Tax Break

John Fisher, international tax consultant

Archive for the month “November, 2019”

Leaving (eventually) on a jetplane

It’s got a better chance

With a month to go until Christmas, this is around the time post offices are bombarded with envelopes addressed to ‘Santa Claus, Roof of the World, c/o Lapland’. Not a postal code in sight. And each year, there are heartwarming stories in the press of whip-rounds among local staff to fulfill the dreams of the least fortunate of the young correspondents.

A High Court decision a fortnight ago, and an article in the financial press last week, reminded me of my own Neverland  letter several years ago. Had the indignant tax authority junior clerk who called me when it was dumped on her desk been Father Christmas, I would have stopped believing in him there and then.

Trying to make sense of the system

The trigger was a foreign multinational corporate client that reorganized its holding structure which included an Israeli subsidiary. According to both treaty and domestic law, the transaction was not taxable in Israel. However, there is a section in the law that requires the sale of an asset to be reported to the relevant local tax assessing officer within 30 days. Non-reporting carries the horrendous penalty of……nothing. However, always a stickler for telling clients to do the right thing, I informed the parent company that we would be filing the form on time. The only problem was that the foreign client didn’t have a tax number, let alone an assessing officer.

So, I wrote a very nice narrative of the transaction, stuck it in an envelope addressed to ‘Assessing Officer, The Income Tax Authority’ together with the required form, and dropped it off at the authority’s Tel Aviv reception desk, making sure to have the desk clerk stamp my copy ‘received’.

About a month later, I received the above-mentioned irate call from the poor lady on whom, having toppled down the entire hierarchy, the letter had landed.

‘What am I supposed to do with it?’

‘I don’t know.’

‘You are wasting my time. Come and collect it.’

‘No’

‘OK – I am going to send it back to you.’

‘As you wish. But please don’t trouble yourself.’

‘So, I will chuck it in the bin.’

‘As you wish.’

Phone slammed down.

I didn’t care. I had my precious ‘received’ stamp, and that was all that was important to me – I had reported. And, if I hadn’t reported nothing would have happened either.

Some people will do anything to get away

The law’s lack of teeth is also a characteristic of Israel’s Exit Tax. A resident ditching his or her tax residence is liable to capital gains tax on, broadly, assets held outside Israel (most assets held in Israel will be caught when sold). The law has been in force since early in the century but reporting such gains is rare. Why? Because, there is a choice to pay the tax on leaving the country, or to defer the tax until the asset is actually sold, then paying tax on a proportion of the gain according to a linear calculation pre and post emigration. But, by that time, the assessee could be sunning himself on Miami Beach, not too worried about being chased on the matter. November 11th saw the culmination of 4 years of court proceedings regarding exit tax charged to someone who was inexplicably caught (or, alternatively, suffering from some kind of death wish or pang of conscience, walked into the tax authority and gave himself up). The upshot was that, there having been two court cases at the district court level, the High Court judges issued a judgment about as short as the writing on the back of an average movie ticket. Surprise, surprise – Income Tax Authority 1 Man-In-The-Street 0.

A few days later the country’s main financial newspaper ran an ‘exclusive’ article (mercifully, without compromising pictures of the Tax Commissioner) that the tax authority was working with its dentists to apply teeth to the law. The only thing for sure is that none of the theories put forward by the learned professionals interviewed will be the ultimate solution. That would be too simple. One thing is for sure, the going is going to get a lot tougher for those leaving the country permanently or semi-permanently.

And despite that ultimate court decision being given on the eleventh day of the eleventh month, it won’t be over by Christmas.

No time to die

In his latest movie, Quentin Tarantino – parodying Hollywood’s parody of itself – has a baddie refusing to die despite multiple wounds to her body. Finally, Leonardo DiCaprio (SPOILER ALERT) incinerates her with a flame thrower he happens to have next to his Beverly Hills swimming pool, and what’s left of her reluctantly succumbs.

Tax advisors also have a habit of never lying down. It is in their DNA to spy out loopholes in tax legislation whatever the good lawmakers throw at them. Indeed, that was never more clear to me than the first time I volunteered (for entirely client-centric reasons) to help the tax authority rewrite a terribly written professional circular. Every altered phrase brought another potential dodge.

After over four years of being knifed and shot at by the 15 Actions of the OECD’s Base Erosion and Profit Shifting (BEPS) project, earlier this month the tax profession was presented with the public consultation document on the Global Anti-Base Erosion Proposal – Pillar Two, conveniently, but outrageously, granted the acronym GloBE. Classified under Action 1 on the digitalization of the economy, it is really designed to catch anything that was missed – the victors bayonetting the wounded.

There are four parts to the proposal. The income inclusion rule means that, if a multinational group shifts income to low tax jurisdictions (or, these days, high-tax jurisdictions with low-tax loss leaders), the parent country will be forced to pick up the discarded tax. The undertaxed payments rule would either not allow a deductible expense or impose withholding tax on payments to scantily taxed related parties. The switch-over rule which, despite its debauched Hollywood-friendly name, would simply allow the ignoring of tax treaties operating the exemption rule on foreign tax (for example, not taxing the profits of a foreign branch) in favor of the credit rule, where the income is taxed and a credit given for foreign tax paid. The subject to tax rule is slated to be instituted as a back-up to thwart the plans of any smart-ass who thought he could get round the undertaxed payments rule through the wonders of a tax treaty.

Down but not out

 The six-million-dollar-fee question is: ‘Are international tax planners about to bite the dust, go west, push up the daisies?’

What do YOU think?

The proposal, which despite my one-paragraph precis runs to 36 pages, gets lost in its own complexities. It has two significant problems: how to define profit; and how to define low-tax. The system has to be simple, so the temptation is to rely on that child of a lesser god – accounting profit. But, what is accounting profit? Those distant cousins – auditors or whatever accounting people call themselves these days – have so far not been able to settle on a single international set of financial accounting standards or generally accepted accounting principles (GAAP). So what do you do when, for example, the parent company does not consolidate under its own jurisdiction’s rules and the group is a Wild West of different systems? And what about those, oh so important, permanent and temporary differences to tax accounting that occupy our tax-crazed minds? And, when push comes to shove, what is low-tax? As the OECD and its friend the G20 have chased tax havens into a corner, the world has become more sophisticated than when Ireland drunkenly adopted a – then unheard of – 12.5% tax rate decades ago. It’s not always the statutory tax rate, stupid.

So, along with transfer pricing, it looks like international tax planning will live to fight another day – it is just going to have to reconstitute itself like in some Hollywood B-horror movie…

No laughing matter

Gallows humor

The masters of smalltalk have to be taxi drivers, barbers and publicans (Google translate: barkeepers). I have wondered for decades what humorous stories publican Albert Pierrepoint shared with his appreciative clientele, as they handed over their shillings encouraging him with the words, “And one for yourself”.

For Pierrepoint had an interesting sideline – he was Britain’s public executioner of choice. Some of the most notorious villains of the 20th century passed through his rope until he hung up his boots in 1956. If the stories are to be believed, he never treated that work as a laughing matter, and – indeed – even once had to hang one of his own customers with whom he had regularly sung duets across the bar.

A short, disagreeable piece on the Israel Tax Authority’s website made me think of Pierrepoint the other day. In an attempt at humour, a report of the results of a spot audit at two of Tel Aviv’s open air food markets was laced with quotes from the caught-red-handed miscreants: ‘ I am careful to register sales but I am after an accident and take pills.’ ‘The paper roll on the till ran out and, just as you arrived, I put in a new one.’ ‘My accountant told me I don’t need to register credit card transactions, only cash ones.’

Now, apart from none of these lines being side-splittingly funny (it IS a tax authority website, after all), there is an element of gratuitous cruelty or, at minimum, a lack of sensitivity. This was not an edition of Candid Camera. As American humorist Dave Barry once wrote after being selected for random audit by the IRS: ‘Remember that, even though income taxes can be a “pain in the neck,” the folks at the IRS are regular people just like you, except that they can destroy your life.’ What did the inspectors expect the panicked market stallholders to say?

I cannot help but believe this is all about the modern world’s obsession with self-promotion. Gone are the days when people with naturally anonymous occupations (like tax inspectors and accountants) beavered away anonymously – their reputation earned for their true professionalism rather than their vacuous razzmatazz.

Years ago, I happened to be at one of Tel Aviv’s main tax offices when a middle-aged man – having evidently been told that he was to be hung out to dry due to chronic non-payment of taxes – went crazy. The inspector was about to call security, when the soon-to-retire Chief Collection Officer came out of his private office, put his arm around the individual, said some soothing words and led him into his office where he offered him a coffee. However much the individual was in the wrong, the tax official understood his distress.

The tax authority’s money is hung out to dry

So, if you want to make fun of somebody, how about the Globes newspaper report the other day that the Israeli Tax Authority is unable to collect as much as a billion shekels from foreign assessees because neither the Bank of Israel nor the commercial banks are willing to facilitate payment of, what might be, laundered funds? A case of ‘hoisted with their own petard’? What a joke.

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