Tax Break

John Fisher, international tax consultant

Archive for the month “May, 2019”

Tales from the Crypt…

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Cryptowhat?

In a landmark Israeli court case last week, it was decided that Bitcoins are assets, the profit on sale of which attracts capital gains tax. The case revolved largely, but not exclusively, around the question of whether such cryptocurrencies meet the description of – well – currencies, exchange differences arising from which are exempt from tax.

The judge waxed  lyrical on the technical definition of ‘currency’ in Israeli law, bringing back memories of the 1980s when Milton Friedmann’s Monetarists ruled the macro-economic world; if there is no – what you and I call – cash, there is no currency. Given the movement towards a cashless society since Friedmann’s death, some might argue that the  approach was a little primitive (although, in fairness, the judge did recognize the prospect for change). But, let’s face it, why be just primitive when you can be positively Neanderthal?

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We really have come a long way since the Stone Age

We all know that money came about as a way of avoiding the gross inefficiencies of barter. Instead of a hunter having to schlep home the two sheepskin jumpsuits he got for his wild boar and then swap one of them for a wife, some bright spark realized (possibly while taking a break from inventing the spark), that the supply chain could be streamlined. All it needed was something the supply of which couldn’t be tampered with by the caveman next door, that would maintain the relative values of the items being traded.  Somewhere down the line people left the caves, gold came gradually  to the fore, and it wasn’t until 1931 – with one world war behind it, and the human race less than a decade away from indisputedly proving that it hadn’t really got anywhere since the stone age – that the Gold Standard was ditched.

So,  all that was really needed in this case was to establish whether Bitcoins, or cryptocurrencies generally, can be described as replacements for barter. With that in mind, it is time for a fairy story that will prove that every decently educated five-year old could have judged this case, and saved the State a small fortune.

Once upon a time, there was a poor widow whose old cow stopped giving milk. She sent her son to market to sell the beast. On the way, the boy – who was always looking for the chance of a quick buck – met a man in a pinstripe suit who offered him a handful of, what his prospectus claimed were, magic beans. When the boy arrived home, proud of his financial prowess, his sensible mother summarily chucked the beans out of the window. The next morning the boy found a beanstalk where the new Maserati should have been. To cut a long story (and a long beanstalk) short, as every one of you knows, Jack ended up – through a morally questionable transaction – with a pile of gold (gold!), a goose that laid golden (made of gold!) eggs, and an annoying harp that was presumably ditched in the nearest lake.

Jack’s deal for the magic beans was purely speculative. Jack didn’t know what he was getting, and his mother’s reaction was absolutely logical. And, look how the story ended. No beans in sight. To give the tale a happy ending, the storyteller had Jack and his mum back in hard currency (gold) quicker than you could say ‘Jack and the Beanstalk’.

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How I learnt Economics

Bitcoins are magic beans (the analogy can be extended to marijuana shares by substituting magic mushrooms for magic beans). There is no way any self-respecting caveman, five year old, or fairy tale character would accept them in a barter transaction as long as their price continues to move all over the place.

There have been too many unnecessary court cases over the last couple of years in what are, to any self-respecting tax specialist with no patience for worthless sophistry, open and shut matters. (Take for example, Snow White and the 1.83 Meter Actor). On the other hand, there are lots of disputes involving genuinely controversial issues that are settled by compromise with the tax authorities when a judicial clarification would be to the advantage of society.

There must be a better way to ensure that honest taxpayers can live happily ever after.

 

 

 

 

Hand it over and nobody will get hurt

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Automatic exchange of information between governments has been suspected for years

The ink on the page of my last post about the new softer, gentler approach to tax collection was not yet dry when Israel’s main financial daily ran a banner headline concerning the upcoming automatic exchange of information between tax authorities. The wording was a rather unimaginative: ‘ A flood of requests from foreign banks on the way: Demand  reporting of Israeli residency.’ Personally, I would have gone for the more catchy: ‘We will find you, and we will kill you.’ Game on.

The Common Reporting Standard, that – based on domestic legislation –  will require most  of the world’s tax authorities to collect data on foreign resident accounts from financial institutions in their jurisdictions and ship it out to the salivating jaws of the tax authorities of the account holders’ countries of residence, is at the door (see Tax Break January 7, 2019).

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Not a word about tax evasion

What bothered me about the headline, and the accompanying two page article, was not the accuracy – in my younger days, I would periodically pull my hair out at the distorted product of an interview I had given to that particular journal on a hot topic. This piece, however, appeared researched and reasoned. My problem was that any reader of the newspaper, other than someone with a financial death wish, has already done what they had to do (compliance, voluntary disclosure, or expensive – and possibly regrettable – planning). Meanwhile, a colossal number of people who do not read the financial press, and may not be financially savvy, remain – incredibly – blissfully ignorant as their canoe careers inexorably towards the falls.

As the death knell for international tax evasion has grown louder in recent years, the Israeli tax authorities (in line with many of their international counterparts) have shown remarkable restraint in enabling errant residents with unreported income from abroad to come clean with minimum fuss (paying some tax and remaining friends). Voluntary disclosure programs have been renewed, extended (there is currently a program in force until the end of this year – albeit without the previous advantage of anonymity),  and-where relatively small amounts are involved – even made simple.

The trouble is that, in a country like Israel that does not require a tax return from most salaried employees, many people  don’t ‘think’ tax of their own volition. So, when Belgian Aunt Sophie left Yossi  the contents of a bank account in Switzerland which sensible Yossi didn’t touch – treating it as rainy day money – he also didn’t think to report the interest to the Israeli tax authorities. And, unprompted, he still doesn’t. He will presumably start thinking about it when he gets a summons to appear in court in his mail box. The tax authorities will have achieved exactly what they actively set out not to do – waste valuable resources crucifying people they are not interested in. As Jesus  is reputed to have said a mile and a half  from where I am now sitting: ‘Forgive them, for they know not what they do.’

The solution is so simple, it hurts.

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I don’t care WHAT you were doing in the bank…

In the absence of a universal tax return, every resident over the age of 18 should be required to complete and submit a simple annual questionnaire (either online or offline) including such questions as: ‘Do you, or any of your children under the age of 18, have any access to the contents of a  foreign bank account?’ The answer ‘Yes’ to such questions should result in a compulsory tax return coming through the door. Failure to complete the form should result in a compulsory tax return coming through the door together with an appropriate fine designed to concentrate the  mind of even the most financially illiterate.

And, if that doesn’t work – the tax authorities need feel no guilt in unleashing the Spanish Inquisition.

 

 

 

‘Your money or your life, please!’

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How some people view the taxman

Stopped in the street by a young person with a clipboard, and asked: ‘What do you think motivates people to pay tax?’, I would have to answer honestly: ‘Five to ten, with time off for good behaviour’. Were my inquisitor brandishing a microphone and staring into a camera, however, the same question might elicit all sorts of ego-enhancing responses such as: ‘A positive view of democracy’, ‘Trust in government’, or, teeth gleaming beneath the arc lights, ‘A belief in the redistribution of income’.

When it comes to tax, who we are, and who we want others to think we are, are entirely unrelated.

Last month, the OECD invited public comment on the update to its 2013 report, ‘What drives tax morale?’ (Google translate: ‘What motivates people to pay tax?’) The original report made some good points: Ghana (which, if one was going to single out one country out of over 190, was evidently as representative as any) sounds like it has residents queuing up to pay tax because of its policy of earmarking revenue for specific purposes (eg VAT for health care). Eminently sensible, if you can do it, although Western treasuries have traditionally had insurmountable difficulties even keeping their hands off earmarked National Insurance/Social Security contributions.

But, what aroused my suspicion about the whole enterprise were the high scoring answers (questions elicit a 5 down to 1, or 10 down to 1 sliding scale response) to some highly moral questions:

  • People in Africa who agree that the tax department always has the right to make people pay taxes – substantially no country scored less than 3.5 out of 5.
  • People in Latin America who think that tax evasion is never justified – only outliers scored less than 7.5 out of 10.
  • People in Asia who would like to see more government spending even if it requires tax increases – 3.5 out of 5.
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Not as holy as he looked

Of course, some of this partially depends on who they were asking. I am sure a lot of people in Asia would like to see increased government spending as long as others (the rich) are paying the increased tax. But the whole thing smells of acute bias, whatever the reason.

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Even kids recognized the brown envelope

My most relevant  takeaway  from the recent update was a behavioural economics ‘experiment’ in  Britain that has already had wide exposure in the press. Her Majesty’s Revenue and Customs sent letters to taxpayers who had not paid their taxes on time. There was nothing new in that – generations of Britons (me included) remember the brown window envelope that ruined their day even before they had picked it up off the floor behind the front door. The innovation was in the language. Instead of British understatement asking them to ‘please pay their debt promptly’ (or words to that effect), taxpayers were greeted by exhortations such as:

“Nine out of ten people with a debt like yours, in your area, pay their tax on time”, “The great majority of people in your local area pay their tax on time” and “Most people with a debt like yours have paid it by now”.

We are told that the percentage of people paying their bill as a result of these letters went up from 34% to…wait for it…39%! I wonder what the numbers would have been had the letter arrived by registered mail, been printed in red, and promised prosecution two weeks before the letter actually arrived if the amount was not paid IMMEDIATELY.

I rest my case.

What a laugh!


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Don’t mention the war!

The irony of Ukraine’s recent election of a Jewish president would not have been lost on my grandparents who fled the Odessa pogrom of 1905, but they would have been utterly bamboozled – along with millions of members of their grandson’s generation – by the news that he is a satirical comedian.

On the other hand, many would think the contrary – that a honed satirical mind provides the keenest insight into the human condition, the sine qua non for an elected leader.

For someone who has made his living out of speech, President-elect Volodymyr Zelensky was remarkably mute on the issues during the campaign. He was either saving it all up for the ‘opening night’, or – more worryingly – he didn’t have anything to say.

As ‘news’ seeps out about his intentions, it does appear that the new president intends to push ahead with Ukrainian corporate tax reform. As the reform is somewhat revolutionary, it is either a sign of great political courage, or a complete absence of new material in his act.

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The polls just kept smiling on him

Despite Zelensky’s media people improbably waving it around as one of his team’s great ideas, the Ukrainian government and parliament have been toying for some time with replacing corporate profits tax (the plain vanilla thing we recognize around the world) with a ‘tax on withdrawn capital’. In a nutshell – companies would not pay corporate tax annually on their ongoing profits, but would incur tax on the withdrawal of any funds. So, for example, dividends  paid to a foreign resident would first attract tax at the company level, that foreign resident picking up  the net dividend as taxable income in  their home country with no credit for the Ukrainian tax paid. This contrasts with the traditional situation, where withholding tax would normally ‘belong’ to the recipient and be creditable in the foreign country either according to domestic law or treaty.

The rationale of the proposal, bantered about by the outgoing administration,  is that the non-taxation of reinvested funds will make Ukrainian industry more competitive. The reality is more likely that it is because tax collection is currently fiendishly difficult, and it will be much easier to collect on a transactional basis when the money is heading out the door anyway. For a courageous newcomer with a proven sense of humor and satirical prowess,  a far superior rationale might bring the house down –  the proposed tax makes more sense than the system employed by the other 190-odd countries in the world.

Although the tax on withdrawn capital is to be imposed on the company, in economic reality it is a tax on the recipient collected through the company – as if an uncreditable withholding tax were imposed on, say, the dividend. The company effectively pays no tax, period.

As I wrote on these pages back in July 2015, it is by no means clear that companies should pay tax.  While Shylock could ask, ‘If you prick us, do we not bleed?’, joint-stock companies – like Pinocchio – do not have the same luxury. Companies are a legal fiction – the Walt Disney of the business world. As they do not have feelings (an accusation often aimed at me), they cannot suffer taxation. Taxation is paid by flesh and blood people – it is the customers who pay higher prices , the shareholders who make lower profits, and the employees who receive lower income. The company just sails on regardless – and, if it dies, does not even warrant a marked grave. There has always, therefore, been a strong movement to abolish company taxes in favour of taxes on individuals – income tax, withholding tax, value added tax. Company taxes, it is argued, distort economic performance.

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Putting Ukraine on the map

There is, of course, one colossal problem with the whole idea – it is nigh impossible to predict annual tax revenues when so much is dependent on the decisions of companies  to distribute, or not. The system has evidently worked in Estonia – a small country – but failed in others. Ukraine is a big country with a complex  economy and a population of over 42 million. It has even won the Eurovision Song Contest twice.

It will be interesting to see if this idea continues its long run, or closes soon after the new leading man takes over.

 

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