Tax Break

John Fisher, international tax consultant

Archive for the month “January, 2019”

The Celtic Tiger changes its stripes

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I can’t wait for 2046

The biggest debunker of conspiracy theories has to be what the British call ‘the thirty year rule’  for the declassification of secret documents. It is not that the released documents reveal the truth (the really juicy ones are locked up for far longer); it is, rather, the realization that the behind-the-scenes machinations of government way back then were far more chaotic than anything we imagined at the time. Conspiracies need thought.

So, my conspiracy theory about Ireland’s mammoth tax bill  to pharmaceutical giant Perrigo towards the end of last year will probably be utterly disproven sometime in 2048. But, by then I will be either dead or too old to care. So, here goes.

The (undisputed) story:

In 2013 the (undisputed) Irish Elan Corp sold its interest in Tysabri, a multiple sclerosis drug, to Biogen Idec Inc for a lot of money. A few months later (undisputed) US corporation Perrigo Inc entered into an inversion transaction with Elan. The transaction involved the smaller Elan achieving ownership of Perrigo, with the Perrigo shareholders receiving a majority of the shares of Elan. The principal  (undisputed) advantage to Perrigo was a reduction in future tax. This would be achieved by (calculated conjecture) including future non-US acquisitions under the Irish parent, thus bypassing the then draconian US tax system, and engineering debt from the US to the Irish parent. The latter  would reduce US taxable income at 35%, and increase Irish taxable income at rates of between 0% and 25%, with the Irish foot secretly holding the scale at the lower end thanks to leprecaunish Irish wheezes such as the Double Irish and Single Malt schemes ( the Irish clearly chose names they were convinced could never be traced back to them).

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Ireland is quite a distance

In December 2018 it became known that the Perrigo group (Elan had very cleverly changed its name to that of its new subsidiary) had been issued a bill by the Irish tax authorities for  €1.64 billion. The justification was the reclassification of  the profit on sale of the intellectual property to Biogen from trading income (somewhere between 0% and 12.5% tax) to capital gains (33%). Perrigo promptly announced  that  it was suddenly hard to run a US customer-service organization from the other side of the pond. It is now rumoured that the group is threatening shelving plans for expansion in Dublin unless, presumably, their appeal against the tax assessment is successful.

And now, the conspiracy theory:

As opposed to the $13 billion tax claim from Apple forced upon Ireland by the EU (poor Ireland), the issue  here is what one commentator called Tax 101 – the party trick of tax advisers worldwide walking the tax classification tightrope between capital gains  and trading income, ready at all times to pull the tax-saving bunny out of their moneybags. The sale of the IP was several months before Perrigo merged into Elan. It is to be presumed that Perrigo ordered a tax due diligence, and even if some bits and pieces were obscured by the Guinness, had some inkling of a potential €1.64 billion tax bill. Either they received an utterly obese indemnity from Elan’s shareholders, or there was a clear understanding from somewhere that lreland’s long-standing open-sewer policy of encouraging American investment at all moral cost meant that the authorities could be expected to stay out to a liquid lunch.

Fast forward to the beginning of 2018, and the US had a new tax law . The complementary regimes of Foreign-Derived Intangible Income on certain income of US companies from abroad, and Global Intangible Low Taxed Income of non-US subsidiaries, established a planning benchmark US effective tax rate  in either case of  around 13% . Add to that new inversion rules and restrictions on interest deductibility, and the question that comes to the befuddled mind is: ‘Why Ireland?’

So, what does a country do when its economic raison d’etre is disappearing down the  sewer? It takes a leaf out of Donald Trump’s book – and thinks protectionism. But, in the case of Ireland – other than its beer and whiskey industries – there was precious little of its domestic economy to protect. Other  than its tax advantage, that is.

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And where do you think you’re going?

In October 2018 the Irish budget included, as expected, Controlled Foreign Corporation provisions as required by the EU (see Tax Break 1/1/19). What wasn’t expected was the early imposition of an Exit Tax (which was not due until 2020). Companies wanting to expatriate from Ireland will now face a 12.5% ‘capital gains tax’ – or, in other words, they are pretty well stuck.

All this opened the door for the Irish Treasury to take off its kid gloves, and treat captive foreign companies just like any other. The Irish seem to be saying to Perrigo: ‘You can check out any time you like. But you can never leave.’ I wonder how many Irish-Americans there are in California.

 

Telling it like it isn’t

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Very last call …

A rabbi, a priest and the secretary-general of the OECD walk into a bar… Not heard that one before? Read on.

Last Wednesday, January 2nd, as the 20th Knesset breathed its last before flatlining in the run-up to a General Election, the Finance Committee approved regulations paving the way for the introduction of the international ‘Standard for Automatic Exchange of Financial Account Information in Tax Matters’.

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Game over

The New World Order, where there is nowhere for the less-than-honest to hide their ill-gotten gains, has been heading this way to much fanfare for some time. Too long, in fact. Israel signed on to the G20/OECD 2014 initiative early on, and was committed to having the necessary legislation in place by January 1st 2017. This was to be followed by necessary bi- or multilateral agreements (it committed to two multilateral ones), necessary bilateral commitments to ensure  the other side would respect confidentiality – as well as being both legislatively and operationally sound – and technical guidance to Israel’s banks on how to provide data on accounts of foreign resident in standard international format (so they could be easily deciphered at the other end). Information exchange was to start in September 2018. In fairness, Israel didn’t score too badly other than on one rather critical point – although legislation was in place in mid-2016, well in time for the 2017 deadline, it could not come into force until accompanying regulations took effect.

Well, as the naysayers would have it, a miss is as good as a mile and the road to hell is paved with good intentions. By December 2018, there were only seven countries that were non-compliant: Antigua & Barbados, Brunei Darusallam, Dominica, Niue (is that a country or a spelling mistake?), Qatar, Sint Maarten and … Israel. This prompted a desperate letter from the secretary-general of the OECD to Israel’s prime minister, and the eleventh hour passing of the regulations last week, exactly two years and one day late. If you are going to be late, you might as well do it in style.

What went wrong?

The required regulations, as the American FATCA information exchange regulations before them, hacked at one of the mainstays of ultra-Orthodox society (and a much valued traditional Jewish institution)  – the ‘Gemach’. The concept is a simple one. Groups of largely anonymous donors provide money to an intermediary who generally disburses the funds as interest free loans to those in need. In the event the borrower is unable to repay, the donors (who have generally kissed goodbye to the money) have no recourse. Until now, these arrangements have had no legal or regulatory basis – essentially private arrangements that could run into incredibly large sums. When FATCA came along, Israel’s banks started closing Gemach accounts as they were unable to verify to the US authorities that there were no US ‘depositors’. On the other hand, as the chairman of the Finance Committee repeatedly protested, requiring a donor who gets nothing other than a place in Heaven out of the whole process to fill in forms for the tax authority is a kiss of death for the institutions.

A solution was found, with the evident acquiescence of the US authorities, for small Gemachim, and in August 2016 Gemachim generally were given two years grace, in which time they would – against their will – be brought under regulation, and they could organize their affairs to be compliant for the banks. To cut a long story short, after a lot of weeping and gnashing of teeth, including the flat refusal of the Bank of Israel and Capital Markets Authority to supervise them (The Capital Markets Authority lost, and ‘won’ the job), the very last piece of legislation to pass its third reading in the 20th Knesset was the attrition-much-reduced Gemachim Law, which paved the way for the Chairman of the Finance Committee to agree to approve the information exchange regulations.

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The only thing crooked about him

Had the script of this farce been written by the 2008 financial crash’s moral voice, then Archbishop of Canterbury Rowan Williams, the Finance Committee and Israel might have walked away with their heads held high. Williams had maintained that the ‘markets’ that bankers claimed dictated the path of the financial system, were – in Judeo-Christian – terms a form of idolatry, something man-made being attributed independent powers. He argued that modern financial transactions lacked the face-to-face component of yesteryear – it is much easier to default when lenders are obscured behind a curtain of intermediate transactions than when recognized at an individual or community level. Here were self-regulating funds that should not be collateral damage in the post-2008 meltdown regulatory war against the unfettered avarice of the players in the financial markets.

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There are always the traditional methods

However, Anglicanism hasn’t had much of a look-in around these parts since 1948, and  the ‘guilty’ Knesset Finance Committee was chaired until last week by an ultra-Orthodox rabbi-politician not given to philosophical musings, but rather to horse-trading in the name of his flock. The reason there was a need for a law regulating the Gemachim was that a number of them, predominantly in the United States and Israel,  had been the facilitators of big-time money laundering and tax evasion. A war of attrition in the long process of arriving at the final wording,  holding the inevitable (and, hence, unforgiveably late) information exchange regulations hostage,  is considered  to have severely compromised the regulatory effect of the law. Any collateral damage ultimately suffered by the moral majority of Gemachim is thanks, therefore, to the unsavoury dealings of some of their number, rather than the excesses of the financial system.

The last weak joke of the 20th Knesset…

Double Dutch

Another way to keep the tax bill downBack in the days when there were twelve pence to a shilling and twenty shillings to a pound, there was an urban myth of a retired Maths teacher who runs into his worst student as the latter climbs out of a Rolls Royce. The younger man embraces his old nemesis, proceeds to thank him for the great Maths education that enabled him to succeed, and declares: ‘I buy ties for a pound, sell them for one pound ten shillings (Google translate: £1.50), which means a ten per cent gross profit. My after-tax earnings are amazing’.

As 2018 was drawing to a close, Holland appeared to be having a similar problem with basic Maths in meeting its commitments to the European Union, albeit that the EU had itself been guilty of gross bureaucratic circumlocution.

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How will the EU manage with the English language when the UK leaves?

In 2016, the EU issued its ambiguously entitled, ‘Anti Tax Avoidance Directive’, which might have been the credo of our low-taxed tie entrepreneur had it not been for the fact that the text made very clear that this was a pro-tax directive aimed at ensuring there was no avoidance. It was however a warning that members would be dealing with poor-language damage control. The Directive directed that interest limitations, exit tax, hybrid arrangements and controlled foreign corporations (CFCs) all had to be dealt with in individual national legislation by the end of 2018. So far, so clear.

As summer gave way to autumn (and, in some cases autumn gave way to winter) member states seemed to inexplicably vie for last place in the legislating stakes, despite having no ultimate choice – even the hapless British, who were hanging off the edge of the EU, had to comply.

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There are other ways of solving the problem of offshore jurisdictions

As the stragglers came on board, thanks to the abovementioned Dutch, there was one curiosity deserving attention. The Controlled Foreign Corporation (CFC) has been with us since the week of the Cuban Missile Crisis (CMC) in October 1962, when John F Kennedy (JFK) signed the US version into law. In a nutshell, despite jurisdictions adopting various incarnations of CFC, the underlying nous is that certain income either parked in or diverted to a low-tax jurisdiction is to be taxed on a current basis in the hands of the parent as if a dividend has been distributed.

One of the features common to most CFC regimes is that the calculations are objective – identify the item and tax it. The EU version offers two options to choose from. Option A is the traditional method – identifying specific types of income, while Option B has CFC provisions stepping in where state-of-the-art Transfer Pricing isn’t satisfactory. Option B is clearly subjective, and seems to beg to be ignored (when was the last time a company volunteered that its transfer pricing wasn’t up to much?)

Common to both methods, however, is the ownership level triggering CFC, and the rate of tax below which the CFC legislation can apply. That last point is where the Netherlands  appear to have lost track of the numbers, and the EU to have lost track of its mind.

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I think I’ll stick with the mind reader

We all surely remember the ‘great’ mind-reading trick of our youth – telling some unwitting stooge (usually a younger brother) to ‘think of a number, double it, add X, divide by two, and take away the number you first thought of’. The answer, due to the rudiments of Mathematics, was always X/2.

Well, the Directive establishes low-tax for CFC purposes by the following calculation:

‘The actual corporate tax paid on its profits by the entity or permanent establishment is lower than the difference between the corporate tax that would have been charged on the entity or permanent establishment under the applicable corporate tax system in the Member State of the taxpayer and the actual corporate tax paid on its profits by the entity or permanent establishment.

Now, as hard as I try, I  cannot interpret this gobbledygook as anything other than a horribly complex and roundabout way of arriving at half the parent company’s corporate tax rate. Almost all the EU member countries appeared to come to the same conclusion. However, not the Dutch. Perhaps the official Dutch translator in Brussels was drunk or stoned, but after a lot of bellybutton watching in recent months over an initially proposed 7%, they finally plumped at the eleventh hour for 9%. Despite wrestling with every combination of current and proposed higher-income and lower-income Dutch corporate tax rates, I could not justify 7% or 9% when fed into the above ‘equation’.

So, what is happening? As far as I can see – nothing. The EU bureaucracy is in Christmas hibernation, with instructions only to be aroused from its slumber by occasional wake-up coughs from the tiresome British.

It will be interesting to see if, now we are in the New Year, anybody notices.

Happy New Year – especially to my Dutch friends.

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