Tax Break

John Fisher, international tax consultant

Archive for the month “January, 2020”

Is the law an ass?

‘A fair decision? I’ll be the judge of that!’

Last Sunday, the High Court clipped the wig of a first-class judge – and the tax community in general – in a landmark decision overturning a lower court’s ruling. It reminded me of the reaction I received from a tax authority official to an article I wrote at the turn of the century for a national newspaper. But first, the case in a nutshell:

It involved the sale by an Israeli company of shares in a foreign subsidiary. With the clearly laudable intention of promoting tax neutrality, Israeli law includes a special provision that treats the capital gain on sale – to the extent there are sufficient accumulated profits in the company sold – to the same tax rate as that applying to dividends. Dividends between Israeli companies are normally exempt from tax, on the grounds that tax has already been paid, so that – while the entire transaction is considered one of capital gain– a portion of the gain is then exempt from tax. Tax neutrality comes in, because there is then no need to reduce taxation by physically distributing a dividend, withdrawing funds from the company that may be economically important to it.

The legal discussion revolved around whether such treatment should be extended to the sale of investments in foreign companies – the relief to taxation not coming from the exemption of intercompany dividends (which only apply within Israel), but rather the availability of a credit for foreign taxes paid which, in this situation, produced the same zero effect.

The lower court took a liberal view, concentrating on the ‘legislature’s intent’, and effectively recognizing that the wording of the law left something to be desired – in layman’s terms, ‘filling in the gaps’.  Foreign companies would be included. The higher court was far more prissy. The legislature clearly knew exactly what it was doing, the wording was clear, and the intention of the law was only to achieve tax neutrality in domestic transactions – who gives a fig about international ones?

I always thought it was Berk’s Law

Quite apart from the hypocrisy of a court that has built up a reputation for waving its gavel at any output of the legislature it doesn’t like the look of, the assumption that the legislature gets tax legislation right simply beggars belief.

Which brings me to that article I mentioned.

There was a piece of new legislation in the early 2000s (ironically, if my memory serves me correctly, it involved investment in foreign shares) that included three sub-paragraphs. Without the absent fourth (it was a question of working backwards) the legislation was without teeth. In my slightly cynical way, I suggested the scene at the meeting of members of the  Knesset Finance Committee as they worked into the night to complete the legislation. A senior tax official, drafted in to assist, looked at their watch and gasped. It was 11pm and they had to relieve the babysitter. The meeting came to a quick end, and paragraph 4 was never legislated.

Of course, the entire piece was pure fantasy. The article was duly published in the Business Section of the newspaper’s weekend edition.  As the new week began, I received a phone call from a senior tax official: ‘How did you know?’

You couldn’t make it up.

Perhaps because of its complexity, tax legislation is often notoriously incomplete. Thankfully, the tax authority often issues professional circulars, as well as rulings, that attempt to fill in the gaps. Indeed, in the very field of foreign tax credits, I don’t know where we would be without them on such topics as Trusts and Foreign Personal Vocation Companies.

The High Court should be a last resort for sanity. I rest my case.

The Windsor Saga

Who by car crash? Who by suicide? Who by execution?

One of the perennial challenges of the writers of successful soap operas is finding original ways to write actors, who have had enough, out of the script. They can’t all be sent off to Canada, and the public sometimes doesn’t like what it gets. When, broadcast on Christmas Day 2012,  Downton Abbey’s Matthew Crawley died in a car crash on the way back from visiting his wife and new-born son, the outrage was almost tangible. One nutter even tweeted: ‘Why oh why Lord are you testing me…let alone on the day your son was born?’.

‘It’s the BBC, they want us to do a series.’

The British Royal Family has, of course, been a real-life soap opera at least since the Queen let the cameras into Buckingham Palace a half century ago. Writing people out of the script is a lot more complicated than Downton Abbey. Tragically, they have had the car crash and the sex scandal(s), while one of their number (plus household) is about to head for Canada. Lacking the imagination of Downton creator Julian Fellowes, others just get sidelined or – like old underground trains – are retired from public service.

The latest ‘Rexit’, that of Prince Harry and his family, appears to be attracting attention, less because of the human element, and more because of the budget. That isn’t what writers want to see – it detracts from the fairy tale script, and places the whole event in the grubbiness of the real world.

The British press is full of that bombastic and pompously self-righteous term: ‘The British Taxpayer’. How are they going to live? How much is it going to cost ‘us’? While that last question may be appropriate for Leninists, Trotskyites, and Corbynistas, it is not the ticket for a country whose electorate just returned a Conservative government with an 80 seat majority.

He also surrendered America

The Queen is not a pauper surviving on handouts from the State. Monarchs across the centuries amassed huge fortunes from – inter alia – rape, pillage and murder that gave them direct or indirect control over the means of production and human capital. Nice people all. On assuming the throne in 1760, George III surrendered his income from the ‘Crown Estate’ (basically, his property) in favor of an annual payment from Parliament (the Civil List). The Crown Estate was effectively placed into trust for the State, and the Treasury received the income. That state of affairs lasted for over 250 years until, 7 years ago, the Civil List was replaced by the Sovereign Grant which set the payment to the monarch at 15% of the total net revenues of the Crown Estate (temporarily increased to 25%).  Add to this the Royal Family’s  private wealth from the Duchies of Lancaster and Cornwall, as well as the occasional  flutter on the horses, and the Queen is not short of a pound or two.

Thus, as the right to own private assets is still embodied in British law, and as the Sovereign Grant – as successor to the Civil List – is a contractual agreement to pay royalties at a fixed percentage  in perpetuity for the surrender of all control of the Crown Estate by George III, why is it anybody’s business how the wealthy Queen finances her grandson’s welfare? Were the monarchy to be dissolved today in anything other than a communist-style revolution, the royals would be entitled to the two duchies (as at present) and a financial settlement in respect of their rights to income from the Crown Estate. They wouldn’t be living on a council estate as depicted by Adrian Mole creator Sue Townsend in ‘The Queen and I’.

The British Taxpayer can’t even feel indignant over the income tax and capital gains tax position of the monarch anymore. While a king or queen cannot pay tax (it is, after all, HER MAJESTY’s Revenue and Customs), the Queen and Prince Charles have been paying voluntary amounts since 1993 that are supposedly designed to shadow the position of the rest of us.

There is one gaping exception. One of the subplots in Downton Abbey is the recurring issue of Death Duties, today known as Inheritance Tax. It serves as the reason great family after great family is forced to sell their stately home or significant parts of their estate. Under the Queen’s arrangement with her Revenue and Customs, everything she leaves to her successor is not liable to Inheritance Tax (as well as everything inherited from her mum). While it might be argued that the properties included in the Crown Estate (such as Buckingham Palace and Windsor Castle) do not belong to her, Sandringham and Balmoral definitely do (her father even had to buy Balmoral off his abdicating brother), not to mention the assets held by the Duchies.

A parody of a soap opera

So, if the press wants to get on its soap box, lay off the Sussexes – that’s a family affair – and concentrate on the death taxes. Of course, were the position to change tomorrow, Her Majesty could transfer all her assets to Charles immediately, and would only have to live 7 years to avoid Inheritance Tax. At 100, she would be a year younger than her mother when she died. Long live the Queen!

Now is the winter of our discontent

How did they find me?

Years ago, before Millennials stalked the earth, I received a call from the Israeli tax authorities. ‘When is your client going to approach us regarding the capital gains tax on their transaction?’ I was duly impressed by the fact the inspector had read that morning’s paper and put two and two together, and was tempted to reply, ‘When they approach me’, but I opted for the benign, ‘All in good time’.

Once more unto the breach, my friends, once more

The fact was that, in the good old days, when the tax authorities wanted money, they had to get off their bottoms and sniff it out. I believe the thrill was in the chase. Not anymore.

Our friends at the Treasury now bless us with their annual shopping list of ‘Positions Requiring Reporting’. These are common tax planning devices where the taxpayer is told, ‘Do what you want, but you have to tell us about it if you are going to make a packet from it’. If all things go to plan, the sniffer dogs will be round before you can say, ‘Two tickets to South America, please’.

Thou hast slept well. Awake

The tax inspector is not as benign as he looks

The latest list, published last week, leans heavily on those coming out of the 10 year tax exempt hibernation granted to first time residents and veteran returning residents on their foreign income. As that particular jolly only entered the law in 2007, it is not surprising that the boys and girls gathering fuel for the engines of state have only woken up now –a year after the  first beneficiaries of the status  were required to report (the 2017 tax year, reporting in 2018).

What is irksome is that, apart from some of the positions being churlish (the income of CFCs and Foreign Personal Vocation Companies being taxable for the entire year even if the new resident’s 10 year period only expired on December 30th), there is at least one which is downright weird. The best way to understand it is to assume the authors of the list were having such a festive time in December while sitting in the comfort of their offices, pens at the ready, that they let the party get out of hand. I will explain.

Among the new positions, it is clarified that, if a dividend is paid from a foreign company after the end of the 10 year exemption period, but in that same year, despite the fact that the income of the foreign company accrued during the 10 year period, it is taxed normally. Fair dinkum. Dividends are a distinct ‘source of income’ in the tax ordinance, and the dividend appeared after the 10 year period. Although not presented in order, it is likely this led them on to the CFCs and Foreign Personal Vocation Companies where a ‘notional’ dividend is considered received on the last day of the year. Not nice that they didn’t split the year into ‘before’ and ‘after’ – it wouldn’t have hurt if, heaven forbid, they had taken the intention of the legislature into account – but there is little to do but gnash teeth.

Aye, there’s the rub

Then the authorities went a step further. Trusts settled by living parents (and certain others) for their Israeli resident children – known as Relatives Trusts – are, by default, required to pay  tax when a distribution is made. Provision is made in the law, and tax authority circulars, for the capital element to be deducted and losses and foreign tax credits to be taken into account, subject to proof being provided to the assessing officer. This approach is distinct from regular trusts that pay tax on an accumulative annual basis – a status that can also be elected by a relatives trust that chooses not to pursue the distribution route (also obtaining a beneficial tax rate). Beneficiaries in their 10 year exemption period are unequivocably entitled to an exemption from tax. But, what about those on the distribution route who receive distributions of income earned after the exemption period?

Fair is foul, and foul is fair

The authorities got carried away with their logic

Evidently pushing the dividend analogy one stage too far, they came to the conclusion that, as the tax event only occurs on distribution, no exemption will apply if the distribution is made after the 10 years. However, while dividends are a ‘source of income’ liable to be taxed in their own right, a distribution is not . What is more, the wording of the law clearly relates to the income derived or accrued abroad – not a million miles from the wording of the clause dealing with the 10 year exemption. It is hard to understand why the exemption would not apply.

I am not bound to please thee with my answers

The good news is that these positions are not legally binding – although their reporting will invite the prospect of audit.

But, let’s face it – the language of our laws isn’t up to Shakespeare’s standards.

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