Tax Break

John Fisher, international tax consultant

Archive for the month “April, 2019”

Que?

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The British University of Glue

The English language often lags scientific progress. We still ‘turn on the radio’, even if none of us have seen a dial in years. When my kids were growing up, I always reminded them to ‘pull the chain’ even though toilet flush mechanisms had long been more user-friendly. And today, our computers offer us the opportunity to ‘cut and paste’ when there isn’t a pair of scissors or tube of glue in sight.

Early in my career, cutting and pasting was the standard way a kidnapper combined letters taken from a newspaper into a ransom demand, and a tax adviser pulled the disjointed components of a document together into a work of art that could demand a ransom. As we went (the ‘we’ being tax advisers rather than kidnappers), we deleted and replaced inconsistencies of language with red biro, and sent the resultant scrolls down to the soon-to-be-cursing typists.

Well, thanks to Word, those days are long numbered – but something close is going to hit the tax world like a tsunami next year (in fact it has already hit – but in very limited circumstances).

The Multilateral Instrument (MLI) – that won wide praise for the fact that it happened at all – is going  to make a lot of people’s lives (including mine) a misery, and no amount of Microsoft wizardry is going to lift  spirits; the Gettysburg Address was a magnificent eulogy – but it didn’t help the poor fellows buried there.

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Lost. Full-stop (Google translate: Period)

For the uninitiated, the MLI is a 49 page document of semi-comprehensible English and French that modifies bilateral tax treaties without the need for excruciating bilateral negotiations. Over a hundred countries signed up to the basic wording (the latest entries into force, in the last fortnight, are Malta and Singapore), with multiple choice opportunities for certain clauses, the right to exclude other clauses or sub-clauses that are satisfactorily covered in a specific bilateral treaty, and the right to ignore yet other clauses. There is also a right not to include another country (Israel has, for example, so far excluded the UK, and only the UK). The document deals – as part of the BEPS project – with hybrid situations, treaty abuse, avoidance of permanent establishment status, dispute resolution and arbitration. If you want a feel of how complicated it is – the section entitled ‘Simplified Limitation of Benefits’ runs to four and a half pages.

But that is not the difficult bit. If, for example, an Israeli adviser is going to consider a transaction with one of Israel’s 54 treaty partners that are not the UK, after establishing whether and when  that partner has signed up to the MLI, it is necessary to shoe-horn the relevant sections into the bilateral treaty, update specific sub-clauses, and then try and make sense of the different language styles and terminology without the benefit of a red pen – each change depending on the options the other side has chosen along the way. Cutting and pasting gone mad.

311fe468b42dace6de2e60adefc53918The OECD is making efforts to make it all easier with an MLI Matching Database (Beta) which,  at least, should obviate the need to view both country’s details with a split screen. Mind you, the OECD’s I-know-nothing disclaimer means it will also all need to be checked manually anyway. And, in any event, the cutting and pasting as well as different language are still there.

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Poor chap

The only long-term answer will be for some enterprising professional (probably a legal and tax publisher) in each country to produce updated treaties that read in one go from beginning to end.

I suppose we should be grateful that, with the United States not on board and the UK leaving Europe, they didn’t just do the whole damn thing in French.

Bog standard (almost)

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These days a bloke would do anything for a free ticket to Australia

Charles Dickens’s fecund imagination allowed Pip’s benefactor Magwitch to return to England  from transportation to an Australian penal colony, albeit at risk of judicial execution. By all accounts, thanks to the triple-knot of location, location, location, escape for  real-life transportees wasn’t all that simple. What the desperate convicts of the nineteenth century needed was the solution of the  twentieth – air travel. And, in a twist of fate, the first person to pilot a controlled flight in Australia (back in 1910) was none other than history’s greatest master of escape, Harry Houdini.

Well, by now, the world’s tax advisors are becoming used to the locks, double locks and padlocks being used to prevent international tax planners from thinking out of the box. But, the tax treaty signed (though not yet ratified) last month between Israel and Australia plonked a kangaroo, with a 10 ton weight in its pouch, on the box’s lid.

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Truth be told, the Wright Flyer never did move very much.

The treaty itself is not very exciting. It contains much of the usual – just about comprehensible – gobbledygook, together with a fair share of the totally ludicrous. An  example of the latter: SHIPS AND AIRCRAFT SHALL NOT BE REGARDED AS IMMOVEABLE PROPERTY. Thanks for that.

There is also an unhealthy obsession with the amount of time that needs to elapse before work on a  construction site or installation project by a resident of one country  becomes taxable in the other – too many numbers and too many conditions (and given the nature of trade between the two countries – not too many instances).

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Spreading the love (and hate)

At the end of the day – as with all treaties – it is withholding taxes that are the real bread, butter and Vegemite of the agreement. These fit within the ‘new normal’ of international double taxation treaties: 5% – 15% for dividends, 5% – 10% for interest, and 5% for royalties. It is the Australians who benefit from this much more than the Israelis. While, in the absence of a treaty, dividends from Israel can rack up upwards of 30% tax, as long as Australian corporate income is franked (ie the company paid tax in Australia), there is no Australian withholding tax. Similarly, Australia’s withholding tax on interest is 10% as opposed to Israel’s mainly 25%. Only when it comes to royalties are the tables  turned.

Among the sparse points of genuine interest is the question of whether the exemption on pensions from Australia to Israel applies to immigrants to Israel in their first 10 years of residence.That one will have the experts opining vigorously.

What makes this treaty ‘different’ is the (what I believe to be unique) ‘Article 28, Protocol’. Now, many treaties have protocols which are agreed explanations and adjustments to those carefully negotiated agreements.  The recent protocol (not yet in force) to Israel’s treaty with the UK (Tax Break  27/1/19) is effectively a new treaty. But, to have a section in the treaty that simply refers to an attached protocol as part of the treaty is – at first sight – circular and balmy.

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No!! Not Hybrid Instruments!

However, closer inspection reveals all. Article 28 is to tax advisors what Room 101 was to Winston Smith in Orwell’s 1984 – the fulfillment of their greatest fear. Among all the normal explanations and clarifications, just in case anyone had any ideas about favourable interpretation of the treaty,  is a section that lists most of the goodies of the BEPS project, stating that nothing in the treaty can stop a country clobbering anybody who tries it on, whatever the wording. Game, set and match.

The Great Houdini’s most famous escape was from a water-filled tank in which he was inserted upside down, heavily manacled. Antipodean tax planners will  soon be standing upside down working out what to do next, together with their right-way-up Israeli counterparts.

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