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Archive for the month “June, 2014”

Taking the mojo out of inversions

By now, everybody has heard of the aborted takeover of  British pharmaceutical firm AstraZeneca by US giant, Pfizer. The latest in a series of US corporate inversions, the new corporate structure was  to be headed by the smaller UK company, thus largely spiriting the merged group beyond the lascivious tentacles of the US Internal Revenue Service.

Fascinated by the subject, I trawled  the quality press and professional literature for relevant articles. As I will explain later, despite the extensive coverage of the topic, I was utterly frustrated by the universally poor standard of reporting. The experience brought back vivid memories of  my first fresh-off-the-production-line car.

Twenty-five years ago, I took delivery of a sparkling white  Austin Montego. To be precise, by that stage in Austin’s long and painful decline as part of the government-owned British Leyland, it was simply a Montego: an orphaned car, no make or mark  willing to admit parenthood.

The ultimate driving machine

The ultimate driving machine

I think I realized there was something wrong when I first clapped eyes on it. Arriving at the delivery point, and after completing the relevant paperwork, I was confronted with a neat row of identical vehicles. I noticed that one of the newborn had a white spot of paint disgracing the otherwise pure black bumper. I prayed but to no avail. That was my car. A black blob hurriedly splashed onto the offending area, the car was soon heading for home with yours truly at the wheel. By the time I reached our car park, the driver’s mirror had fallen off the windscreen. By the end of the 12 month guarantee period the car was on its fourth alternator. Driving the Montego made me imagine piloting a Spitfire in the Battle of Britain. Before the car was finally towed away for the last time from under our house some twelve years later, anything that was not bolted to the exterior had fallen off and the lining of the ceiling had sagged down as far as the dashboard, giving the impression that the car was a mobile bordello.

Some years later I saw a documentary about the, by then defunct,  factory where my car was built. A group of former production-line workers sat in the pub explaining how it all worked. It turned out that, if someone was sick, late for work or needed a pee, the production line did not stop. When it got to fitting their part, either one of the other workers  did a rush job or, if the part was not considered critical by the professors manning the production line, it would simply be omitted. This was related without humour or bitterness – just that confident matter-of-factness that is the mark of the unmitigated moron.

Which brings me to my point.

Financial journalist phoning in his copy

Financial journalist phoning in his copy

Every single article that I read about US corporate inversions (and there were many) had critical parts missing or not properly connected to each other, resulting in the whole being incomprehensible (even after trying to put the jig-saw puzzle of articles together with all the pieces laid out on my dining table).  Had the articles been my Montego, by the time I got home on that first day I would have been driving an engineless go-kart .

The thinking behind inversions is that, since US corporate tax is punitive and there are loads of  planning schemes on how not to pay tax on unremitted income from abroad – there is a clear advantage in a US group having its parent company in a convenient jurisdiction beyond the shores of the United States. Enter the corporate inversion which, once upon a time, enabled the shareholders to quite simply insert a foreign holding company between themselves and the US company.  Convenient locations were the usual suspects that had the common virtue of never having heard of income tax.  In 2004 the US authorities woke up and imposed anti-avoidance legislation that effectively ignored the inversion to the foreign jurisdiction if at least 20% of the ownership in the new parent did not pass to third parties. The exception to this rule was if there were substantial business activities in the foreign jurisdiction which led companies to start looking at slightly less sunny jurisdictions such as Switzerland and Ireland where tax could be magically reduced to manageable proportions.

With the recent wave of mergers of the Pfizer – AstraZeneca type (the UK is still a lot more favorable tax location than the US) which meet both the 20% rule and substantial business activity test, Congress is now considering upping the 20% to 50% and tightening up the substantial business activity rules. Loss of control is expected to be just a little too much for the average US multinational.

The problem with the available literature on the subject is that, while inversion transactions are presented (on an amalgamated basis) as dark acts of genius to escape the draconian levels of US tax while avoiding US CFC legislation  and enabling tax-free repatriation of cash, it is far from clear how any of this is to be achieved.

Firstly, the transfer of the US company under the new foreign parent appears to be a s367a transaction which only escapes tax if a Gain Recognition Agreement is achieved with the IRS (under the circumstances I don’t know if that is a slam dunk).  Next, if the US company wants to avoid CFC legislation  it needs to sell/dividend/transfer its foreign subsidiaries to the foreign parent – which would generally involve a lot of tax. As regards ‘repatriation’ of cash trapped abroad, unless the US company’s foreign subsidiaries are transferred to the foreign parent,  the profits still have to pass through the US company – incurring the same US tax as before the merger plus likely withholding tax to the foreign parent.

While some articles clearly state that the CFC problem would remain, others hint at the US company disappearing into the new foreign parent. One states that the main advantage is that the foreign parent could loan extensive amounts to the US company enabling US profits to be cut by half due to interest expenses. When it comes to repatriation, I found one truly beautiful and incomprehensible graphic that has the merger involving cash payments to the US company and subsequent loans from Barbados through the foreign parent to the US company. I discussed all this with two US international tax experts who sympathised and went off to lunch.

My take on all this is that inversions must be very complicated and financial journalists cannot afford to burn copy when they realize they are out of their depth.

Vorsprung durch technik. Almost

Vorsprung durch technik. Almost

I do wonder, however, whether with Congress hot on the tails of multinationals (Senators also presumably do not understand what is going on), the planning may be a little too clever for comfort. In that same documentary about British Leyland, there was a piece about the Triumph Stag. The Stag was a cabriolet designed in Italy, the contours of which were generally considered to be thirty years ahead of their time. It was a truly magnificent driving machine. While Triumph’s sister mark, Rover, fitted  Buick 3.6 litre engines in its top-of-the-range model, the executives at Triumph decided they could go one better. Triumph had a boring family saloon called the Dolomite that just happened to have a 1.8 litre engine. You guessed it. They took two Dolomite engines and fused them together. This explains why, throughout my youth, when traveling on motorways I would regularly see Stag owners lounging luxuriously in their Italian leather seats, waiting to be towed. There has to be a lesson there somewhere.

 

 

 

Foul!

Sir Tom Finney not looking very illiterate

Sir Tom Finney not looking very illiterate

“I fail to understand why any of you would be interested in twenty-two illiterate young men kicking an inflated pig’s bladder around an oblong of grass.” A bible-bashing preacher doing the rounds of Lancashire’s pubs in late-Victorian England? Not quite. Actually, the headmaster of my school (see previous post) in mid- 1973 berating a hodgepodge of gormless fifth-formers for bunking off  around the corner to the Hendon Hall Hotel to see the England team.

For those of you not acquainted with sophisticated evenings of lager and lime  at  the irrevocably stained bar of  that  starless Inn, whenever there was a game at Wembley (if you don’t know what Wembley is, this Post is not for you) one team stayed at the Hendon Hall and the other at the Brent Bridge. Knee-high to a grasshopper, I had accompanied my Dad there seven years earlier, and watched transfixed as Charlton, Hurst, Moore and pals passed within tackling distance of where I was standing.

D Day plus 22 years

D Day plus 22 years

A day later Moore was raising the Jules Rimet trophy, his team having shown the Hun good and proper  for the third time that century who really ruled Europe. (On the first two occasions, victory had not required a disputed goal from Geoff Hurst but did involve an American front line).  Of course, in 1973 the England players were gloriously on their way to not qualifying for the Finals, let alone the Final. But then, there only ever was one real World Cup Final.

As the 2014 Brazil World Cup approached, everyone seemed a little too preoccupied to pay much attention to it. The press was taking  far more interest in what was waiting  in store for football fans in 2022. I could not begin to understand why people were so shocked at the Sunday Times expose of the alleged corruption that bought Qatar the hosting of the competition. Now, I am a fairly ambivalent football fan. I was born with two left (very flat) feet, a left head and a left eye-for-the-ball. But even I know that, when you have an entire planet to choose from for staging the most important competition in the game’s calendar, you do not go for a country where (1)there is no beer (2) there is no grass and (3) there is no thermostat. Not unless, of course, there is money in it.

In the meantime, the almost octogenarian Septic Bladder, who has presided over the FIFA shenanigans since 1998 is well placed to be elected to a fifth term as President at the special Congress to be held next year. It turns out that the 209 member nations  have an equal vote so, similar to that other den of iniquity – the United Nations, the mice can rule the house.

Various ideas have been mooted for solving the problem including, curiously, asking Switzerland (the home of FIFA) to revoke its tax-free-not-for-profit status. While I recite 15 times every morning: “tax makes the world go round”, I fail to understand how this will solve anything other than forcing the national leagues to fork out more spondoolies.

The Queen's grandson-in-law looks like he could sort out Septic Bladder

The Queen’s grandson-in-law looks like he could sort out Septic Bladder

It would seem to make much more sense for the wealthy leagues and nations to insist on “one dollar one vote” , which would relegate all those runty little nations to the sidelines. In addition, similar to nations for whom democracy is not a foregone conclusion, there could be election observers. In this case, it would not have to include that gratingly annoying failed president, Jimmy (pronounced ‘Jimmuh’ ) Carter, but perhaps a group of people from another sport. Given the scandals in Cricket (‘You know, it just isn’t Cricket”) maybe they should go for Rugby (albeit, itself not with lillywhite hands). With Football traditionally a game for gentlemen played by thugs and Rugby a game for thugs played by gentlemen, they could bring in some of the Hooray-Henrys to clean things up. Even the Queen’s (there is only one Queen) granddaughter is married to a Rugger Player. And, if FIFA didn’t play the game, who could be better placed to put the boot in.

I hope it is not too late to send Qatar packing. FIFA could be reminded that there is one country that has proved itself in the last two years supremely capable of organizing a major international sporting event while having plenty of world-class football stadiums ready and waiting. And, no, I do not mean Russia. They have already bought the 2018 extravaganza to sit side-by-side on Putin’s sideboard with the Sochi Winter Olympics (Sochi, like Qatar, is short on snow). Ambivalent fan or not, in mid-July 2022 I hope to be standing outside the Hendon Hall Hotel.

 

Down Wiv Skool

Arvind Mahankali won the National Spelling Bee by correctly misspelling Kneydl

Arvind Mahankali won the National Spelling Bee by correctly misspelling Kneydl

I was chatting the other night with my middle son when he came out with the word “procrastinate”. He also knew what it meant – not bad for a young man neither born nor bred in an English-speaking country. While ‘procrastinate’ is not as complicated as ‘antidisestablishmentarianism,’ the word does have as many syllables as  that old spelling bee horror: ‘Mississippi’.

“Procrastinate” is a word that should be on every English-speaking tax advisor’s lips.  Meaning ‘Manana’, it is what tax authorities the world over are truly expert at doing. If tax authorities ran hospitals, patients would all be dead  from untreated disease or old age.

It may therefore come as a surprise that ‘procrastinate’ is a word I do not use. I do employ lots of other words to convey my feelings to the tax authorities which, over the years, have got me into several scrapes requiring a grovelling apology the next day – but “You incompetent procrastinator” never made it to the top of  my windpipe.

My singular avoidance of the word has its roots in an event 40 years ago this month.

While the rest of the world was celebrating the 30th anniversary of the D Day  landings in Normandy, I was experiencing my own Dunkirk.

In June 1974, at the ripe old age of 16, I sat my O levels. For those not raised in Britain or those too young or too old (they are coming back in 2017) to remember them O levels were, coupled with the horrendous 11-plus,  the components of a peculiarly patrician British examination system designed to ensure sufficient dropout at 15 or 16 to maintain  supply  of  barely educated labour to the mines, factories and clerical jobs. (There were also ‘immigrants’ who drove the buses and suchlike, but they were  called other names then that are no longer de rigeur).

We should have been so lucky

We should have been so lucky

About two hours after completing the paper in English Literature I received a call at home from the school secretary that the headmaster (principal) wanted to see me “Now!”.  Not having the faintest idea what I was being summoned for, I remember sauntering calmly to school – despite the fact that the headmaster had a reputation as a  frightening despot. Arriving at his study door, I was ushered in. I think I know what condemned men in US prisons feel when they enter the Death Chamber. The headmaster, cruelly disfigured by acute arthritis,  sat at his desk smoking his beloved pipe. Next to him stood the superannuated  chief invigilator, a truly dreadful man who had been an amateur boxer in his younger days and was a diabolically poor maths teacher to boot. The latter  wore  his trade-mark fixed grimace. Various other senior masters littered the room in diverse states of discomfort.

“Is this yours?” It was the headmaster creaking his head in the direction of the far edge of his desk.

Following his line of sight,  my eyes landed on the pink answer book that had my candidate number on it. Now, readers, you will doubtless share with me the feeling that, similar to watching a coffin being lowered into a grave at a funeral, when you hand in an exam paper, it is your fervent desire that you will never see it again. So, shocked by the situation, I answered the obvious: “Yes, sir.” I saw the invigilator’s mouth lengthen into a pencil-thin smile.

“So, you admit it, do you?” The headmaster again.

“Of course. It is my exam paper…sir”

‘Not the exam paper, boy (they really did speak like that in those days – TB). This’. He manoeuvred his arm toward the exam book and clawed at a heavily folded piece of white paper perched on top of it. He waved it in my direction. I took it and opened it. It was a series of brief crib notes on Sean O’Casey’s “Juno and the Paycock”.  The first line contained one solitary four syllable word. You guessed it (No, it wasn’t Mississippi).

“Mr E***** (he of grimace fame) found this in the examination room and, after carefully checking the handwriting of all the papers, has come to the conclusion that it is closest to yours.” E***** was clearly as good a graphologist as a maths teacher.

I managed to compose myself.

“Sir. If you look closely, this is clearly not my handwriting. Furthermore, if you look for the word “Procrastinate” in my paper, you will not find it”. I even ventured a little joke from the gallows: “I wish I HAD known the word. It might have bought me a few more marks.”

“It is our intention to send it to the University Examination Board and let them decide”.  This was positively frightening. Whatever else I was or wasn’t in school, I was always known as scrupulously honest. At the University, I would just be a number and my – as yet not quite – budding academic career could be prematurely ended by a summary trial and execution by firing squad.  With that, the inquisition ended and I was dismissed to mull over my future.

The bottom line was that, following the intervention of a number of civilized members of staff and, I believe, the Headmaster waiting enough time to shake the Chief Rottweiler off his tail (tale?), I was informed a few days later that the matter was closed.

As regards that English Literature exam, I have to admit (perhaps to the surprise of some readers), that I was not much into it in school. I did scrape a minimum “Pass” grade largely thanks to the fact that the black-and-white movie version of one of the two set-books was shown on television on the Sunday afternoon prior to the exam – thus negating the need to read the wretched thing.

I didn't make it up

I didn’t make it up

As Chick Flicks go, the 1939 Oscar-winning adaptation of Emily Bronte’s Wuthering Heights scores pretty high on the Kleenex charts. A weepy if ever there was one, the most poignant scene has to be the death of Cathy (Merle Oberon) . Determined to maximise the pathos , the immortal William Wyler directed that, while the emotionally stunted Heathcliff (Laurence Olivier) took adulterous centre-stage, Cathy’s hapless husband, Edgar Linton (David Niven), should cry bitterly as he bent over the body (and they say the modern world is immoral). When Niven failed to produce the tears, the prop man blew menthol into his eyes resulting in him ejaculating the entire contents of his nose over the corpse. The hitherto dead Cathy proceeded to return immediately to life and run off screaming to the dressing room. Astute observers of the blooper-free scene on You Tube will notice that Niven does not make it any further than the end of the bed. While naughty Heathcliff gets to caress his dead mistress’s limp hand, Linton has to make do with his wife’s dead feet.

Many years ago, when my eldest son was in High School, he forgot to take something with him in the morning that was relevant for something-or-other that day. I was around  at home for some reason, so I offered to take whatever-it-was to him. Arriving at the door of his class, I observed total mayhem. Pupils were walking in and out, talking, shouting, standing on desks. I assumed it was Morning Break and sauntered in. Pleased to see me, my son suggested we went outside. As I was leaving the class, I noticed a teacher buried in a book at the front. Safely outside, I asked my boy what was going on. “”Oh! We are in the middle of an exam.” You couldn’t make it up.

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