Tax Break

John Fisher, international tax consultant

Archive for the category “European Union”

Red Scotch Tape

And then came the 1970s

When Queen Victoria opened the Great Exhibition in 1851, Britain was the world’s leading industrial power, producing more than half its iron, coal and cotton cloth.

 Well, I don’t think Her Late Majesty would be very amused to hear from her great-great granddaughter how the country she bequeathed to her descendants in perpetuity is currently faring in that field (mind you, her grandson Kaiser Bill did a far bigger hatchet job on Germany).

Nothing highlights the shifting sands more starkly than the announcement the other day that, following World Trade Organization approval, the US is to apply ‘the biggest ever’ new tariffs to imports from the EU – and specifically the UK, France, Germany and Spain.

The British air industry knew when to be competitive

The issue has been brewing for 15 years, ever since the US first complained to the WTO that the EU was subsidizing Airbus and others to assist in their competition with Boeing and others. The EU was indeed found to have overshot the General Agreement on Tariffs and Trade and given until late 2011 to comply. The EU did take measures, but in 2012 the US requested the review of a compliance panel, and in 2018 the WTO determined there had been further violations. The WTO finally ruled last week in the US’s favor and the US Trade Representative was quick to issue a list of products to have their wings clipped through new import tariffs.

The list of products to be punished, represented by their Harmonized Tariff Schedule Codes, is long. The first item is, unsurprisingly, aircraft – the prices of which are to be hiked by 10% from later this month.

It is the next item – designed to hit Britain – that is gobsmackingly strange. You would have thought that it would be heavy turbines, trains or ships. No. It is single malt (and only single malt) scotch whisky – together with single malt Irish whiskey distilled in Northern Ireland, if there is such a thing. And no friendly 10% for them. 25% slapped drunkenly on the price.

It turns out that the most effective way to get at what was once ‘the workshop of the world’ is through premium brand whisky. But, it is all so unfair. Check on Wikipedia for ‘Aircraft Manufacturers of Scotland’, and you will be greeted by ‘Defunct Aircraft Manufacturers of Scotland’. In fact, tragically, Scotland’s biggest claim ever to aviation fame was probably the 1988 Lockerbie Disaster, for which they suffered more than enough.

So, sadly, the good people of Scotland (in the interests of full disclosure, I should point out that I am half Scot) are being made to pay for the shenanigans of their southern partners (who themselves are probably far less guilty than the Germans and French , both of whose record on air wars is abysmal).

Who are the Americans trying to kid?

I don’t know what hurts more – Britain’s descent from the industrial world to the spirit world, or the gross unfairness of trade wars. Not much can be done about the former, but the latter should be exorcised before the new mercantilism takes an unbreakable hold.

We are not amused.

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!

Double Dutch

Another way to keep the tax bill downBack in the days when there were twelve pence to a shilling and twenty shillings to a pound, there was an urban myth of a retired Maths teacher who runs into his worst student as the latter climbs out of a Rolls Royce. The younger man embraces his old nemesis, proceeds to thank him for the great Maths education that enabled him to succeed, and declares: ‘I buy ties for a pound, sell them for one pound ten shillings (Google translate: £1.50), which means a ten per cent gross profit. My after-tax earnings are amazing’.

As 2018 was drawing to a close, Holland appeared to be having a similar problem with basic Maths in meeting its commitments to the European Union, albeit that the EU had itself been guilty of gross bureaucratic circumlocution.

skool1

How will the EU manage with the English language when the UK leaves?

In 2016, the EU issued its ambiguously entitled, ‘Anti Tax Avoidance Directive’, which might have been the credo of our low-taxed tie entrepreneur had it not been for the fact that the text made very clear that this was a pro-tax directive aimed at ensuring there was no avoidance. It was however a warning that members would be dealing with poor-language damage control. The Directive directed that interest limitations, exit tax, hybrid arrangements and controlled foreign corporations (CFCs) all had to be dealt with in individual national legislation by the end of 2018. So far, so clear.

As summer gave way to autumn (and, in some cases autumn gave way to winter) member states seemed to inexplicably vie for last place in the legislating stakes, despite having no ultimate choice – even the hapless British, who were hanging off the edge of the EU, had to comply.

cubanmissilesgraph

There are other ways of solving the problem of offshore jurisdictions

As the stragglers came on board, thanks to the abovementioned Dutch, there was one curiosity deserving attention. The Controlled Foreign Corporation (CFC) has been with us since the week of the Cuban Missile Crisis (CMC) in October 1962, when John F Kennedy (JFK) signed the US version into law. In a nutshell, despite jurisdictions adopting various incarnations of CFC, the underlying nous is that certain income either parked in or diverted to a low-tax jurisdiction is to be taxed on a current basis in the hands of the parent as if a dividend has been distributed.

One of the features common to most CFC regimes is that the calculations are objective – identify the item and tax it. The EU version offers two options to choose from. Option A is the traditional method – identifying specific types of income, while Option B has CFC provisions stepping in where state-of-the-art Transfer Pricing isn’t satisfactory. Option B is clearly subjective, and seems to beg to be ignored (when was the last time a company volunteered that its transfer pricing wasn’t up to much?)

Common to both methods, however, is the ownership level triggering CFC, and the rate of tax below which the CFC legislation can apply. That last point is where the Netherlands  appear to have lost track of the numbers, and the EU to have lost track of its mind.

saw in half

I think I’ll stick with the mind reader

We all surely remember the ‘great’ mind-reading trick of our youth – telling some unwitting stooge (usually a younger brother) to ‘think of a number, double it, add X, divide by two, and take away the number you first thought of’. The answer, due to the rudiments of Mathematics, was always X/2.

Well, the Directive establishes low-tax for CFC purposes by the following calculation:

‘The actual corporate tax paid on its profits by the entity or permanent establishment is lower than the difference between the corporate tax that would have been charged on the entity or permanent establishment under the applicable corporate tax system in the Member State of the taxpayer and the actual corporate tax paid on its profits by the entity or permanent establishment.

Now, as hard as I try, I  cannot interpret this gobbledygook as anything other than a horribly complex and roundabout way of arriving at half the parent company’s corporate tax rate. Almost all the EU member countries appeared to come to the same conclusion. However, not the Dutch. Perhaps the official Dutch translator in Brussels was drunk or stoned, but after a lot of bellybutton watching in recent months over an initially proposed 7%, they finally plumped at the eleventh hour for 9%. Despite wrestling with every combination of current and proposed higher-income and lower-income Dutch corporate tax rates, I could not justify 7% or 9% when fed into the above ‘equation’.

So, what is happening? As far as I can see – nothing. The EU bureaucracy is in Christmas hibernation, with instructions only to be aroused from its slumber by occasional wake-up coughs from the tiresome British.

It will be interesting to see if, now we are in the New Year, anybody notices.

Happy New Year – especially to my Dutch friends.

Bad Cumpany

scaramander

‘Come, come Mr Bond’

If, like me, you have been wondering for decades what the European Parliament is there for, wonder no more. Following a recent vote, the august institution is considering  setting up an investigations unit to tackle two humongous European fraud schemes  named improbably  ‘cum-cum’ and ‘cum-ex’. The first warning that something was afoot came in 1992, and the fan turned brown in 2017, but the wheels of power turn slowly in Strasbourg. (Or was it Brussels? Or Luxembourg?)

For those without a Latin education, the schemes translate as ‘with-with’ and ‘with-without’. It would be nice to leave it at that, but I had better explain.

Both schemes revolve around dividends on stocks. A stock is cum-dividend when a securities buyer is destined to receive a dividend that a company has declared but not paid. That is the status quo (more Latin) until the date at which the stock trades ex-dividend – when the dividend will go to the seller. Thanks to lacunae (Latin noun – first declension nominative plural, like mensa/mensae) especially in German law, but evidently in about ten other European jurisdictions, bankers and the other usual suspects were (possibly still are) able to bleed national treasuries of scarcely imaginable sums.

The cum-cum smacks more of an old-style tax avoidance scheme than hardcore evasion. Stocks of German companies held by foreigners who were not eligible to  dividend witholding tax exemption were ‘lent’ (effectively sold with an agreement to repurchase , – but it isn’t written that way) to bona fide German banks shortly before a payment date. The stock went back at a lower price without the dividend. Naughty, but with loud protests that it only made hay while the legislators slept. There was one exemption, and the bank had a technical right to it.

Godfather

He knew how to make sure a secret was kept

Cum-ex was a far dodgier form of exploitation, which did not rely on foreigners. It did, however, require collusion and, on the grounds that ‘two people can keep a secret as long as one of them is dead’, it was bound to be found out eventually (having said which, the German and other authorities seem to have made gargantuan efforts to miss what was going on beneath their noses). Basically, a bank would ‘borrow’ stocks cum-dividend within two days of the dividend payment date and would sell them (short) to a third party. Delivery was required in two days, by which time the stock had gone ex-dividend. The procedure in force until 2011 in Germany (and heaven knows what is still happening elsewhere) was that the bank had to make a compensatory transfer between the seller and the buyer for the net after-tax amount of the dividend, and then issue a certificate of withholding to the buyer even though he did not actually receive the dividend. The theory went that the seller would no longer be entitled to that withholding as he had transferred the dividend amount to the buyer, and therefore would not receive a withholding certificate. Aye, and there’s the rub. The short seller of the stock was not the ultimate owner and had not suffered the withholding tax. The ultimate owner also received a witholding tax certificate (if handled correctly, the number of withholding tax certificates could be multiplied) enabling two or more ‘owners’ to cash in on the same tax benefit. This is not clever tax avoidance. It is clearly tax evasion. And it has cost European state coffers an estimated €60 billion.

mob

The words ‘company’ and ‘companion’ derived from the Latin ‘cum panis’ – with bread

But, at least we know we can now sleep safe at night in the knowledge that the European Parliament is on to it. It has only taken them 26 years. Rumour has it that MEPs are soon to issue a communique announcing the end of the Second World War. The suspense is killing.

 

Brussels Sprouts

Quiz: Name the President and Foreign Minister of the EU. Clue: He was Belgian Prime Minister. Second Clue: Belgium is a country next to France

Quiz: Name the President and Foreign Minister of the EU. Clue: He was Belgian Prime Minister. Second Clue: Belgium is a country next to France

“I never forget a face, but in your case I will be glad to make an exception”.

Groucho Marx’s famous line haunted me the other day as I tried, in vain, to remember  the name, face or other distinguishing feature of the first (and only) person I ever met who worked in Brussels with the European Commission. All I recall is that he was a smooth-talking, post-pubescent All American Boy  wearing khaki trousers, a blue Oxford shirt and navy blazer. He spoke with the confidence of a young man who had been to enough college lectures about Europe to know he could teach it a thing or two. C’est tout, as they say  at the epicentre of European folly  and promptly translate it into 22 other languages. With 27, going on 28, countries to cherry-pick its people from, I have never been able to fathom how this New World imposter managed to elbow his way into the bastion of the Old.

I admit that I have no time for the faceless bureaucracy of Europe. Those guys would give the Circumlocution  Office in Dickens’s Bleak House a real run for its money. Legislation starts its life at the European Commission where 27 individuals, whose main claim to their position is that their national governments needed to be rid of them,  churn out competition choking ideas by the kilometer. The Commission sends its proposals to the directly elected European Parliament together with the ever-changing Council of Ministers (made up of 27 ministers who fancy a day-trip to Brussels) for them to mull over.

While both the Parliament (directly elected) and the Council (constituting representatives of national governments) can put a tick in the box on the form that says “democratic” , in reality that democracy has virtually no meaning. Whether followers of Hobbes, Rousseau or Locke, the raison d’être (when I think of the waste in the EU, those French expressions just keep on coming) of any system of government is the organization of civil society. The European Union is not (at least, yet) a civil society. It is at least 27 civil societies (some more civil than others). 27 civil societies cannot produce a representative government. What they CAN produce is a serious irritation to the skins of their societies – and that they have done very effectively.

End of world domination?

End of world domination?

The respected contemporary historian, Niall Ferguson, points out in his recent book “Civilization”, that one of the main reasons that “The West” completely eclipsed “The East”  over the last 500 years was the competition between the myriad of States in Europe. The Industrial Revolution was led by Britain not because the Greatest Nation in the History of the World (sorry, I had to get that in) invented everything (it didn’t), but because labour costs in Britain were comparatively high, which encouraged innovation to improve productivity.

Well, after the better part of a century of a world dominated by Communism, National Socialism and Socialism, over the last 30 years it has looked like we are finally getting back on track with the word competition making a comeback in the lexicon of polite English, and the East not overcoming the West but joining it.

Did I forget something?

With the collapse of Planet Earth’s financial system a few years back the world’s governments realized (once again) that, while competition is a grand thing and the financial sector is a critical part of world growth, that same financial sector has the power to really screw things up for everybody bigtime so it needs regulating.

The Dodd-Frank Act in the US and the UK’s Financial Services Act 2012 represented the verbose but fairly measured responses of the two most significant financial sector nations.  The Basel Committee, established originally by Central Bankers, came up with Basel III revisiting the capital adequacy of the international banking system – which, while inevitably attracting a degree of controversy, is the most appropriate response  for bankers to a crashed financial system.

With the rational responses safely on the road, it was inevitably time for the We-Want-To-See-Blood Brigade to get going. The British Government had briefly, and ignominiously, flirted with a super tax on bankers’ bonuses (it would have been much more fun to burn them at the stake), but soon realized that revenge maketh not sound economics. Meanwhile, across La Manche (there I go again) President Folies Bergere still insists he wants to bury his nation with a 75% top income tax rate even though the courts have struck it down (who cares – when there have been 5 Republiques, what’s the big deal going for a 6th?). But, these, at least are anti-competitive responses of national governments pandering to the blood-lust of their electorates.

The EU, on the other hand, exercising what Rudyard Kipling’s cousin Stanley Baldwin once called “power without responsiblity, the prerogative of the harlot through the ages”, is left to run havoc with its bureaucratic chainsaw through the back streets of Europe.

Following a mad agreement in February to limit bankers’ bonuses which will just lead to higher fixed salaries and less flexibility in a downturn (the EU , to its chagrin, has not yet managed to sink its fangs into national tax systems), in March the EU Parliament decided to go after investment managers. And not just any investment managers –  the investment managers of Mutual Funds. These funds, which are generally not leveraged, do not cause any systemic risk to the economy. Furthermore, the Parliament wants the managers to receive at least half of their bonuses as investments in their funds – which ignores the fact that US investors are banned from investing in such vehicles so “Good Night, and Good Luck” to American Fund Managers; they could always, I suppose, get work in Brussels. In short, this is a load of piffle. The good news is that, in order for it to become law, it needs the agreement of the 27 National Governments  which is about as likely as World War III breaking out (which is what the EU was designed to prevent). Meanwhile, the Members of the European Parliament will be able to keep spending taxpayers hard-earned cash commuting between Brussels and Strasbourg (not to mention, their home countries). A far better idea than limiting investment managers’ bonuses would be to limit MEPs’ salaries – to zero, and send them home.

Weapon in next European War

Weapon in next European War

Groucho may have another lesson for us regarding EU bureaucrats. Following a luncheon interview with the legendary Alastair Cooke at Marx’s golf club, they were queuing at the till to pay. The middle-aged Jewish matron in front of them was taking her time finding the cash in her handbag to settle her bill. His signature cigar revolving in his mouth like an anti-aircraft gun, Marx finally fired a salvo at the cashier: “When you see the whites of her eyes – shoot!”.

Europe has fought several of its wars on Belgian soil. Could the next one be over free markets and competition? C’est la guerre.

In God (Alone) We Trust

Business Card

Business Card

When the news broke last Sunday that a Boeing 737 had inexplicably missed the runway at Bali airport and ended up in the sea without, miraculously, any loss of life, I couldn’t resist a sardonic smile. In the closing pages of Swedish author Jonas Jonasson’s improbably titled “The 100-year-old man who climbed out the window and disappeared”, an elephant laden, privately chartered Boeing 747 is trying to get permission from air traffic controllers to land at Bali airport. The gist of the conversation goes like this:

“My name is Dollars, One Hundred Thousand Dollars.”

“Excuse me, what is your first name, Mr Dollars?”

“One Hundred Thousand and I want permission to land at your airport”

“Excuse me Mr Dollars. The sound is very poor. Could you be so kind as to say your first name once more?”

“My first name is Two Hundred Thousand.”

“You are most welcome to Bali, Mr Dollars”.

It does make you wonder. In fact, my knowledge of Indonesia (of which Bali is a part) is founded entirely  on the above-mentioned novel and Barack Obama’s positively embarrassing “The Audacity of Hope” in which he frighteningly bases his concept of foreign policy on his childhood experiences with his mother and autocratic stepfather in that country. What is interesting is that both authors take the existence of corruption there for granted and, in the case of Jonasson, he is clearly aware of his readers’ subconscious expectation that, in that part of the world, bribery will always be involved.

But that begs a question about the West.

Why is it that every time somebody in authority puts his hands in the till (or elsewhere) we freeze in indignation and shock, adopting the facial pose of someone in desperate need of the bathroom, and fast? Indignation has some logic to it. But why shock? Shouldn’t we expect it? Just look at the shenanigans in high places of only the last few months:

Starting with monarchies. There is the King of Spain’s son-in-law facing fraud charges (with his wife Princess  Christina being required to appear in Court). Meanwhile, there are accusations of a political slush fund that may have benefited some of the King’s highest democratically elected political servants. And then there is the widow of King Baudouin of Belgium (who shared first place with General Franco in my childhood stamp collection) who has been siphoning off part of her considerable State pension to a foundation for the benefit of her Spanish nephews so as to avoid Estate Tax.

"Who loves ya, baby?"

“Who loves ya, baby?”

Republics have not been faring any better. Berlusconi’s antics in the boardroom and the bedroom do not  need repeating here but even he is being outshone by the political heirs of the Sun King. The French establishment seems to be guillotining itself with the disclosure that  the treasurer of President Zeropopularityrating’s party invested illegally in the Cayman Islands  followed by the resignation of his Budget Minister for a similar iniquity.

Furthermore – and not because I want to be fair to the French but because I want to make a point –  if we go back a few short years, a large number of MPs, constituting  the rump of the British Parliament, were caught inflating their expenses, claiming for such necessities as the cleaning of a moat.

For the life of me, I cannot understand why intelligent, educated people in their millions are still shocked by these antics. There are simply too many of these good people to assume that they are the same poor souls who still believe in Santa Claus and saunter down to the lily pond at the end of the garden on a summer’s evening to dance with the fairies.

All this is not a cue for the God Squad to jump up and start lecturing on the debilitating effect on morality of an increasingly secular society.  They might like to reflect on the state of organized religion which has, itself,  not been having a very good press  lately. Moreover, a recent book by primatologist Frans de Waal has shown that chimpanzees display considerable moral behaviour in terms of looking after the infirm, the old and the orphaned – which should wipe any remaining  smug smile off the face of the average, intellectually stunted Holy Joe.

Anyone who can see past the Evangelist standing on the doorstep trying to sell human salvation – in fact, anybody who gets around to reading the older part of the Bible he is trying to peddle – should realize that immorality is here to stay. Instead of being surprised by it – society should  legislate for, and strictly enforce, the bits that cause the most angst.

A few months ago I wrote about a British Parliamentary broadside against Amazon, Google and Starbucks who, it was contended by British lawmakers (in between consultations with the moat cleaner), were not paying enough tax. Committee Chairman Margaret Hodge accused them of being immoral rather than illegal. This was balderdash. Apart from the fact that a company cannot be moral, intelligent or humorous because it is just a number in a government registry – how are company managers to know who the god, or gods, it is that they are required to serve – shareholders, host country government , home country government or customers?

And, while we are at it, what defines Morality in the modern Global Village? Perhaps it was prescient that the only typo ever recorded in the official King James Bible was in the 1631 edition where the 7th Commandment was rendered as “Thou shalt commit adultery”. In those days, if you committed adultery it could cost you your life (and if you committed adultery with the wife of the heir to the throne, you watched yourself being chopped up first). Nowadays, it just costs you your house and car.

"Good mornin', Mista Fisher"

“Good mornin’, Mista Fisher”

As the sun began to set on the last century,  I spent a few months working in Manhattan. On my first day in the apartment on 34th and 2nd the concierge caught me on the way out. “Mista Fisher, you gotta separate yer garbage. It’s de law Mista Fisher, it’s de law”.  I, of course, proceeded to do exactly what he said for the entire two months. Why? Was it because, I had a Green epiphany and considered it morally reprehensible to put recyclable and non-recyclable rubbish in the same bin (sorry, “can”)? You kiddin’, or somethin’? There were two reasons: I thought that, if I got caught 3 times putting the washed out remains of the Drip Brew filter  with the empty Ding Dong packets I would get life without parole; and the concierge talked and looked like Jimmy Cagney so I wasn’t taking any chances so close to the East River.

FDR was wrong when he announced at his first inauguration that “all we have to fear is fear itself”. With all the progress in the world, when it comes to enforcing the law, there is no substitute for fear. Maybe they should bring back the Rack. It might not deter corrupt high-flyers much, but it would satisfy the moral majority’s primitive urge for revenge.

Faulty Powers

At least the humour doesn’t age

A month shy of the 40th anniversary of its first broadcast, I was impressed when my teenage son asked me last week whether I had ever seen the Cheese Shop sketch. He was astounded when I started quoting from it and informed him that Monty Python had defined humour for my generation (sorry Yanks, it was not Benny Hill). For several months my mind has been filled with another of their skits  that circumstances will simply not allow to fade away.

Those were not the days

When I first saw the Four Yorkshiremen sipping good wine and trying to outdo each other in exaggerated memories of their poverty-stricken childhoods (“I had to get up in the morning at ten o’clock at night half an hour before I went to bed”) I just found it very funny. When I grew up and read Orwell’s “The Road to Wigan Pier” that deals with the abject poverty and misery of the mining families of Yorkshire and Lancashire during the Great Depression, I realised its satirical greatness.

As Europe pulled away from the summer – reading, watching and listening to the media  – you could be forgiven for thinking that the Euro Crisis was on its way out. Agreement on banking union, adoption by the ECB of  ‘lender of last resort’ status and a green light from the German Constitutional Court for German participation sent government bond yields down in Spain, Italy and Portugal. At the same time Spain, Italy, Portugal and Ireland were congratulated for their austerity packages which only left Greece listing badly and looking like she is likely to sink.

Leave it all to the Irish. The Iranians wouldn’t know what hit them

Well, now that we are out on Autumn’s open road, all hell has broken loose as demonstrations and  riots erupt across Europe against the austerity packages imposed on the citizens and residents of problem countries.  The policymakers in Berlin, Brussels, Madrid, Lisbon and Rome seem to have forgotten one thing in their calculations. The suffering of the people.  The Spanish are reduced to reminding us that they discovered the New World, the Italians are reminding us that they used to rule the world, the Portuguese are reminding us that they discovered South America (which explains why, when I travel to Brazil, I cannot understand a single word they say) and the Greeks continue to annoy us by reminding us that they created Western Civilization . Only the Irish, who discovered Guinness that has brought more happiness to men’s faces than all those discoveries put together, are shutting  up and suffering in silence.

Of course, what all those nations did in their earlier incarnations is irrelevant in the show-me-the-money modern world. But what should be  critical to policy makers is the here-and-now. And the here-and-now is not made up of central bank statistics of inflation targets, quantitive easing and long-term growth. The here-and-now is made up of people who need to live through today and tomorrow before they get to the long-term. The European Union is about people and if its pensioners are being deprived of their only potential source of livelihood and if 50% of youngsters cannot find work then –  whatever the ECB statistics say – the European Union is setting itself up for its own fall.

And that is even before we get to the question of whether austerity measures are macroeconomically the way to go (the ongoing battle between the Keynesians – no way – and the  followers of  Hayek – absolutely).

The extent to which statistics have trounced humanity came home to me last week in, what is almost an aside to the whole shambolic situation. The Portuguese Prime Minister  announced that, in an effort to encourage employment, his government was going to cut the Employer’s National Insurance contribution on workers’ salaries by 5.75%.  Good economic sense but for one small point. In the same announcement he informed the public that Employee’s National Insurance contributions were going to rise by 7% to pay for the reduction thus slashing take-home pay.

The issue here is not whether costs need to be reduced and taxes raised  but, rather, the socially destructive way in which that goal was to be achieved. By telling the man in the street, who understands as much economics as it is to his advantage to understand, that he is being forced to finance the profits of his already overprivileged employer is inviting that man in the street to clamber onto the barricades. Simply idiotic.  When I recall that the current president of the European Commission is himself a former holder of the august position of Prime Minister of Portugal my hands start to shake involuntarily. In the meantime the Portuguese Government has backed down on this issue.

And then there is the macroeconomic situation. Most economists today (who happen to be neo-Keynesian) agree that austerity is not the right way forward in the short-term. The view stems from what Keynes called the Paradox of Thrift – that while good housekeeping including saving for a rainy day is an undoubtedly sound policy for individual households, at the collective national level it leads to a fall in GDP and recession. While targets should be set for the long-term, Governments should be allowed to run up bigger deficits in the short-term during a recession to protect their citizens and kick-start the economy. 

People, not statistics

The irony is that several governments have already been given their marching orders by electorates for fouling things up. On the other hand, the troika charged with sorting things out are the EU Commission (non-democratic), the European Central Bank (non-democratic) and the International Monetary Fund (non-democratic and not averse to a bit of fun in New York hotel rooms). Of course, in the background conducting  this Chamber Orchestra is a certain daughter of a Lutheran pastor. Her electorate is likely to boot her out in 2013 if she does not inflict some horrible pain on the recalcitrants. Which means the people can continue to be stretched on the rack, albeit with a little more slack than before due to recent developments at the ECB. The question to be asked is “How many more pensioners will need to commit suicide or how much will violence need to increase among the young unemployed, before those who make the decisions understand that the future of European society is not just about positive financial indicators derived from questionable econometric equations?”

Apropos, the Cheese Shop sketch has proved quite prescient.  John Cleese, playing an intellectual prig, enters a boutique cheese shop with a view to assuaging his hunger. Live entertainment is provided by an unlikely duo of  bowler hatted gents dancing in the Greek tradition to the accompaniment of a bouzouki. The shop is completely empty of cheese although the shopkeeper, Michael Palin, continues to give Cleese the impression that he has plenty of cheeses. Remind you of a country in Europe (there was a subtle clue in the text)? Anyway, the final part of the scene is where the analogy falls apart. Cleese tells Palin that he is going to ask him straight if he has any cheese and, if he answers “No” he will shoot him. The shopkeeper tells the truth.

Risks of the import/export/import business

The crooks used to die laughing

Back in the sixties when my all-time superhero,  Batman,  used to dress like he was going to a neighbourhood Halloween party, actors Adam West and Burt Ward would issue warnings to stupid children not to try any of their stunts at home. That was sound advice.

While they had the full attention of the little weirdos they might also have told them that, when they grow up, they shouldn’t try crime. Because, while stupid people might get a real kick (and “pow” and “splatt”) out of crime, when they get caught (and stupid people who think they can swing across skyscrapers with capes catching between their legs DO get caught) it really messes up their social life.

I reckon it is precisely these sorts of wackos who  go in for VAT fraud. VAT fraud is very tempting. As will be seen from my “VAT Fraud for Dummies” below, it carries the very real advantages over regular aggravated burglary of not involving physical violence and offering theoretically unlimited gains.

It’s a dog’s life sentence

The problem is that when you get caught, as happened to a gang in England recently, the judge tends to get enthusiastic when it comes to sentencing. One genius  copped a 17 year sentence last month. For any Americans reading this, British custodial sentences compare with American ones like dog lives compare with human ones – so for 17 years read 119 years (and for VAT read an indirect regressive tax designed to fall on final consumers and hated by every Yank who hates Barack Obama).

The most popular form of VAT fraud operates best in the European Union. This is mainly because the Europeans, as a matter of policy, trust each other. They trust the Greeks, the Italians and the Spanish just as much as they trust the Germans and the French – and that is official.

In describing “Carousel” fraud I will actively omit a few essential steps so that, just in case some fat con sunning himself next to a pool on the Costa Del Sol with a cocktail in one hand and his computer in the other is reading this, he will NOT be able to commit the crime of the century (and then get caught).

It starts in, say, France where a member of the syndicate (you need a lot of goons for this game which increases the risk of someone singing) exports mobile phones to Britain. It is almost always mobile phones or similar devices although carbon credits have recently joined the list. The French exporter does not charge VAT because, as an export sale, it is subject to zero rate VAT. In Britain – where VAT is not charged at the port because the British and French are in bed together in the EU lovefest – the VAT registered purchasing company  on-sells the goods with a profit to another British VAT registered company charging whatever rate of VAT Britain’s coalition government is charging that month (for VAT fraudsters – the higher the better – so bring it on, Dave). The first British company then conveniently forgets to pass over the VAT to the UK authorities and ultimately “disappears” with the VAT it has received from the next company which is its accomplice. So far, apart from breaking the law, nobody is better off. From here on, depending on the level of “sophistication’ of the perpetrators the goods may now pass through a number of “legitimate” companies in the UK charging and reclaiming VAT until they reach the final UK company that makes it all worthwhile (until they get caught). That company exports the goods to France issuing a zero rate VAT invoice (“There’s a hole in m’ bucket, dear Liza, dear Liza..”). Under VAT law, the exporter can now reclaim the VAT it paid to the company it purchased the goods from. The final upshot is that the first UK company has disappeared with cash supplied by the syndicate but ultimately “refunded” by the British government. Best of all, the whole process can start again with the French company exporting to the UK – so the same stock of goods can be sold several times and multiples of the VAT amounts “lifted”.

In the early days the tricksters used to, at least, play the game. There was a stock of mobile phones that moved around the market. Then somebody woke up to the fact that, unless you were really unlucky and got hit with an audit, nobody ever needed to see the goods – but to be on the safe side they packed up boxes in warehouses with bricks and a layer of phones at the top. Later, it appears that even the cost of the bricks and their transport between companies bothered them so many did away with the goods altogether.

You can’t put a round peg in a square hole

This is nicely reflected in how two such frauds were blown in recent years. A while back HMRC did an audit on a stock of mobile phones in England and discovered that their chargers did not have British square-pinned plugs and were hence unsellable in England. More recently, a case was uncovered because the invoices were for models of mobile phones that, due to a manufacturer’s delay, had not yet reached world markets. As I said above, these are the same stupid morons Batman and Robin were talking to.

You will be pleased to know, however, that the great bureaucracy, the EU, has not stayed silent. Several years into this mess (it is estimated that VAT fraud runs into the billions) the EU Commission  finally proposed two weeks ago that, for a limited period only, certain very specific categories of goods (including mobile phones) should be accounted for using the “reverse charge mechanism. This is a method whereby, broadly, VAT is not charged by the seller but is instead accounted for by the purchaser until the final sale to the consumer.

Could somebody tell her that she is supposed to be DOING the frisking?

This reminds me of  US airport security since 9/11. Every time I take my shoes off in a US airport so that they can check for explosives similar to those once concealed by a British citizen boarding a flight, I think of two things. Firstly, the only deadly thing about my shoes is the odour. Secondly, that there is a terrorist who has just walked through security with a cleverly hidden device chuckling to himself about the stupidity of Homeland Security in thinking  he would try the same schtick twice.

But VAT fraudsters are not terrorists with an ideology and a mission. They are greedy fools most of whom are lucky to be less stupid than the European bureaucrats sent to stop them.

Rocket tax

Where is the Higgs Boson when you need it?

At the dawn of my career when I would flit from audit client to audit client, red and green pens at the ready, every accounting department would resonate at least once each day to the gravelly voice of Bonnie Tyler singing  “Every now and then I fall apart”.

Well, last week scientists finally proved (almost) that she was talking rubbish and people and things and the universe don’t fall apart. This is  because of something called the Higgs Boson. What really got up my nose were  all those goofy scientists, whose parents were too tight to pay for orthodontic treatment, coming down off Mount Olympus to explain to us mere mortals the significance of the discovery of the “God Particle” in a multitude of idiots guides, guides for dummies, table-tennis balls on trays of sugar and impossible cartoons.

Who, in heaven’s name, do these physicists think they are? It occurred to me that I should return the compliment, so if any scientists read this blog – this post is meant for you.

The cost to the American taxpayer was $170 billion.

Everybody knows that taxation is rocket science. It is full of equations and graphs that mean nothing to the scientist in the street but make people with doctorates in taxation feel that they have not wasted their lives.

The European Union is currently facing a major crisis among the countries that make up the Eurozone. As I have pointed out  in previous posts, the only way the Euro has a future is if the countries achieve fiscal unity, a significant level of political unity and there is cultural convergence. Following negotiations last week, the first two are looking increasingly likely in the medium term – but nobody is talking about the last. This is complex stuff and invites a plethora of  courses in Euro for Dummies. To try and make it simple, I will use the analogy of the Higgs Boson to explain.

It is no coincidence that the countries causing Euro problems are predominantly in Southern Europe (Greece, Spain, Italy, Portugal, Cyprus – Ireland is a special case). It is a fact of life that the weather around the Mediterranean is a lot more clement than in the North. There is incontrovertible empirical evidence to show that when the weather is good and you have a Mediterranean coast down the road, there is a desire to spend less hours in the office. The incontrovertible empirical evidence stems from my experience of having spent half of my life so far (hopefully only a half-life) in the smog of London and the other half with a view of the Mediterranean from my office window.

No escape – 24/7

As mentioned in my last post there is a widespread belief among tax professionals in “Tax Neutrality” – that tax should not affect the allocation of economic resources. One of the many divergences from this rule is the tax treatment of leisure. When people’s work income is taxed their desire to work diminishes and their desire for leisure increases. Ever since Corlett and Hague (1953) it has been recognized that, to rectify this disequilibrium, leisure should be taxed. However, since governments cannot tax something intangible, they should tax leisure “complements” while, possibly, offering tax relief for tax substitutes.

Getting difficult? Let’s shoot over to the Higgs Boson. Scientists have known for eons that atoms are made up of electrons and a nucleus. The nucleus is made up of protons and neutrons which, themselves are made up of quarks and lots of other bits and pieces. But it was not clear what gave all these particles mass – in other words what kept everything together. Peter Higgs (and others) developed a theory in 1964 that the missing ingredient was an invisible particle of force which came to be called the Higgs Boson. As particles went flying madly around they collided with the Higgs Field (made up of Higgs Bosons) which permeates the whole universe. Depending on the nature of the particles these were slowed down at various rates and success by the Higgs Bosons. Some particles, such as photons, are so aerodynamic, that they shoot through the Higgs field at the speed of light. The existence of the Higgs Boson was (almost) proven this week by crashing protons head-on in the 27km Large Hadron Collider spanning the Swiss-French border near Geneva.

Southern European compromise?

Now let’s imagine that the citizens of the Eurozone are particles and that tax is the Higgs Field. The workers of Northern Europe are slowed down by taxation, making them more interested in leisure but it takes such effort and money to create meaningful leisure in most of the miserable months of the year that they are not slowed down significantly. The workers of  the Mediterranean Basin, on the other hand, are slowed down totally by the tax because their leisure in outdoor activities such as the beach and  barbeques at the back of the house, is cheap. 

It follows, therefore, that for the Eurozone to survive – through, among other things, increased productivity in Southern Europe – leisure needs to be taxed. The way to achieve that is by increasing consumption taxes (VAT) and other charges on the products that complement cheap leisure. Examples would be charging for using beaches, banning outdoor cooking on weekdays, increased VAT on swimsuits (wouldn’t help much in parts of Greece) as well as deodorant (which would encourage people to stay in air-conditioned offices).

Sounds pretty horrible. Agreed. The alternative would be for the Southern European populations to behave responsibly. The prognosis is not good. It would require a quantum leap in behavioural patterns. In the meantime the Eurozone crisis is a case of an irresistible force (Germany) meeting an immovable object (Southern Europe).

Waltz or requiem?

Trust? Yes I could set you up one of those for a suitable fee

I was in Vienna last week for a European tax conference. Inevitably, the Eurozone crisis loomed enormously large but, in addition to the crop of European experts, there were speakers from China, Africa and the US to remind participants that Europe is not an island. Throughout the two days there was one word that refused to lie down. It kept popping up in just about every speech or comment. That word was “Trust”. The need to restore trust between nations in Europe. The need to restore trust between governments and their electorates. The need for trust in forming companies’ tax policies. The need for trust between tax authorities and taxpayers. The keynote speaker was a brilliant financial journalist, highly prominent in her field, with a PhD in Social Anthropology who set the tone for the entire conference.

Overall, the vision was remarkably optimistic. Faced with economic armageddon in Europe, EU nations from North and South will understand that they need to cooperate. With the stampede of government changes at the polls voters will regain confidence in the executive branch. Faced with the nagging protests via social media and Occupy the World movements companies will abandon over-aggressive tax planning and adopt ‘moral’ tax strategies. With the prospect of never-ending tax disputes and lack of certainty companies will come forward and expose themselves to real time tax audits while tax authorities will be put on a leash to stop them going for the taxpayers’ throats.

And they will all live happily ever after.

Not quite.

All men are created equal – but it doesn’t mean they are the same

In what I can only put down to western Europe’s post Holocaust obsession with, what itself can only be euphemistically referred to as, ‘political correctness’  everybody ignored the elephant in the room – and that elephant was cultural diversity. Different cultures have varying views on what constitutes the truth, fairness, morality – you name it. The only speaker I heard touch on the subject was the Chinese guest who suggested that companies’ approach to national tax authorities should depend on the nature of the executive, judiciary and tax authority in a particular country- but then until two years ago it was politically correct to be executed for tax evasion in China.

You can talk until the cows come home about building trust vertically, horizontally or three dimensionally – but, to put the matter in perspective, I would have happily challenged any of the speakers to convince the average Greek in the Street that he has a moral obligation to pay tax. For crying out loud, one of the  speakers was the geezer who wrote the Liechtenstein Tax Code which, although I have not yet set aside the 5 minutes  required to read it (rumour has it that he wrote it while traveling in an elevator), must surely be full of trust and  love to all men. Another guest was a former finance minister of Greece (I understand there have been quite a lot of them)  who, on the odd occasion he was coherent, expressed absolutely no remorse for anything that had happened and looked forward to  being bailed out by Germany, despite the fact that successive governments lied about their statistics.

Stunning! But Mozart must have turned in his grave

If, to survive, the Eurozone needs to look for a single European cultural standard, then surely Austria should lead the way. Austria, of course, is a synonym for culture. It is, simply put, a cultural paradise. What nation could be more appropriate?  A quiet economically strong country, its people are the epitome of politeness. From the minute I boarded the Austrian plane my ears were massaged with Strauss’s Blue Danube Waltz. The service was perfect. Viennese architecture is absolutely breathtaking and, as an American colleague commented to me while  we admired the Throne Room of  the Hofburg Palace , “We don’t get this in Miami”. Precisely. And the natural beauty, of course, only starts in Vienna.

Waydamminit!

Good bye! By 11am on November 11, 1918 the number of deaths had shot up from 2 to around 16,000,000.

While I sat last Tuesday in my hotel room thoroughly enjoying England’s richly undeserved win against the soccer representatives of the Thugdom of Ukraine (from which my grandparents fled a century ago), my mind wandered elsewhere.  While Ukraine is receiving much coverage for proudly co-hosting Euro 2012, didn’t Austria, in living memory, proudly co-host a slightly bigger competition- namely the Second World War? And for that matter, might the Austrians be responsible for that little contretemps attracting the title “Second World War”, since arguably if it wasn’t for them there wouldn’t have been a first one. And wasn’t it their president, the upright one-time Secretary General of the United Nations who was discovered to be a little too enthusiastic member of the Wehrmacht? And not one word of remorse from him or the country.  Even in the field of international taxation, in their own quiet way they have historically had one of the most brutally favourable holding company tax regimes in the developed world, grabbing what they could from the competition.

Greek workers taking a clandestine 5 hour lunch break

In short, Austria suffers from cultural schizophrenia. And maybe – just maybe – that is PRECISELY what Europe needs just now. And that is why the choice of Austria to stage the conference this year was so appropriate. Perhaps the other  members of the European Union – ignoring  Britain which surely won’t be there ten years  from now-  need to accept publicly the credo of German economic ethics while maintaining their own differing cultures at home.  They could take their cue from the Marrano Jews of Spain who chose conversion to Christianity over the auto-de-fe during the Spanish Inquisition but maintained their Jewish traditions at home in secret (although a cautionary word – that option did not work for the Jews in the 1940s). Alert readers will have spotted that this idea essentially represents Virtual Occupation. Given the history of the Continent, if the European project is not saved, Virtual Occupation may well be preferable to the alternative.

Next year’s conference is in Berlin.

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