Tax Break

John Fisher, international tax consultant

Archive for the month “September, 2019”

One day more

Even he looks bored

Of all the hackneyed aphorisms that grate on my undertaxed mind, that one about nothing being certain except death and taxes has got to be prime candidate for the next cull of the English language.

So, I was both irritated and fascinated when it was brought to my attention that Monday last week was the first ever Tax Certainty Day. We have become used to ‘Days’ designed to make us more aware of everything from climate change to world health, but why a day to make us more aware of something we are all so painfully aware of already? After all, there is no Death Day (or is there?). My appetite for information was further whet by the news that the center of the celebrations was the City of Love itself.

Never underestimate the ability of tax to underwhelm.

It turns out that Tax Certainty Day is not about the inevitability of paying taxes, but rather about achieving certainty over how much to pay. It was marked at the OECD headquarters in Paris, where – rather than enjoying a day of tax non-deductible booze – the participants were presented with the OECD report on the 2018 Mutual Agreement Procedure (MAP) statistics. Add to that, presentations from Austria and France (the only justification for singling out these particular two countries apparently being the two world wars fought between them), and a suitably drab day must have been had by all.

Or not.

Somewhere else the scores mean nothing

Tax professionals like statistics, and this was a day for league tables of which countries had started and finished the most mutual agreement procedures (broadly, the discussions between international tax authorities to resolve disputes over taxing rights in specific international transactions), how long the procedures took on average, how many related to transfer pricing and how many to other transactions, how many were withdrawn, how many were not resolved, and so on.

Now, judging by the reporting of the occasion, these statistics must have been quite intoxicating, because there seemed to be a fair degree of back slapping for hitting the top of the various categories, and a degree of back turning to those at the bottom. This appears utter nonsense. While MAP is a competitive sport involving two opposing teams, there was evidently no category of winners, and it takes two to tango for timely dispute resolution. Manchester City’s emphatic 8-0 demolition of Watford last weekend did not entitle Watford to equal points for helping their opponents wrap up the game in the first half. Furthermore, quick resolution may just reflect a tax authority’s willingness to ‘have a go’ at charging a taxpayer while caving in as soon as they get around the table, or alternatively, their support of aggressive tax planning. It is perhaps not a coincidence that Malta came top in the speed stakes (2 months). Saudi Arabia, a country justly maligned for so much, was perhaps unfairly singled out as the only country sporting no MAPs. It could be that they are just very fair tax-wise to foreign companies (unfortunately I have no first-hand knowledge of that particular jurisdiction’s practices).

Coming to a cinema near you: ‘Tax, Lies and Red Tape’

Second in the league table of aphorisms for the gallows must surely be that one about lies, damned lies and statistics. Like guns, statistics are highly dangerous when they fall into the wrong hands.

Time for an International Statistics Awareness Day?

Papering over the cracks

Thou shalt not get caught

It was reported at the weekend that the Panamanian cabinet had approved an amendment supposedly strengthening Law 70 of January 31st 2019 which criminalized tax evasion for the first time.

For those of us who remember the invasion of Panama in 1989, Noriega’s sojourn in US prisons, and – even for those without much of a memory – the Panama Papers scandal, at first flush this appeared heady news indeed.

Not so fast.

With a smoking gun against its head from the main international financial agencies, and after a year of soul-searching (Google translate: searching for a soul), the Panamanian Government (good to know there is one) agreed back in January to outlaw tax evasion for amounts over US$300,000. In a country that the Economic Commission for Latin America reckons cradles upwards of $340 BILLION of evaded tax, that proved enough to buy some complimentary headlines in the international press.

What were the journalists smoking?

Panama operates a territorial tax system for both companies and individuals. That means everyone is only taxed on income sourced in Panama. Respectable tax rates apply, but the country is pockmarked with free zones and special economic areas (the difference between a zone and an area escapes me) where tax basically doesn’t apply. And then there are multinational enterprises which have a similar status despite not belonging to any zone, area or front drive.

Over the years, a lot of water has flowed under the bridge

Law 70, which threatens two to four years in the slammer plus payment of the tax owed, specifically states that the evasion to which it applies is only that against the National Treasury. Given the territorial basis of Panamanian taxation and the myriad exemptions, a tax evader would need to go to great lengths to evade US$300,000. In fact, it would be quite an achievement.  And if he did, he could be expected to be sent home with a rap over the knuckles as long as he paid up the amount owed plus interest and penalties. However, just in case somebody clever managed to go the whole way, the purpose of the amendment reported this weekend was to exclude first time offenders. I think you would find that, statistically, most people caught evading tax big time are first time offenders (or, more precisely, first time getting-caughters). Even Al Capone, who would have hit it off a treat with Manuel Noriega, only got busted and convicted once.

So, what are the $340 billion of evaded taxes? Of course, evaded from everyone else. Law 70 doesn’t give a fig about all that, not to mention international money laundering.

They are full of hot air

Do they really believe they can fool all of the people all of the time? Judging by the press coverage, the answer might be ‘yes’.

The Judgment

Where should I go to work?

To me, Israel’s National Insurance Institute is one of the last bastions of socialism in our essentially free-market economy. Despite legislation by the freely elected Knesset, it has always appeared to operate according to its own rules. Indeed, over an international tax career in this country spanning three decades, I was so confused that, when I would finish dealing  with the tax consequences of anyone going to work abroad  (and in this Start-up Nation, LOTS of Israelis go to work abroad), I would reach a point where I would simply tell them to visit their local NII office, provide a full explanation of their plans, and accept whatever they told them to do. That invariably resulted in a minimum (and I mean, minimum) monthly payment. When I did try to wade in – once sending not one, but two official letters for a ruling to two relevant addresses – I received two diametrically opposed answers.

The saddest thing of all is that the law is perfectly clear on the matter – an Israeli resident working abroad (unless governed by a Totalization – avoidance of double payment – Agreement between the two governments) is liable to full national insurance contributions on his or her income.

For decades the law might have been law, but bureaucracy was bureaucracy, and – as in any good socialist society – bureaucracy trumps law.

An appeal has just been heard to a case that was brought before a regional labor court back in 2017. The result is Kafkaesque. Hold onto your caps, comrades.

‘I am a faceless bureaucrat’

The case involved an individual who had gone to work abroad in 2009 and 2010 for a foreign employer. He did what any good free-marketeer (or even socialist) would have done at the time, and – on his tax advisors’ advice – trundled off to his local branch of the People’s Republic of National Insurance. They told him – as they did to countless others – that he would be required to pay minimum monthly payments during his sojourn abroad.

Four years after his return he received a (metaphorical) knock on the door from the men in raincoats telling him to pay up maximum (not nominal) amounts on the time abroad. The men in raincoats – as opposed to the bureaucrats manning the local offices of their Institute – clearly knew the law. The individual went to court.

In 2017, the labor court found in favor the little man. The judge sympathized with the plaintiff’s argument that, whatever the law, the clear practice of the Institute at the time was to charge the minimum amount. It even turned out that, when the NII dealt with the intrinsic problem in 2014 (a year conveniently sandwiched between the transgression and the claim for back payments) the reason for their cockeyed policy became apparent. There are three classifications for National Insurance – self-employed worker, employed worker, and not employed and not self-employed worker (‘worker’ is in the original, comrade). The first and last are required to pay over their own contributions; the second transfers obligation to pay to the worker’s employer. Foreign employers couldn’t be expected to pay the contributions, so workers in foreign employment were shoe-horned into the third category, which called for minimum payments. The judgement also made a big deal of the amount of time it had taken the NII to get to the individual, given that he had come clean prior to taking up the position.

Well, the appeal at the end of July, which took two long years to be heard, overturned the lower court’s position. The fact that the National Insurance Institute didn’t know its head from its backside was not a reason to relieve the individual of the need to pay – even years after the event. The Kafkaesque bit was that the judge even implied that – knowing the correct law – the individual should have come forward, reported, and paid. (In practice, the income tax authorities share the income tax assessment with the NII, and that is how liability is determined countrywide. Strictly, however, the reporting of that income to the NII is incumbent on the assessee).

Now, I don’t know the last time this judge turned up at a government office and told the bureaucrat behind the desk that – despite a clear monthly liability – they have got it wrong and they demand to pay more. I see the following scenarios:

  • The bureaucrat telling them in no uncertain terms to kindly stop wasting their time while looking around for the hidden Candid Camera.
  • The bureaucrat opening up an investigation into the individual’s affairs to find out how much they REALLY owe.
  • The bureaucrat calling the men in white coats (as opposed to raincoats, this time) to cart the individual off to a place their employer will never find them.

In Yiddish folklore, there is a town full of fools called Chelm.

Brexit Blarney

Why the British really don’t want an Irish border

A few years after the Good Friday Agreement, I found myself driving along the Irish border. Now, as a non-reconstructed Englishman would expect to find in Ireland, the road snaked drunkenly in and out of each of the United Kingdom and Republic of Eire (fortunately no other countries were involved, probably because there was a sea in between), without any respect for the  political map.

I got to thinking about that drive the other day, when I noticed that Israel’s new-improved Free Trade Agreement with Canada came into force on Sunday. The last time I checked, Israel didn’t have a border with Canada, but the United Kingdom – for better or for worse – has a border with the Irish Republic. And I know what it looks like. It doesn’t look like anything. They don’t even have a tourist attraction like Berlin’s Checkpoint Charlie to cause an obstruction to passing motorists.

One solution?

The only way goods are going to make it into Israel from Canada is via air, sea or someone else’s border. And the Customs Authority must be licking its rubber stamp, because, far from reducing necessary bureaucracy, free trade agreements – that do away with tariffs (sort of) – create more bureaucracy. Whereas an import from a country governed by WTO rules just needs a quick open of the box to see that what is inside is what they said was inside, under an FTA they have to know what is inside what is inside. ‘Rules of Origin’ stop the good citizens of Bunga-Bunga just changing the packaging and passing their dubious products for Canadian or, even, Canadien.

The British, on the other hand, are currently in a customs union with the Irish, albeit through no fault of their own having been admitted together with them to the EEC in 1973. Customs unions are much more efficient than FTAs because everybody in the union adheres to a common external tariff system – ie all the foreigners (for the purpose of this discussion – and this discussion alone – the French and Germans are not foreigners) get the same treatment. That means that when goods pass between member countries, the local customs authority doesn’t need to see what is inside the box at all. On the other hand, an FTA allows members the flexibility to decide their own external tariff policy. Canada does not need to leave NAFTA (or whatever Trump calls it) just because it has a new FTA with Israel.

Our ex-army Economics master assured us that the word ‘snafu’ stood for ‘self non-adjusting f*** up’. Assuming Britain is not willing to, at least partly, raise anchor on Northern Ireland, the equation is simple:

Independent and seamless UK + Borderless Ireland = Permanent Error.

Who IS going to check on the Irish side?

If Britain leaves the EU Customs Union (which is a fundamental of Brexit because it will enable Britain to throw off the shackles of agreements with non-EU countries that benefit other members of the EU and not Britain), it will presumably sue for an FTA with the EU. But – even if the British decide to turn a blind eye to imports from Ireland –  who is going to check the Rules of Origin on the Irish side on behalf of the entire EU?

Boris Johnson promises technology – a grander version, I suppose, of the automatic supermarket check-out trolley we have been keenly awaiting for years. There is only one problem – what they need is still the stuff of science fiction (probably not forever, but time is not on their side).  

Mr Johnson – there is a less fanciful solution, but only if the British are willing to leave it to the Irish:

 Leprechauns.

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