Tax Break

John Fisher, international tax consultant

Archive for the month “February, 2019”

GILTI until proven simple

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What a joke

Appearing on Johnny Carson’s Tonight show in 1975, the ex-governor of California quipped: ‘We live in the only country in the world where it takes more brains to figure out your income tax than it does to earn the income.’ A little over a decade later, the same gentleman put his pen where his mouth was, and signed into law the Tax Reform Act of 1986, ostensibly simplifying the US Tax Code.

Well, I have to admit that I didn’t take much interest in the Code before Reagan’s reform, but – if that was simplification – I dread to think what it was like in the good old days. Fast forward thirty-odd years and Donald Trump was playing the same game. Or was he?

As US taxpayers start to consider their first  filings under the latest reform, one example should show just how complex the damned thing is.

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He also borrowed the line

As of  2018 the US corporate tax system went over to a territorial basis. That broadly meant that dividends received from abroad by US corporations would be exempt from tax. Nothing is ever that simple. America had invented, back in 1962, the concept of Controlled Foreign Corporation  (today the internationally ubiquitous CFC) which essentially taxed passive and certain other profits parked in tax-advantaged jurisdictions on a current basis, irrespective of whether the income was repatriated. But, if they were to transition to a territorial basis, that wasn’t enough. To paraphrase Mr Carson: ‘Wheeeeeere’s Google/Amazon/Apple?’ What about active income being cleverly sheltered in the Islands and Irelands of the world? And so was born Global Intangible Low Taxed Income (GILTI). After certain adjustments, foreign income (‘intangible’ was evidently thrown in to make a good acronym) would be taxed at half the federal tax rate (10.5% in the New World Order) with a foreign tax credit for 80% of the foreign tax paid on the income. That meant that a foreign tax rate of over 13.125% cancelled out the US tax (which is the same effective rate on Foreign Derived Intangible Income – the export incentive offered to US corporations under the reform – meaning there is ostensibly no tax advantage to going through loops to carry on the business offshore).

So far – if a little complicated –  bearable. The fun starts, however, when considering the effect of GILTI on individual or transparent entities (LLCs, S Corps, Partnerships) investing directly in foreign companies. Once caught within the CFC rules, their position becomes untenable. As it seems right now, they get no 50% deduction for GILTI and no foreign tax credit. That means they have to pay up to 37% tax on the gross income abroad, in addition to the local tax paid.  Given that the foreign jurisdiction may impose withholding tax on distribution of an actual dividend (albeit that such tax may be credited – if there is other income – in a general basket separate from GILTI), and given the exposure to State taxes and Obamacare, it is time to consider buying a one-way ticket  up the Empire State Building.

Now, straight-thinking people  might have thought this was a mistake, calling for suitable regulations to correct the situation. Evidently not. In this (once again) newly simplified world of US tax the solution being screamed from the rooftops is for the individuals to make a S962 election for their income to be treated as corporate  for tax purposes. That way they (probably) become eligible for the foreign tax credit – although the 50% deduction still looks doubtful. Because they have elected to be treated as a corporation, there is tax to pay on the ‘dividend’ when received. This ‘might’ be eligible as a qualified dividend (23.8% tax) and there ‘may’ be a credit to be had on the foreign withholding tax. But, nobody seems very sure.

This is simplification?

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Don’t try this at home, kids. It’s just for movie stars

I recall an interview with the conservative intellectual guru William F Buckley Jr. on the night of Reagan’s 1980 victory. Asked why he wholeheartedly supported the former actor, he told a story (much as the newly elected president might). He had been one of a group, including Reagan,  attending a meeting in a room on a high floor of a luxury hotel. The door became jammed, and they couldn’t get out. Reagan proceeded to climb out of the window, feel his way  along the perilous ledge to the next room, where the window happened to be open, climb in and come around to open the door from the outside. To the genuinely brilliant Buckley, that showed decisiveness, and made Reagan eligible to rule the world. When I heard this, my immediate reaction was: ‘Wouldn’t it have been simpler to just call reception?’

Perhaps the Americans just have a different concept of  ‘simple’? After all, as George Bernard Shaw is reputed to have said: ‘The English and Americans are two peoples divided by a common language’.

Watch this space

The Fast Show Special

The Rolls Royce (alright, Bentley) of tax havens

The proud boast of the John Lewis Partnership Department Store chain, ‘Never knowingly undersold since 1925’, is less than impressive when compared with Switzerland’s record on international tax. It has never been knowlingly undersold since at least 1872 when one of its cantons signed the world’s first every double taxation treaty. I thought of Switzerland when enquiring about a new car last week. As the model that interests me is sold in two local showrooms, I tried both. One was highly professional and even told me the ‘real’ statistics for fuel consumption, as well as which model would best suit my needs. The other went through the usual car salesman’s pitch and, before signing off, blatantly declared they would undercut anything the other guys were offering. The search goes on.

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Anything you need..

Throughout my career, Switzerland has been enormously useful. Holding companies, domicile companies, principal companies, mixed companies and finance branches have provided solutions for international groups looking to park some of their profits offshore without the need for sailing out to some God-forsaken island in the Atlantic of Pacific where, once upon a time, the local representative might have been cooked for lunch. However, as international competition for corporate tax tourism picked up in recent decades, the Swiss had to up their game. There were even international visits from  respectable firms of Swiss tax advisors offering private rulings involving somersaults of tax logic. Nothing particularly strange about that. It was the fact that they were accompanied by  representatives of their local cantons’ tax authorities, smiling benignly.

And then came the world’s Damascene Conversion to fairness and transparency in the international tax sphere. For Switzerland it was more a case of the Spanish Inquisition. With nowhere to turn, where would they would they go from here?

Well, the response has been sometime in coming, and thanks to 50,000 troublemakers forcing a referendum on the issue a couple of weeks back, it will still be coming until at least May. But, the proposal approved by the legislature late last year does away with all those different types of special company and says goodbye to private tax rulings. In their place come ‘reduced’ combined federal and cantonal tax rates centred around 13% to 14% and a string of other provisions.

It is the string of other provisions that has left me checking the internet for booby-trapped timing devices.  Switzerland just has to stay ahead of the pack. Call it Swiss DNA. In the modern world 13% to 14% just ain’t going to swing it. (They couldn’t go any lower – as a nation that doesn’t sport beaches and not much else, they do have to worry about funding their welfare schemes. As it is, employee/employer taxes have had to be upped to cover the loss of corporate revenue). There is provision for step-up of assets for companies migrating to Switzerland (some nice planning available there) and the write-off of hidden reserves for companies coming out of the old regimes. But, the latter only lasts five years and Switzerland presumably hopes to live a bit longer than that. Notional Interest Deductions on capital are thought to only apply to one canton. Beyond that, patent box and R&D treatment are pretty standard.

quote-in-italy-for-thirty-years-under-the-borgias-they-had-warfare-terror-murder-and-bloodshed-they-orson-welles-277430So what are they going to do long-term? Switzerland, of course, is not just a pretty rock-face. Three of the largest fifty companies in the world are headquartered there (and I don’t just mean tax headquartered). The tourist industry  is massive. And there is, of course, its impressive watch industry. However, 75% of the economy comes from services. Banking secrecy has been permanently compromised, and tax tourism seems to be following suit.

The Gnomes of Zürich must have something under their hats, surely? If there is one thing the Swiss are not, it is cuckoo.

 

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