Tax Break

Who said tax is boring?

Archive for the month “November, 2018”

It’s just not cricket

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He might still need more proof of residence than this

Last month’s news from India, that tax residency certificates would no longer be a must for  foreigners claiming treaty benefits, will come as a welcome relief to the finance departments of organizations doing business with that great country. Obtaining certificates of residence can be a pain in the neck, especially when they are needed quickly. When it comes to transparent partnerships, like accounting firms, the bureaucracy can be a nightmare.

Although at first sight this announcement may put India in a positive light, it is more a reflection of the relief to heads no longer banging against brick walls – the original requirement for certificates stemmed from a silly amendment to the law in 2012. There is so much that is daft about India’s approach to international taxation.

When I hear the words ‘India’ and ‘Tax’ juxtaposed, I invariably think of Kipling’s quote ‘Power without responsibility – the prerogative of the harlot throughout the ages.’

India – the largest democracy on Mother Earth – has, when it comes to international tax, a split personality. On the one hand,  its appellate tribunals and courts wax more lyrical than anybody else on tax  issues brought before them. In 2017 it was estimated that nearly a quarter of a million disputes were awaiting resolution. Every international tax practitioner knows that, when examining the case history of OECD treaty articles, it is rare for a bon mot from India not to pop off the page. On the other hand,  India maintains primitive imperialist designs on the tax that rightly belongs to others (I wonder what Gandhi would have said). Its Dividend Distribution Tax, declared a tax on the distributing company rather than a withholding tax on the recipient, has deftly (and, I believe, uniquely) sidestepped treaty withholding restrictions, while its technical services tax has long-armed income that should have nothing to do with India. Then there was that beautiful moment a few years back when they followed seller Hutchison and buyer Vodafone up the food chain, and rather than going for  a bite out of the indirect seller’s cake, tried improbably  to extract it from the indirect buyer’s mouth. That’s chutzpah.

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It could have been worse. It is only an accident of history that they didn’t produce Austin Allegro doppelgangers

Perhaps, however, this recent loosening of the tax belt is not just a blip, but a symptom of something bigger. Since 2014 India has jumped a remarkable 65 places in the World Bank’s Ease of Doing Business rankings. Starting in 142nd place, it is today sandwiched at 77 between Uzbekistan (the butt of many of Borat’s jokes) and Oman. To show they were aware that the century had turned, they even stopped production of the Hindustan Ambassador in 2014 –  a copy of an early model of the Morris Oxford that the British replaced nearly sixty years previously. That’s progress.

Microsoft, IBM, Proctor and Gamble, Tesco, Wallmart, motor companies (thank heaven not British) – India is opening up for business. This has been accompanied by a massive reform in indirect taxation.

It is to be hoped that international direct taxation will be next. Wouldn’t it be nice if those legislators who draft the laws so suspectly could listen to those world-class judges charged with interpreting them so expertly? Or is that an encroachment upon the foundations of democracy?

The taxman takes his cut

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At least he also had a day job

Initially dubbed ‘the war to end all wars’, the act of carnage that ended a hundred years ago this week had to later suffer the ignominy of having ‘First’ stuck at the front of its name. While recognizing the sacrifice of the combatants and the tragedy of 20 million dead, subsequent generations have suggested the futility of the whole thing.

As the world prepared to commemorate those events, Israel’s judges, perhaps ironically, had to waste their valuable time on something else absolutely futile – the taxation of professional poker players (not one, but two). The wording of the judgements (and appeals) gave the distinct impression that each learned judge would have been quite happy for the young men in question to take their chances being ‘sent over the top’, but they had no choice other than to give them a fair hearing.

Although I have no sympathy for gamblers, and in both cases the end result was the payment of tax at marginal rates (one of them had to be reined in by the court as an Israeli tax resident), the result bothered me.

Israel, like other tax jurisdictions, operates a system of marrying income to various sources (such as business or vocation, work, interest). The word ‘income’ is defined in dictionaries as deriving from capital or labour – fitting nicely with the sources mentioned in the Income Tax Ordinance (which is just as well, really,  since it is called the ‘Income’ Tax Ordinance). The proceeds from gambling and lotteries  do not derive from labour or capital, and did not therefore have a place at the sources table in the law.  In the course of time, however, legislators were reminded of HL Mencken’s definition of Puritanism: ‘The haunting fear that someone, somewhere, may be happy.” As a result they shoe-horned an extra clause taxing  profits from gambling, lotteries and prizes. To make the whole thing work they called  the resultant windfall ‘income’, a sleight of hand that would not disgrace the most unsavoury of card sharks.

However, when the tax authorities brought the two intrepid poker players to the table, they did not play for the 25%  tax that the misplaced clause then legislated, but full marginal tax on the basis of ‘business’ income. Both these characters were, after all, professional players. The position of the courts was that – similar to business income – their income could be considered income from a  vocation, their expertise implying effort and, therefore, labour. The last hand played was the appeal against the tax authorities’ insistence not to allow expenses in the production of income such as flights, hotels and payments to the casinos that financed some of the tournament games (the mind boggles). Here, the judge was consistent – if it’s income from a vocation, it’s a vocation, and proven expenses should be allowed.

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And so did they…

The bug in all this is that while these poker players were taken out of the bunker of  restricted tax  onto the battlefield of regular income, there is still dissonance.

The various sources of income (labour and capital) that combine to form the backbone of the Income Tax Ordinance are inextricably linked to Gross National Product and Gross Domestic Product. It isn’t by chance that governments measure their tax take accordingly – by taxing income, they are  taking their share of the value created in the economy.

Gamblers – professional or otherwise – do not add to the value of the economy. It is a zero-sum game. One person’s  gain is another’s loss. When, the legislature incorrectly added a section on gambling to the Income Tax Ordinance instead of legislating an excise tax (as they should have done),  they at least had the sense to exclude the possibility of setting off losses from other sources of income while isolating the gambler’s activity.

In transferring professional gamblers to a business/vocation basis, while the rate of tax may be higher, in a perfect world the overall tax take should be zero  (or negative due to expense set-off). Of course, in practice, most of these games are taking place abroad against non-Israeli taxpayers which clearly changes the domestic picture – but today  the name of the game in international tax  is a level playing field.

It feels like somebody wasn’t playing with a full deck.

FANGs ain’t what they used to be

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Repairs courtesy of the Information Superhighway

Facebook, Amazon, Netflix and Google, the tech giants collectively dubbed the FANGs, are hardly going to be digitally quaking in their virtual boots over British Finance Minister Phillip Hammond’s Budget announcement last week that he plans imposing a 2% Digital Services Tax on their UK related turnover. Hammond himself admitted it would only be expected to bring in around £400 million a year, the amount he coincidentally just allocated to filling pot-holes on Britain’s roads.

The UK is not alone in taking the ladle to the primordial soup of  the evolving digital economy – Australia, France, Israel, Hungary, India, Italy (and the UK itself with its Diverted Profits Tax) are already at the feast, due to be joined by the EU when it is finally sick of wasting its time trying to eat the UK for Brexit.

Hammond’s hammering of the Goliaths earned kudos across the entire spectrum of British society (even the Tory-hating Guardian gave grudging praise) – but nobody seemed to pick up on the gaping irony of the whole thing – the use of a neolithic method to  tackle a state-of-the-art problem.

Egged on by the 2013 G8 Summit in Northern Ireland (to the non-Catholic citizens of which, I unreservedly apologize for using ‘British’ interchangeably with ‘UK’), the OECD and  the rest of the world (apart from a possible few smelly islands once – and probably still – frequented by pirates and other undesirables) have been engaged in tackling the unfairness of the international tax system. I, for one, started out sceptical that anything could be achieved. Country-by-country reporting, the MLI modifying tax treaties, and changes in the Permanent Establishment definition are just some of the impressive advances that have been made in the last six years in the BEPS (Base Erosion and Profit Shifting) project, not to mention (sorry) the automatic exchange of information.

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California is still part of the United States

But, there are two major gaps – the United States’ lack of enthusiasm when it cottoned on that it was a large part of the problem the others were trying to solve, and the reform  of the taxation of the Digital Economy – which happened to be the first of the 15 Actions listed by the OECD.

The international tax system is founded on two principles established a century ago – ‘nexus’ and ‘profit allocation’. The first is supposed to determine where business is done, and the second, how to divide the spoils between the places of business. Fitting the digital economy into this framework is not easy. In trying to establish where value is created, three challenges have been identified: nexus, data and characterization. The first suffers from what is pompously termed ‘ scale without mass’ – you don’t need much physical presence in a country to do business these days; the second raises the question of the interactivity of data exchange – if a social platform is using data gathered from members, where  the income arising from its exploitation belongs; and the third recognizes that the world is changing constantly and the classification of income needs constant updating.

In trying – so far unsuccessfully – to reach a consensus, the participating countries have broadly divided into three groups: those that believe the problem is confined to specific business models involving user participation in data (eg Facebook’s), that need to be dealt with individually; those that believe there is no problem (if you think that is strange – consider how long it took countries to realize there was going to be a Second World War); and those that think everything is completely screwed up, and we need a revolution (hopefully only in international taxation, which can be achieved using pens rather than swords). The OECD has kicked the can down the road (a game my generation played before digitalization condemned children to little screens) with the hope of reaching an agreement by 2020. Given the ‘slight’ differences between the participants, it doesn’t sound like we should be holding our breath – but I have had egg on my face before.

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Which wireless age does the new UK tax belong to?

So, in the meantime, nations like the UK have been driven to adopting recessive taxes that would have been more familiar to the 18th century than the 21st. Its approach to the digital economy is to throw income tax out of the window (or should that be Windows?) in favour of a tax on turnover, that looks far more like the excise duty stuck on barrels of rum that smugglers didn’t manage to secrete in coves along the southern coast of England. (In fairness, it is only to be applied to companies with worldwide turnover of over half a billion pounds, and there will be exemptions for loss making companies and those with low margins).

As an English playwright wrote four centuries ago: ‘O for a muse of fire, that would ascend the brightest heaven of invention’. And I doubt he paid any taxes at all.

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