, much of what she wrote made me want to throw up – which is probably a sign of how good it was. While the Adrian Mole series of books and her most recent “The Woman Who Stayed in Bed for a Year” prey on the dysfunctionality of the  British  middle class (lower and whatever else), “The Queen and I” cuts out the middle-class entirely; the deposed Royal Family are forced to subsist on social welfare while living on a filthy working class estate. Prince Charles gets arrested, while the Queen Mother has the down-and-out neighbours over for tea.

My personal favourite Sue Townsend novel is “Number 10”, in which a thinly disguised Tony Blair dresses up as a woman and tours the country with his police guard finding out what the public really thinks. The dearth of unattractive dysfunctionals, coupled with my eternal delight at seeing that particular Prime Minister dissed,  makes it an uplifting experience from beginning to end.

You couldn't make him up

You couldn’t make him up

My most-loved quote from that novel, and from the late, lamented Ms Townsend’s pen in general,  relates to when Edward Clare’s (Tony Blair’s) wife Adele (Cherie) has taken a fashionable breast-feeding break from a meeting on the subject of Irritable Bowel Syndrome at 10 Downing Street. Baroness Holyoaks of the Liberal Democrats (those wombats who are now in coalition with Dave Cameron) is striking up a conversation with Rosemary Umbago, the blind editor of the Daily Voice:

“…’I do think it’s marvellous how you manage with your visual impairment, Rosemary.’

“Rosemary snapped, ‘Oh please call it blindness. I really can’t bear those weasel words of political correctness. I’m blind, for God’s sake. I was born blind. I’m not one of those sensitive nouveau-blind people who keep whinging on about their precious sight loss.’

“Baroness Hollyoaks, mindful of Rosemary’s dislike of politically correct language, said, ‘So, Rosemary, I understand you are married for the second time to a South African. Is he a nigger?'”

Now, while you search for excuses as to how she could get away with that last line, although Townsend was born in Leicester – which has the highest ethnic minority population in the United Kingdom –  far from being black she could probably best be described as a “whiter shade of pale”. She was, however, blind – along with being plagued with a cacophony of other dreadful illnesses and impairments as well as a history of near-poverty. It may explain why her satire is so cutting and spot-on. It also speaks volumes about a remarkable woman who brought enormous pleasure to millions. The Taxbreak family will keenly miss Ms Townsend and her creations and while this Post has nothing to do with tax, it has everything to do with this Blog .

My condolences to the multi-ethnic inhabitants of Leicester on the loss of  a favourite daughter and, meanwhile,  Happy Holidays to those of you in Leicester celebrating Passover or Easter this week. (Anyone?)

 

 

Bits in pieces

It doesn't get any easier when they get older

It doesn’t get any easier when they get older

“Look mum. No hands!” It is every parent’s nightmare to be forced to watch helplessly as their 7 year-old, with the new-found independence of two wheels, goes careering fearlessly along the uneven pavement in front of the house.  Thanks to a guardian angel, the escapade normally ends with nothing more than a toppling skid or collision with an ancient lamppost that the child’s pride leads him to insist was not there yesterday – painful but, mercifully, not tragic.

Bitcoin, the virtual currency that has taken the  world by storm, is like a bike with no handlebars being ridden by a reckless kid with a pair of cheap tyres thrown in for free.

A friend of mine, a financial adviser by trade, told me the other day that one of his clients was considering investing in some Bitcoins. I expressed genuine delight as someone could now finally explain to me in non-binary language how the Mining process works. Not so fast. His face glazed over as he offered me another whisky. Had he heard of the Mt Gox collapse or the thefts from Flexcoin and Poloniex? Yes – but everybody seemed to agree that these were local  problems, not a systematic issue. “Everybody” would appear to consist of the Lower Manhattan Chapter of 7 year-old bicycle-mounted Hells Angels.

For the uninitiated, Bitcoins had the internet equivalent of an immaculate conception about 5 years ago, appearing on the scene as an orphaned concept, the creator not known until this very day. The idea was to produce an alternative currency to those currently maddening the world that would not be dogged by regulation of Central Banks and Governments. The ostensible genius was in the way – in the absence of all that regulation – the system would regulate itself.

There go another 25 Bitcoins. Time to buy a supercomputer

There go another 25 Bitcoins. Time to buy a supercomputer

In the beginning there was the Algorithm and  a digital Bible that had fallen from the Heavens telling the first punters how to play. In the maturing market participants are required to open accounts, generally through brokers (they are even given virtual wallets to keep their Bitcoins in) and are given two codes – one private and one public. When they undertake  a transaction, they only provide the public code (surprise, surprise). Privately held increasingly powerful computers then race to calculate, by trial and error, the single solution for a block of transactions that is attached to the Block Chain (which includes the entire history of Bitcoin transactions). Every 10 minutes a single computer finds the solution, it is verified by at least 50% of computers (or computer power) extant in the system and the winner is rewarded with 25 newly mined Bitcoins. This process will continue until a predetermined maximum number of bitcoins are mined (I believe around 2030).

This all sounds very clever and infallible but, let’s face it, to err is human, to really screw things up requires a computer. Lo and behold, in the recent Mt Gox, Flexcoin and Poloniex debacles Bitcoins have been disappearing into the ether. But, being the computer dinosaur that I am (I once had to plead with a New York hotel computer help line not to ask me if the computer was plugged-in) my reasoned reservations are entirely analog.

When I studied Monetary History – if my children are to be believed, around the time people were bartering pigs for firewood – I learned what defines money (not as bloody obvious as you think, clever clogs). It must be three things: a “medium of exchange”, which can reliably be swapped for goods and services; a stable store of value, enabling users to hold it for a while  more or less maintaining its purchasing power; and it should function as a unit of account against which value in an economy can be measured. Throwing all three conditions into a basket,  Bitcoin is not looking too respectable. Leaving aside the recent insane fluctuations in value which might sort themselves out eventually, realistically until such time as citizens of the world are paid in Bitcoins and pay for their daily needs in Bitcoins, their value is always going to be measured against other currencies.

Then, even if all the conditions were somehow met ( which they will not), the Bitcoin economy will need to operate according to a very narrow, and largely discredited, “Monetarist” regime. Monetarism, adopted by Thatcher at the end of the Inflationary Roaring 70s and given lip service by Reagan a few years later, claimed control of the money supply as the critical factor in the macro economy. But the money supply had various definitions that went well beyond notes and coins. Only real whackos believed it was about keeping the supply of notes and coins constant – effectively aping the gold standard. Looking at the recent successful use of Quantitive Easing – resort to the printing presses – by the world’s central banks (most recently the ECB) to stimulate the economy it is easy to realize how futile a fixed narrow money supply would be. But that is precisely what Bitcoin is about. The only way for it to work long-term, even if it were adopted as a regular currency, would be for the system to develop an override which would have to be regulated by dreaded humans – a Bitcoin Central Bank. Back to square one.

Having got all that off my chest this is one of the rare moments when I find myself praising the IRS. They issued guidance last week on how Bitcoins should be treated for tax purposes. Instead of giving them the longed-for special status of money (not defined in the Code) they decided that Bitcoins are property. Hence, increases in value will be liable to capital gains tax (or, in some circumstances, income tax on sale of inventory). This treatment also exposes transactions to possible  Sales Tax at the State level.  The IRS approach is in line with several other countries that insist on charging VAT on transactions – a noted exception being the UK.

Real men don't speculate with Bitcoins

Real men don’t speculate with Bitcoins

With complex reporting requirements and huge dollops of VAT, it means that there is – thankfully –  little hope of Bitcoins being more than speculative assets in the foreseeable future. Of course, if circumstances change as the digital economy expands tax treatment could be altered. But a cautionary tale – we are 20 years into the Information Revolution and only now are tax authorities beginning to try to find solutions to the basic problems, while as I noted last month, they are over a hundred years behind with the central tax concept of management and control. It is a “bit” too soon to throw away your dollars.

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