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Archive for the month “August, 2014”

The Battle Of The BEPS

The storm clouds were already gathering at the G8 Summit

The storm clouds were already gathering at the G8 Summit

A hundred years after the countries of Europe drew their battle lines in France and promptly got stuck in the mud, the Paris-based OECD looks like it is facing a long period of trench warfare. Originally predicted to be half-finished by Christmas, the BEPS plan – if it is to be instituted at all – will almost certainly be wrangled over for months and years ahead.

Base Erosion and Profit Shifting was always going to be an ambitious project, but when the G8 (since deflated to the G7) and, subsequently, the G20 (G19) put their weight behind it in 2013, its prospects  started to look up. At a time when major western nations were hemorrhaging taxable profits to offshore and cheeky onshore jurisdictions, there was unanimous support for clobbering tax avoidance. Although Dave ‘Selfie’ Cameron and Vlad ‘The Impaler’  Putin led the charge (Putin displaying his famed respect for international law and order), it looked clear that the Americans, fresh from their FATCA foreign account disclosure victory, would quickly take over.

There is naive, and there is naive with knobs on.

The Americans, in the persons of Rep. Dave Camp and Senator Orrin Hatch, soon realized that the companies making the most bucks around the globe owe ultimate allegiance to Uncle Sam. Some, like Apple and Google, might have successfully sheltered much of their income offshore pending repatriation to the mainland, but that could be dealt with by Congress and the IRS without recourse to all those Europeans who were not even capable of winning or losing their World Wars on their own. BEPS, while having some strong points, was ultimately an attempt to wrench taxable profits out of the hands of the Americans.

Another hybrid white elephant

Another hybrid white elephant

Battling furiously to meet the September 2014 deadline for the first part of the 15 point project, OECD apparatchiks slogged overtime to produce heaps of words on transfer pricing and country-by-country reporting, treaty abuse, hybrids and the digital economy. While the transfer pricing recommendations were greeted with derision, the hybrid proposals were so complicated that they would require more acumen to implement than went into all the previous hybrid planning. And, as for the digital economy, the OECD more or less came out with its  hands up – apart from a recommendation about raising taxation through VAT (which many of us could have happily told Dave and Vlad back at their first meeting and saved them the money).  If none of this gets off the ground, one good thing that will have come out of  it all is that the Hybrid Mismatch document includes some great ideas for future tax avoidance. Somebody at the OECD also, rather belatedly, woke up to the fact that developing countries may have specific problems implementing BEPS; the technical guys have picked up their pens once more.

The proposals are now at various stages of public consultation – for ‘public consultation’ read ‘being rubbished’.

google taxMeanwhile, thanks to FATCA, the Automatic Exchange of Information project , which is running parallel to BEPS, continues to advance rapidly through the battlefield. It may well be that,  taken together with enhanced domestic anti-avoidance legislation by individual countries, this will bring a real solution to much of the tax avoidance and profit shifting that BEPS aims to stop –  in addition to dealing with tax evasion which is its raison d’être. As we have already seen in the wake of the British Parliamentary inquisition of Google, Amazon and Starbucks, although their practices were totally legal, the ability to ascertain and publicise their financial information led to a public backlash. Modern multinationals cannot afford the bad publicity – times they are a changin’.

Will the coming months herald the Battle of the BEPS, as the OECD  Task Force breaks through enemy lines on its way to victory? Or, will they usher in the Great Phut (one day, when the OECD tries the same gambit again,  to be known as the First World Phut)? Without the Americans joining in the war, and with professionals engaging it in hand-to-hand combat, the prospects are not high that the OECD staff will be home for any Christmas soon.

 

The Tax Business

This week's edition has come back to Earth.

This week’s edition has come back to Earth.

If proof were needed that the Silly Season is upon us, it turned up in our mail box a few days ago. Slowly ripping open the envelope housing last week’s Economist, I noticed an ‘x’ peeping out at me from the partially-revealed cover. Excited by the prospect of ‘tax’ finally having  hit the headlines of  the world’s most venerable newspaper, I rapidly finished the job, the publication  falling unceremoniously onto the kitchen table.

Well, it seems that tax doesn’t sell newspapers at airport newsstands in midsummer. The normally sober Economist had gone for the lowest common denominator, running a feature: ‘The Sex Business’. Having seen the article, all I can say is that there will have been a lot of disappointed vacationing punters out there who would not have been able  to get their money back because, by the time they realized their mistake, they were half way round the world.

If the Economist can be silly in August, so can I.

Something that has been bothering me for ages is the complete lack of respect for the English language in certain  tax publications. My firm subscribes to a number of leading journals. Most are pure hardcore professional jobs that pay no attention to format, but provide their product in a raw and timely manner.  However, there is at least one (which I will not mention by name for fear of reprisal), from a highly respected stable, that presents itself as a glossy, ‘hip’ magazine. Sixty pages, lots of colour pictures, a ‘funny’ (spare me, please) back page, plenty of adverts and a $200+ cover price (in fairness, internet access is thrown in). The articles, generally written by tax professionals who I assume are not paid, are often highly informative, justifying the subscription. But, what I cannot abide, is the wanton lack of editing which, frankly, is more-or-less all that is left for the editors and publishers to do.

Here is a recent example:

As those involved in the OECD’s base erosion and profit shifting (BEPS) project reach for the halftime oranges and energy drinks, our special BEPS feature looks at the progress made to date and explores the hurdles that litter the track ahead as the bell rings to signify the last lap in this race against an ambitious timeframe to produce meaningful outcomes.

If you pay peanuts....

If you pay peanuts….

Oh dear! This would have got me a miserable fail  – and a whack round the head –  in primary school. Apart from the lack of punctuation (one comma in an unforgiveably long sentence), the  metaphor is horribly jumbled; although no great athlete, I do not recall half-time in races – even marathons. I could go on and on, but I will not try your patience.

The saddest thing about this ‘sentence’ , apart from the enormous angst it must have caused the myriad readers for whom English is not their mother tongue, is that it was part of the introduction (the rest was no better) to a full-blown feature section. With no appetite to proceed, I dipped into the first article, which included in the first sentence the expression “most well-known’. Unless he had been paid by the word (and well-known counted as two), the average mortal would have gone for the better recognized:  ‘best known’. At that point, I realized: ‘Houston, we have a problem’, and made a mental note to take 2 aspirin half an hour before attempting to read on.

She even edits the text on her tee-shirts

She even edits the text on her tee-shirts

It is high-time they took some of their income from the advertising and $200+ cover price to employ a good copy editor.  If currently between books, E.L. James or Danielle Steele would  do a wonderful job with the syntax and punctuation, at the same time coming up with unthought-of teasers for a three-letter word ending in ‘x’ (in case you were wondering, I was referring to ‘tax’).

And before you start gratuitously red-marking this post – rest assured that, when you start paying me $200 a shot for this Blog, I will employ a copy writer.

Happy Silly Season.

 

 

 

 

 

Nowhere to hide

Israel's Finest

Israel’s Finest

Tax Break has just had its longest break since its inception in 2011 due to the difficult period Israel has been going through. The post below is more sober than usual (in fact, for some people, it might be downright depressing). Please do not adjust your computers – normal service will be resumed as soon as possible.

Shortly before Israel, in order to protect its population from the indiscriminate firing of missiles from Gaza, was left with no alternative but to enter into a bitter war with Hamas, the Israeli Tax Authority embarked on its own “seek and destroy” mission.

The targets were Israeli residents who “omitted” the reporting  of income to the ITA.

The Income Tax Commissioner has stated on several occasions since taking office last year, that he favours a policy requiring all residents to file an annual return – as opposed to the current situation where most employed individuals are covered by withholding tax on their salaries and transactions  through Israeli financial institutions.

Even 007 wouldn't refuse Odd Job cash

Even 007 wouldn’t refuse Odd Job cash

Apart from the scourge of incorrigible Odd-job men who have, “Pay me in cash and I will knock off the VAT,” woven into their DNA – as well as monthly property rentals paid for in grubby two hundred shekel notes – the real problem in 21st century Israel is income from abroad.

Until 1998, when the foreign exchange market was opened up and Israelis could freely invest overseas, the system worked quite well. If you had income-bearing assets overseas, you were, by definition, a naughty person (euphemism for a  crook). Even our most lamented, assassinated Prime Minister was caught red-handed holding an American account from the time he served as Ambassador in Washington (to be more precise, it was his less lamented wife).

Nowadays, apart from occasional new immigrants with all sorts of exemptions, anybody holding income-bearing assets abroad is required to come forward and voluntarily file a tax return (sometimes just a ‘short-form report’).

Aye, and there’s the rub.

It is evidently a lot easier to break the law by “omission” than “commission” and the Income Tax Commissioner believes there are unbelievable sums of undeclared income offshore.  He reasonably concludes that, if individuals had to file  a return that included a declaration that any false statement could result in the cutting off of their hands and feet, most would come clean.

So far, so good.

The Authorities have, however, admitted that, with current staffing levels, a nationwide filing requirement is not on the cards. As a result, they came up with the rather clever idea of sending a letter to 120,000 individuals who do not currently file a return, but who make regular trips abroad, own more than one property or just look plain suspicious.  The polite letter is accompanied by  a form to be honestly completed and signed (on pain of death).

This all sounds eminently sensible, but allow me to apparently digress for a moment.

The authors of the cult book ‘Freakonomics’,  who have been milking the franchise for all it is worth, recently came out with their latest, very underwhelming, ‘Think like a Freak’.  I found only one notable idea in this tome,  but it is a real eye-opener. Have you ever thought (like every week) when you receive a spam email from Nigeria in search of your bank account, why the scammers don’t move on from Nigeria to, say, Zambia? Surely, the logic goes, everybody knows that Nigeria is synonymous with fraud? It turns out that the scammers are not as stupid as they seem as they bob  about on their hundred foot yachts in the Caribbean.

The Nigerian scammers work to minimize ‘False Positives’. The e-mail you receive in your spam-box has been sent simultaneously to millions at  virtually no cost in time and effort. If only one per cent got back to them with queries or a possible desire to invest, they would need armies of potentially whistle-blowing staff to handle the correspondence. The only people who will respond to these e-mails today, apart from Interpol and the odd Nigerian,  are real fools who have been out to lunch for the last 10 years. They are, almost by definition, totally gullible.  The Nigerian bit weeds out the ‘False Positives’.

Now, given that the tax authorities admit that they are short of manpower,  the form accompanying their ingenious plan should have been simple.  It should have asked a series of Yes/No questions followed by threat of  extermination and excommunication. The 120,000 forms could have been run through a computer in an afternoon and the few thousand guilty would have received notice that their lives are henceforth ruined by the following morning.

Why didn't somebody think this out?

Why didn’t somebody think this out?

But this is Israel. Instead of delaying the process by half a day, they decided to send out the standard document for the voluntary opening of a tax file. Let alone the individuals, it wasn’t clear to us tax advisors what needed to be filled in. Furthermore, the form  asked for a considerable amount of information that will mean each one needs to be waded through manually. According to some commentators, it will take months to get through the pile.

Thankfully, the army went about its business more systematically. God bless the State of Israel and its excellent defence forces.

 

 

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