Tax Break

Who said tax is boring?

Archive for the month “October, 2014”

And now for something hardly different

Speaks for itself

Speaks for itself

The surviving members of the Monty Python team must be cock-a-hoop over the cover of the (just about) current issue of The Economist. Under the headline: ‘Europe’s Economy’, a parrot lies dead receiving an infusion, while Angela Merkel comments, ‘It’s only resting’. No further explanation required. Forty-five years on, the Parrot Sketch is part of the lingua franca.

The other instantly recognizable  Python sketch is ‘The Four Yorkshiremen”, in which a group of wealthy, aging northerners  each vie for the distinction of  most deprived childhood. In fact, that piece is almost a case of imitation being the sincerest form of flattery. It started life in the 1967 series “At Last The 1948 Show”, was adapted for the radio series, ‘I’m Sorry I ‘ll Read That Again’ in 1969, and only made it to Python in a live show in 1974.  ‘Almost’ imitation, because Cleese and Chapman were co-writers of 1948, together with Marty Feldman (the  most unlikely Jewish Yorkshireman ever) and Tim Brooke-Taylor (who did ISIRTA together with Cleese).

Tax authorities take this imitation business quite seriously, even if their material is far less original than Monty Python’s.

What's in a name?

What’s in a name?

Despite the hammering of Harmful Tax Practices, first more than a decade ago by the OECD and EU, and more recently by the OECD BEPS project and an extensive transfer pricing review, there has been an upsurge in the introduction of copy-thy-neighbour special IP regimes. To fool the enemy, they carry all sorts of different names and precise terms – Patent Box, Innovation Box, and – the latest Irish smokescreen –  Knowledge Development Box.

The ostensible justification for these schemes is the incentivization of R&D expenditure by offering reduced tax rates on associated revenue. But, with the exception of the UK innovation box, which was for self-defense, what countries are clearly doing is standing on street corners raising their skirts above their knees in an effort to attract new clients. Switzerland is proposing a scheme, as it preempts the forcible closure of its House of Ill Repute by undertaking a comprehensive tax reform. Ireland, meanwhile, no longer able to tempt Apple with its harmful double-Irish position, can at least claim not to be plagiarizing – it had the first scheme in the early seventies which it discontinued in 2010.

Innovation boxes are currently, effectively, under a three-pronged attack but are still spreading. There is Action 5 of BEPS dealing with Harmful Tax Competition – and what could be more harmful tax competition than this race to the bottom? Then there is Action 8 which deals directly with intangibles and the concept of value creation.  Finally, there is the long-running saga of OECD Working Party 6 on ‘The transfer pricing aspects of intangibles’. All these projects seek to prevent the maintenance of intangibles in ‘the second draw, third office along’.  Even if the whole caboodle gets caught up in bureaucracy and self-interest, and is not adopted internationally, something is bound to stick. And that something is likely to be the need for boots on the ground in any jurisdiction claiming the right to substantial returns due to intangibles ownership.

Where countries support large workforces of savvy individuals, the on-the-ground development  of intellectual property makes sense. But if all the country is offering is a crisp suit, a law office and a plaque, the whole thing could easily unravel.

Some called this British humour too

Some called this British humour too

A couple of years ago I made a one day trip to England to see Tim Brooke-Taylor and his colleagues doing a live recording of a long-running radio show – ‘I’m Sorry I Haven’t a Clue’. Over its forty-year run, shows have often ended with the announcement of late arrivals at some ball or other. Among the late arrivals at the Aggressive Tax Planning Ball might have been: ‘From the Republic of Ireland, Mr and Mrs O’Vation- Box and their son N. O’Vation-Box.’ You get the idea. It is called British humour. Patent Boxes and Innovation Boxes are full of it.

Maintaining The Berne Rate

Swiss Chocolate Soldiers

Swiss Chocolate Soldiers

Sorry, sorrowful Switzerland. This pious country, which has been supplying the Vatican with its psychedelic army for the last five centuries, has been forced to take heed of the words of Handel’s Messiah (with apologies to Isaiah): ‘Every valley shall be exalted, and every mountain and hill shall be laid low.’ After hundreds of years  where, thanks to the impossible terrain, the Swiss have ‘made watches not war’, the Western World’s  tectonic shift from bang-bang war to economic war (other than dealing with the primitives of the Middle East), has seen Switzerland flattened.

Their woes started with an attack on their banking secrecy laws, progressed to the nuking of their financial institutions for dirty dealings, and now, knowing that the game is up, they are undergoing a complete ‘voluntary’ overhaul of their corporate tax system.

Switzerland has been a tax haven for as long as the term has had meaning. The first ever international tax treaty, in 1872, was between Great Britain and the Swiss Canton of Vaud. And it has been all downhill since then.

According to draft legislation published last month by the Swiss Federal Government, all those fun, ring-fenced, foreign-owned companies – mixed, domiciliary, holding, principal, Swiss finance branch – would be phased out by 2029. (Twenty-twenty-nine! There could be another World War by then; in fact, maybe  that is what the Swiss are banking on.)

The Swiss tax situation is precarious

The Swiss tax situation is precarious

Having said that, Switzerland is not about to hike its tax take. That would be tantamount to abseiling down Mont Blanc without a rope. The draft legislation is a potpourri of give-aways marketed by  other – slightly less in-your-face – jurisdictions.

There is going to be a patent box, a notional interest deduction, a step-up on corporate migration, a step-up on transition from one of the old regimes (in 2029), a reduction in Cantonal tax rates,  cancellation of the reviled 1% capital tax (that has a habit of becoming 2%), a participation exemption, unlimited loss carryforward, a modified UK style group relief,  and reduction of net wealth tax.

It is tempting to conclude that the Swiss are following the age-old custom of chucking as much as possible against the wall and then seeing what sticks. It is almost inevitable, in the era of BEPS, that there will be a chiseling away at many of these benefits worldwide. Whatever happens, by going for broke, the Swiss should continue to be one step ahead of  the market.

These are better times for the Swiss watch industry

These are better times for the Swiss watch industry

On the other hand, it is definitely time for Switzerland to expand its non-financial sector. Despite the ubiquitousness of the cheap quartz watch over the last 40 years, the Swiss have reinvented the market for the quality precision piece. Time may be on their side after all.

Make it a double, Paddy

"Look. This one doesn't bend."

“Look. This one doesn’t bend.”

The scene in Disney’s Snow White, where the wicked witch entices the heroine with a poisoned apple, has fueled the nightmares of generations of kiddies since it first saw the light of day (or should that be ‘the dark of night’?) in 1937. I had double the reason to be terrified as my parents had an old acquaintance  – the mother of a friend – who, I was genuinely convinced, must be related to the evil lady.  Her name was Megan, born sometime in the last decade of the 19th century. She had masses of unruly hair that matched her nicotine-stained, spindly fingers. And she spoke in an Irish smoker’s brogue. Bed-wetting material, par excellence.

Half a century later, I can still hear my parents talking about her having been in the “Post Office”. For years, my mind’s eye saw her going from house to house delivering mail and, when some unfortunate maiden opened the door, offering her a juicy red apple. It was only when she had died, and I had progressed to a higher degree of cognitive reasoning, that I understood that she had been an Irish Volunteers (later, IRA)  operative in the 1916 Easter Rising. She was in the General Post Office on O’Connell Street when almost the entire leadership was carted off by the British and put in front of a firing squad.

Although the Easter Rising served to unite the people of Ireland in the cause of independence, it was a bit daft really. The arms the rebels were counting on were intercepted by the British, and they knew that they didn’t have a chance, but they went ahead anyway.

The Irish are big on miracles

The Irish are big on miracles

In the spirit of 1916, over the last 30 years successive Irish governments have proven adept at blundering almost thoughtlessly into madcap schemes for economic progress, like the 12.5% corporate tax rate;  miraculously they keep pulling them off. They managed to build a Tiger economy without an ounce of local initiative, relying on US multinationals and extremely generous European Union aid. True, they were hit quite badly by the global financial meltdown, but they pulled out of that faster than any of the other crisis countries.

It would appear that the luck of the Irish may be running out (or, maybe, not). The EU Commission is investigating whether tax agreements with the Irish Government brought  Apple and 4,000 juicy jobs to the depressed area of Cork. For the first time, the Commission is using the argument of ‘State Aid’ to attack a tax break (Fiat and Starbucks are getting it in the neck elsewhere).

The alleged scheme is annoyingly simple (almost, crass) and has been an open secret (but not necessarily in relation to Apple)  to international tax advisers for years. Referred to as the ‘Double Irish’, it takes advantage of two bits of Irish Blarney in local law. Firstly, as opposed to just about every other nation no longer in loin cloths, Ireland did not have  significant Transfer Pricing rules until recently. Secondly, Irish law defines tax residency of a company purely on the basis of management and control (most countries today have an additional test of place of incorporation).

Once those fiercely permissive non-rules were in place, it was time to pour the Guinness. Apple (and there will be plenty more US companies joining the wake, if the EU pull this one-off), is, it appears,  accused of  establishing two companies in Ireland. One, subject to the standard astronomical rate of 12.5%, is alleged to have carried on the business. Lest Apple be saddled with such an unacceptable tax rate, that company had an agreement to pay royalties to the other Irish company (it’s subsidiary) at a Disney fantasy rate. The second company, however, was managed and controlled from an offshore jurisdiction (BVI is popular) so was not liable to tax in Ireland (not even withholding tax on the royalties). Abracadabra – a minimal level of taxation in Ireland. Now, the US has, as everybody knows, a fairly draconian system for catching low-tax profits of foreign subsidiaries (Subpart F) in its tax net. The only  part of this scheme requiring intelligence (the American part) required that the lower Irish company check-the-box for US purposes turning it, effectively, into a branch of the other Irish company. The intercompany payments then, if the rumours are true, disappeared for US tax purposes.

The irony of all this is that the Irish might still come out of this laughing. If the scheme is found to be State Aid, Apple may be required to pay an absolute fortune in tax – to the Irish Treasury.  The Irish Government is claiming innocence in the whole matter (it will need to get over the hurdle of how the world’s tax advisers knew what was going on while it didn’t,  AND possibly embarrassing revelations concerning those rulings). Apple, meanwhile, can reasonably claim that it did nothing wrong – a sovereign country (and EU member, to boot) offered it  a favourable ruling.

Workaholics or Alcoholics?

Workaholics or Alcoholics?

The Irish Government has belatedly announced that it is  taking steps to eliminate  the Double Irish – from January 2015 it is proposed that companies incorporated in Ireland will be Irish resident under domestic law.  With headline rates in other jurisdictions brushing against their once incredibly favourable rate, the Irish may have to start doing things for themselves. They could try learning  from the Seven Dwarfs: ‘Hi Ho, Hi Ho, it’s off to work we go’.

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