Tax Break

John Fisher, international tax consultant

Archive for the month “June, 2019”

Eurotunnel vision

He was too busy womanizing to care.

After arriving in London en route to America, an acquaintance’s grandfather decided to kill time at Speakers’ Corner in Hyde Park. It was 1906, and he, similar to my own grandparents, had fled a pogrom in Russia. Despite having his heart set on New York, he changed his mind when he heard an itinerant speaker slagging off King Edward VII from his soap box. A country that tolerated open criticism of its monarch was a country in which to seek asylum.

Britain has a long and marvelous self-deprecatory tradition of not taking itself, or anyone else, too seriously. Ideologies were for other mad-cap countries to self-destruct with (even the post-war surge in socialism was quickly diluted to something more essentially British). So, when Charles de Gaulle said ‘Non!’ to Britain’s entry into the European Economic Community in 1967, despite Britain having been instrumental in saving his country from speaking German, he knew what he was doing. De Gaulle and his German allies were flying high, out to create something idyllic, and they didn’t need the English bringing them back to earth.

Britain’s next prime minister not taking himself too seriously

Since finally joining Europe in 1973, the British have periodically forced an emergency landing (or, at least, lowered the altitude of such lunacies as the single-currency Euro project), but now that Brexit is in the air, they have also made the mistake of splitting into two ideological camps. Amidst all their own dogfighting, they are missing a lot of the nonsense of Europe.

A recent example should serve the point.

British tax law has an eminently sensible provision permitting the deferral of capital gains tax on the transfer of assets within a UK group. Nothing left the ‘business’ so why prevent the transfer or penalize it with a tax charge? Only when the asset is actually sold outside the group would the tax crystallize taking into account the amount deferred.

Her Majesty’s Revenue and Customs (for, despite General de Gaulle, members of the Union are still responsible for their own fiscal management) held that an asset transfer by a UK company to its Dutch parent company triggered tax, since it was outside a UK group. The assessee said ‘Non!’ and the matter was taken to a First Tier Tribunal (Britain’s lowest tax court). Despite its own evident embarrassment, the court was hit by turbulence, and sided with the assessee.

Why?

One of the fundamentals of the European project is ‘freedom of establishment’. Article 49 of the Consolidated version of the treaty on the functioning of the European Union (yawn!) states:

Freedom of establishment shall include the right to take up and pursue activities as self-employed persons and to set up and manage undertakings, in particular companies or firms within the meaning of the second paragraph of Article 54, under the conditions laid down for its own nationals by the law of the country where such establishment is effected, subject to the provisions of the Chapter relating to capital.

Bottom line – the court felt it had to permit the transfer of the asset to the Dutch parent free of tax, knowing full well that there was no system in place to ensure that, when the Dutch company sold the asset outside the group, Britain would receive its share of the booty. While a form of installment payment was considered appropriate – it didn’t seem to meet European legal requirements,  and was ignored.

Their relationship was never going to work

There is no logic in any of this. With pragmatic Britain’s exit from the EU, de Gaulle’s legacy may finally reach its logical conclusion. Sacre bleu!

GILTI pleasures

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Here they go again…

Just when you thought it was safe to put the Ibuprofen back in the medicine cabinet, the IRS has issued proposed GILTI (Global Intangible Low-Taxed Income) regulations in addition to the long anticipated final ones. (For an explanation of what was supposed to be going on, see Tax Break February 10, 2019).

Back in my day, the examinations for admission to the Institute of Chartered Accountants in England and Wales were multi-stage. The last stage was supposedly the toughest (and I do not use that word lightly). I was, therefore, very surprised (and suspicious) when I turned over the ‘Financial Accounting’ paper to discover a 25 mark question that could be answered by a page of T accounts. T accounts are the graphic form of double-entry bookkeeping, providing a framework for ‘debits by the window, credits by the door’. If that still doesn’t resonate with you, it is like being presented with a first grade Arithmetic problem in twelfth grade Maths (Google translate: Math). When the official answers were published some weeks later, there was a comment by the examiner to the effect that many students had achieved very high marks by answering the question in the wrong way. That alone made me wonder whether I really wanted to join this elite group. Monty Python may have declared that ‘It’s accountancy that makes the world go round’, but from where I was looking, it was more likely to make the world go pear-shaped.

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It was either me or the examiner

That is what I feel about the proposed US regulations – despite being neither a US taxpayer, nor US tax advisor. I shall explain.

By the time the 2018 US tax reform package in general, and Global Intangible Low-Taxed Income in particular, had been suitably chewed over, it was apparent that US corporations were unlikely to be accidentally hit with GILTI tax. (As long as their subsidiaries were paying at least 13.125% corporate tax in their country of residence, they were fairly safe, at least in the short-term). Individuals weren’t so lucky and – in order to avoid horrifically skewed tax bills – they would need to use the obscure section 962 of the tax code, electing to be treated as corporations for this income. It was a case of scratching their left ear with their right hand. And that was how it was expected to remain.

So, despite having no faith in the IRS making anything simple, I was simply gobsmacked when I saw the shock announcement last week that there are proposed regulations that will effectively exclude the reporting of GILTI income where corporate tax is paid in the foreign country at a rate of at least 90% of the US federal rate (18.9%), similar to existing – and well-oiled – passive income rules. Apart from the not-insignficant saving of paperwork for US corporate shareholders, there shouldn’t be a tax difference – GILTI tax only kicking in below 13.125% abroad. It is a sea-change, on the other hand, for individuals with companies in ‘high-tax’ countries such as Israel where they will not need to go through the fantastical rigmarole of corporate-imagined taxation. (In Israel, there will still be an issue with companies with special low tax rates).

Waidamminit! This stuff would be great for wrapping food.

What is amazing is that there is no mention in the proposed regulations of the genuine grievance of individuals that these proposed regulations will evidently redress. There were other reasons given.  In other words, it looks like something sensible and good happened (or, at least, might happen) while nobody was paying attention. Not a million miles from the examiner’s comment in that faraway accounting exam.

And, Monty Python or not, the United States economy really does make the world go round. Scary.

Fair fight?

The tough guys are in charge

Underdog Andy Ruiz’s technical knock-out of world heavyweight champion Anthony Joshua in their fight on June 2 was one of sporting history’s great surprises.

Similarly, civil court cases against the tax authorities are rarely won by the underdog, generally ending with a knock-out – technical or otherwise – of the assessee.

There was an exception back in February (I will explain shortly why the item is topical). It involved three flesh-and-blood Israeli residents who claimed a capital gains tax reduction on the sale of shares in the company they controlled. The basis of the claim was an article in the tax code declaring, in certain circumstances, that the part of the gain  reflected by retained profits in the company would be taxed as if those profits were distributed as a dividend. The company in question had a special tax status that offered a reduced rate of tax on dividends. The tax authority said ‘No Way Jose’ (pugilism and wresting belong to the same family of sports), and they ended up badly matched in the ring.

That’ll tell ’em

The advantage that the tax authority’s lawyers had going into the bout was that this particular article was enough to leave the fittest of fighters punch-drunk. It had been updated twice in the early years of this century – in both cases in response to serious tax reform – leaving assessees and their advisors swaying in confusion.

But, the referee was having none of it. The assessees convinced the referee with their parrying of a barrage of alternative arguments. And it was the referee himself who applied the killer blow,  sending the authority crashing onto the canvas.

The authority had declared in a non-legally binding circular some years back, that – while companies selling the shares of other companies with special status would benefit from the reduced ‘dividend’ tax, individuals would not. Earlier in his judgment, His Honour had already dismissed the entire argument as nonsense, but here was a circular offering no explanation or excuse for the bald-faced indefensible differentiation. Hoisted with their own petard. Count to ten, and out?

Not quite.

The tax authority sought leave to appeal. But, as they gathered their teeth from the canvas, they must have realized that – however low their chance of overturning the reasoned judgement that had floored their arguments one by one – they would be pummeled over their out-of-the-ring circular.

So, in the evident hope that nobody would notice them changing sports – they moved the goal posts. Earlier this month, the authority issued an uncharacteristically terse notice to tax representatives stating that companies selling their investments in other companies with a special tax status would not longer be entitled to the special dividend rates.

While – when the appeal is heard –  that may take the sting out of the judge’s most humiliating punch, there remans plenty more there to sink them.

Don’t worry, he won’t notice a thing

In any event, the authority’s action reeks of chutzpa – doubled by the fact that when  queried about it, they claimed not to understand what the fuss was about as the clarification was about companies rather than individuals There is sophistry, and there is circumlocution.

Were I the judge handling the appeal, I would invite the assessees to join the authority in the  witness box and give them leave to sort it out among themselves.

Who stole the punch line?

Not all double acts know they are funny

I am rarely amused by the pronouncements of the Israeli tax authority – au contraire, they often rile me. But, last week a public ruling had the effect of diverting my mind to the comedy double acts that had their origins in America’s Vaudeville and Britain’s Music Halls. Laurel and Hardy, Abbott and Costello, Morecambe and Wise, The Two Ronnies. The list goes on and on.

The ruling concerned an oldie but goodie in the international VAT sphere. It contained absolutely nothing new (I will rant about that shortly – I am still at the amused stage), but did serve as a reminder to international tax advisors everywhere (in Israel) that corporate tax planning cannot be done in isolation. Corporate tax and VAT are a double act, with the direct tax as the funny guy, and the indirect tax as the straight man. If an international tax advisor does not deal with the two in tandem, they might just as well send in the clowns.

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I just don’t get it

There is a peculiarity in Israeli VAT law not shared – to the best of my knowledge – by the EU or other major operators of the tax. Services provided to foreign residents who are outside of Israel generally attract zero-rate VAT (a doublespeak way of saying there is no VAT). However, there are exceptions – particulary where the service agreement benefits, in addition to foreign residents, Israeli residents. And, as the 17% VAT is on the gross amount, and as the foreign residents cannot reclaim the VAT in the absence of a taxable presence in Israel, advisors need to pull their hair out thinking of structuring solutions.

The matter considered by the authorities involved a local company operating a Hebrew website to provide marketing services (and a little bit more) to foreign suppliers of goods. They charged a commission  for this service to the foreign suppliers. The  authorities were asked to rule that the charge should be zero-rated, as it was a service to a foreign resident. Despite also being  to the benefit of the Israeli resident customers,  the law has a  Get Out of Jail Free card –  VAT is zero-rated  if the marketing charge is included as part of the customs value of the subsequently imported goods (it wouldn’t work for imported services, and hence the need for careful structural planning in this sphere).

The ruling makes the zero rate conditional on proving, inter alia,  that the price of the imported goods is included in the import price. “Nothing wrong with that,’ I hear you mutter. Aye, but there’s the rub. There is a reason the tax authority has a ruling process – it provides certainty where there was doubt. And there is a reason the tax authority publishes condensed and sanitized versions of those rulings – so that the certainty exists across the board. All very noble.

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Have you declared the marketing charge?

The published ruling provided no information that was not known already. The law – as represented in the ruling – is entirely clear. What has never been clear – and why I read this document with keen interest – is: ‘What constitutes proof that the service is included in the value of the imports?’  ‘Ah! I hear you say; it is obviously included because it is one of the costs directly related to the sales to Israel’. All I can say is, that it is at times like this that you need a sense of humour. In discussions with the authorities over the years, they didn’t necessarily think it was so obvious if there wasn’t a specific reference in the import documentation to that element of cost (‘included in the import price’ – get it?)

I want to see them get out of that one.

So, if – as I suspect – the ruling request was seeking clarity on that issue, either it was provided and then excluded from the published summary, which would be scandalous; or it was not given at all, which would mean the whole process was a waste of taxpayers’ money.

Either way, it’s time for the tax authority’s scriptwriters to have a rethink about their material.

Votes for taxpayers!

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Some suffering is not pointless

I was sorry to hear that former US president and Nobel Peace  laureate Jimmy Carterhad  broken his hip last month.  I was not sorry to hear that the incident had ruined his planned turkey hunt in his home state of Georgia. I – like the lion’s share of the western world – have a visceral dislike of the pointless suffering of wildlife.

The Americans continue to do things their way, while the rest of us are becoming more and more constrained by multinational consensus. The latest example came last month when a Swiss referendum ensured the application of a new corporate tax regime, as well as restrictive gun laws. On the face of it, this was an example of absolutely raw democracy in action. In Switzerland, all it takes is 50,000 signatures on a petition to guarantee a national referendum on parliamentary laws. And that was the case here.

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What choice do sovereign states have anymore?

But, beneath the surface, the reality was different. Both proposals had, broadly, been up for national vote previously, and both had failed. This time, the people knew that Switzerland’s much-loved-by-foreigners tax friendly principal companies, finance branches and private tax rulings were dead in the water, thanks to BEPS and related international agreements  pushing for a level playing field for domestic and foreign businesses alike. Meanwhile, persistence with the country’s liberal gun laws would mean exclusion from the EU’s much-prized border control free Schengen Area.

Companies of all stripes will now be subject to the same rate of tax, deductions being given for EU friendly R&Dcosts, patent box and the write-off of hidden reserves. To help cover the expected shortfall in tax revenue, and  pacify the lefter leaning elements of society,  there is to be an increase in social security related taxes. At the same time, residents of Switzerland will have to get used to less freedom to bear arms.

The message to the Swiss from the international community was loud and clear – you can vote any way you like, as long as it’s ‘yes’. Two thirds of voters duly obliged in both referenda; the rest are helping police with their enquiries (that bit isn’t true).

Careful thought about the Swiss situation  raises the long-standing question of the importance of nations and, with it, the importance of citizenship. Before the ascendancy of the nation state, the 17th century poet John Donne meditated that, ‘No man is an island, entire of itself; every man is a piece of the Continent, a part of the Main’. Napoleon, Bolshevism, two World Wars, Apple and Amazon later, and nations have limited control of their own destinies, while hundreds of millions of their citizens live beyond their borders. Despite the passing centuries, we are evidently not done with Donne. And, despite a declaration of the League of Nations scarcely 90 years ago that: ‘Every person should have a nationality and should have one nationality only’, growing numbers of people collect citizenships like their grandparents once collected cigarette cards. 

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This bloke was a US citizen until recently. What was that quote of Baldwin?

The time has surely come to reassess the State/Individual connection. In  a world where -with a few prominent exceptions – compulsory conscription to defend the nation is no longer necessary, too many people fit Stanley Baldwin’s assessment of: ‘Power without responsibility – the prerogative of the harlot throughout the ages’.  An excellent candidate for consideration to, at least partly, replace citizenship in assessing an individual’s rights and responsibilities vis a vis the State, would be long-term tax residency.

Who knows? Monaco might one day be a permanent member of the United Nations Security Council.

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