Tax Break

John Fisher, international tax consultant

Archive for the category “International Tax”

Votes for taxpayers!

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Some suffering is not pointless

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

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

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What choice do sovereign states have anymore?

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

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

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

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

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

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

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

Tales from the Crypt…

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Cryptowhat?

In a landmark Israeli court case last week, it was decided that Bitcoins are assets, the profit on sale of which attracts capital gains tax. The case revolved largely, but not exclusively, around the question of whether such cryptocurrencies meet the description of – well – currencies, exchange differences arising from which are exempt from tax.

The judge waxed  lyrical on the technical definition of ‘currency’ in Israeli law, bringing back memories of the 1980s when Milton Friedmann’s Monetarists ruled the macro-economic world; if there is no – what you and I call – cash, there is no currency. Given the movement towards a cashless society since Friedmann’s death, some might argue that the  approach was a little primitive (although, in fairness, the judge did recognize the prospect for change). But, let’s face it, why be just primitive when you can be positively Neanderthal?

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We really have come a long way since the Stone Age

We all know that money came about as a way of avoiding the gross inefficiencies of barter. Instead of a hunter having to schlep home the two sheepskin jumpsuits he got for his wild boar and then swap one of them for a wife, some bright spark realized (possibly while taking a break from inventing the spark), that the supply chain could be streamlined. All it needed was something the supply of which couldn’t be tampered with by the caveman next door, that would maintain the relative values of the items being traded.  Somewhere down the line people left the caves, gold came gradually  to the fore, and it wasn’t until 1931 – with one world war behind it, and the human race less than a decade away from indisputedly proving that it hadn’t really got anywhere since the stone age – that the Gold Standard was ditched.

So,  all that was really needed in this case was to establish whether Bitcoins, or cryptocurrencies generally, can be described as replacements for barter. With that in mind, it is time for a fairy story that will prove that every decently educated five-year old could have judged this case, and saved the State a small fortune.

Once upon a time, there was a poor widow whose old cow stopped giving milk. She sent her son to market to sell the beast. On the way, the boy – who was always looking for the chance of a quick buck – met a man in a pinstripe suit who offered him a handful of, what his prospectus claimed were, magic beans. When the boy arrived home, proud of his financial prowess, his sensible mother summarily chucked the beans out of the window. The next morning the boy found a beanstalk where the new Maserati should have been. To cut a long story (and a long beanstalk) short, as every one of you knows, Jack ended up – through a morally questionable transaction – with a pile of gold (gold!), a goose that laid golden (made of gold!) eggs, and an annoying harp that was presumably ditched in the nearest lake.

Jack’s deal for the magic beans was purely speculative. Jack didn’t know what he was getting, and his mother’s reaction was absolutely logical. And, look how the story ended. No beans in sight. To give the tale a happy ending, the storyteller had Jack and his mum back in hard currency (gold) quicker than you could say ‘Jack and the Beanstalk’.

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How I learnt Economics

Bitcoins are magic beans (the analogy can be extended to marijuana shares by substituting magic mushrooms for magic beans). There is no way any self-respecting caveman, five year old, or fairy tale character would accept them in a barter transaction as long as their price continues to move all over the place.

There have been too many unnecessary court cases over the last couple of years in what are, to any self-respecting tax specialist with no patience for worthless sophistry, open and shut matters. (Take for example, Snow White and the 1.83 Meter Actor). On the other hand, there are lots of disputes involving genuinely controversial issues that are settled by compromise with the tax authorities when a judicial clarification would be to the advantage of society.

There must be a better way to ensure that honest taxpayers can live happily ever after.

 

 

 

 

Hand it over and nobody will get hurt

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Automatic exchange of information between governments has been suspected for years

The ink on the page of my last post about the new softer, gentler approach to tax collection was not yet dry when Israel’s main financial daily ran a banner headline concerning the upcoming automatic exchange of information between tax authorities. The wording was a rather unimaginative: ‘ A flood of requests from foreign banks on the way: Demand  reporting of Israeli residency.’ Personally, I would have gone for the more catchy: ‘We will find you, and we will kill you.’ Game on.

The Common Reporting Standard, that – based on domestic legislation –  will require most  of the world’s tax authorities to collect data on foreign resident accounts from financial institutions in their jurisdictions and ship it out to the salivating jaws of the tax authorities of the account holders’ countries of residence, is at the door (see Tax Break January 7, 2019).

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Not a word about tax evasion

What bothered me about the headline, and the accompanying two page article, was not the accuracy – in my younger days, I would periodically pull my hair out at the distorted product of an interview I had given to that particular journal on a hot topic. This piece, however, appeared researched and reasoned. My problem was that any reader of the newspaper, other than someone with a financial death wish, has already done what they had to do (compliance, voluntary disclosure, or expensive – and possibly regrettable – planning). Meanwhile, a colossal number of people who do not read the financial press, and may not be financially savvy, remain – incredibly – blissfully ignorant as their canoe careers inexorably towards the falls.

As the death knell for international tax evasion has grown louder in recent years, the Israeli tax authorities (in line with many of their international counterparts) have shown remarkable restraint in enabling errant residents with unreported income from abroad to come clean with minimum fuss (paying some tax and remaining friends). Voluntary disclosure programs have been renewed, extended (there is currently a program in force until the end of this year – albeit without the previous advantage of anonymity),  and-where relatively small amounts are involved – even made simple.

The trouble is that, in a country like Israel that does not require a tax return from most salaried employees, many people  don’t ‘think’ tax of their own volition. So, when Belgian Aunt Sophie left Yossi  the contents of a bank account in Switzerland which sensible Yossi didn’t touch – treating it as rainy day money – he also didn’t think to report the interest to the Israeli tax authorities. And, unprompted, he still doesn’t. He will presumably start thinking about it when he gets a summons to appear in court in his mail box. The tax authorities will have achieved exactly what they actively set out not to do – waste valuable resources crucifying people they are not interested in. As Jesus  is reputed to have said a mile and a half  from where I am now sitting: ‘Forgive them, for they know not what they do.’

The solution is so simple, it hurts.

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I don’t care WHAT you were doing in the bank…

In the absence of a universal tax return, every resident over the age of 18 should be required to complete and submit a simple annual questionnaire (either online or offline) including such questions as: ‘Do you, or any of your children under the age of 18, have any access to the contents of a  foreign bank account?’ The answer ‘Yes’ to such questions should result in a compulsory tax return coming through the door. Failure to complete the form should result in a compulsory tax return coming through the door together with an appropriate fine designed to concentrate the  mind of even the most financially illiterate.

And, if that doesn’t work – the tax authorities need feel no guilt in unleashing the Spanish Inquisition.

 

 

 

‘Your money or your life, please!’

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How some people view the taxman

Stopped in the street by a young person with a clipboard, and asked: ‘What do you think motivates people to pay tax?’, I would have to answer honestly: ‘Five to ten, with time off for good behaviour’. Were my inquisitor brandishing a microphone and staring into a camera, however, the same question might elicit all sorts of ego-enhancing responses such as: ‘A positive view of democracy’, ‘Trust in government’, or, teeth gleaming beneath the arc lights, ‘A belief in the redistribution of income’.

When it comes to tax, who we are, and who we want others to think we are, are entirely unrelated.

Last month, the OECD invited public comment on the update to its 2013 report, ‘What drives tax morale?’ (Google translate: ‘What motivates people to pay tax?’) The original report made some good points: Ghana (which, if one was going to single out one country out of over 190, was evidently as representative as any) sounds like it has residents queuing up to pay tax because of its policy of earmarking revenue for specific purposes (eg VAT for health care). Eminently sensible, if you can do it, although Western treasuries have traditionally had insurmountable difficulties even keeping their hands off earmarked National Insurance/Social Security contributions.

But, what aroused my suspicion about the whole enterprise were the high scoring answers (questions elicit a 5 down to 1, or 10 down to 1 sliding scale response) to some highly moral questions:

  • People in Africa who agree that the tax department always has the right to make people pay taxes – substantially no country scored less than 3.5 out of 5.
  • People in Latin America who think that tax evasion is never justified – only outliers scored less than 7.5 out of 10.
  • People in Asia who would like to see more government spending even if it requires tax increases – 3.5 out of 5.
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Not as holy as he looked

Of course, some of this partially depends on who they were asking. I am sure a lot of people in Asia would like to see increased government spending as long as others (the rich) are paying the increased tax. But the whole thing smells of acute bias, whatever the reason.

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Even kids recognized the brown envelope

My most relevant  takeaway  from the recent update was a behavioural economics ‘experiment’ in  Britain that has already had wide exposure in the press. Her Majesty’s Revenue and Customs sent letters to taxpayers who had not paid their taxes on time. There was nothing new in that – generations of Britons (me included) remember the brown window envelope that ruined their day even before they had picked it up off the floor behind the front door. The innovation was in the language. Instead of British understatement asking them to ‘please pay their debt promptly’ (or words to that effect), taxpayers were greeted by exhortations such as:

“Nine out of ten people with a debt like yours, in your area, pay their tax on time”, “The great majority of people in your local area pay their tax on time” and “Most people with a debt like yours have paid it by now”.

We are told that the percentage of people paying their bill as a result of these letters went up from 34% to…wait for it…39%! I wonder what the numbers would have been had the letter arrived by registered mail, been printed in red, and promised prosecution two weeks before the letter actually arrived if the amount was not paid IMMEDIATELY.

I rest my case.

Dead Wrong

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April fool!

It’s bad enough that, thanks to the controversy surrounding Brexit, the average Briton no longer lives with peace of mind. From April 1 they will no longer die with peace of mind.

A headline-grabbing exaggeration perhaps, but probate fees for opening a file to deal with a deceased person’s estate are due to jump from £155 to, in some cases, £6000 from next week. While the government insists it is a fee – in order to avoid a legal requirement to include it in the annual Finance Act – the Office for Budget Responsibility announced on March 15 that it would be included, alongside Inheritance Tax, as a tax for statistical purposes.

Her Majesty’s Revenue and Customs  has been administering the controversial – and widely hated – Inheritance Tax since its inception in 1986.

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The Twilight Zone?

As in other countries imposing an Estate Tax or Inheritance Tax (there are many that have either cancelled or never adopted either) UK Inheritance Tax is  controversial for the wrong reasons. It is argued that it represents a double tax on already-taxed income, while at the same time not bringing in much revenue (other than from the good dead people of Guildford, the recently crowned inheritance tax capital of Britain). The first argument cries out for a different spin, and the second (it represents around 1% of tax-take) may anyway cease to be valid in the years ahead.

As taxes go, an Inheritance Tax makes a lot more sense than an Estate Tax.

An Estate Tax imposes tax on the estate of a dead person – beneficiaries receive what is due to them out of the post-tax value of the estate. There is, unquestionably, an element of double tax (although the likes of Thomas Jefferson and liberal philosopher John Stuart Mill gave the finger to that), and the fact that estate tax planning is entirely within the bailiwick of the donor (subsequently the ‘dead person’) such tax can often be minimized.

An Inheritance Tax imposes tax on the beneficiaries. In that case, the double tax argument is weakened – the dead person passes on their estate free of tax (but without a tax deduction for the transfer as they, rather than society, decide who is to receive it) and the beneficiaries – similar to the winner of a lottery – pay taxes on their windfall. As regards the level of collections, imposing tax on the beneficiaries also puts something of a spanner in the works of aggressive tax planning during the donor’s lifetime.

There are two types of inheritance tax  – accessions and inclusion. An accessions tax system provides the beneficiary with their lifetime tax-free inheritance threshold, and hits them with the prescribed rate of inheritance tax on  the balance of what they receive from any number of donors, while an inclusion tax  charges beneficiaries according to their marginal income tax rates  (plus an inheritance surcharge). While inheritance tax is always fairer than estate tax, the inclusion tax system is the fairest of them all – as it clearly works in favour of beneficiaries of smaller amounts and/or lower income.

Furthermore, in all cases (Estate Tax and both types of Inheritance Tax), the increased exchange of information between tax authorities mean it is increasingly difficult to hide assets ‘abroad’ – which should also substantially serve to increase the revenue collection.

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‘More tea, guv?’

Britain claims to have an Inheritance Tax. The problem is that – to all intents and purposes – no, it doesn’t. It has an Estate Tax. The government website (Gov.UK sounds like an initiative of the Kray Twins) talks to the donor. Other than in specific circumstances the tax is claimed from the estate. The tax-free threshold is given to the estate – and even in the case where specific gifts are given outside the will in the 7 years prior to death, they get first benefit of the tax-free amount. And the tax rate is fixed.

So, why is it called an Inheritance Tax?  We shouldn’t complain. At least it is called a ‘tax’ as opposed to the Probate Fee, which is a tax but the government can’t afford to call it that. And what about Her Majesty’s Revenue and Customs?  Isn’t it a tax authority?

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At least they still call it a ‘tax’ return

Perhaps we shouldn’t ask too many difficult questions of a country with a tax year-end of April 5th.

Prospecting for tax

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True heroes…

If you hear the term: ‘sans frontieres’, it is odds on that – after ‘French’ – the first thing that will come into your mind is ‘Medicins Sans Frontieres’, that truly remarkable international humanitarian medical NGO founded in 1971 and based in Switzerland. Add to that ‘Avocats Sans Frontieres’, the human rights lawyers, and a plethora other ‘Without Borders’ organizations, and your forehead will probably furrow as your thoughts turn to the altruism of Churchill’s ‘Never in the history of human conflict was so much owed by so many to so few’, and Kennedy’s ‘Ask not what your country can do for you’.

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… and true fools

As proof of my innate cynicism, when for the first time last week I came across  ‘Inspecteurs des Impots Sans Frontieres’ (Google translate: Tax Inspectors Without Borders), my agile memory leapfrogged all those worthy international bodies dating back to the early seventies. ‘Jeux Sans Frontieres’ – known on my TV set as ‘It’s a Knockout’ – was a banal  pan-European TV competition tracing its history to 1965. Similar to a well-funded kids’ birthday party, participants were required to engage in physical contests of the utmost idiocy. Europe had been laid waste twice in the preceding half century by the two most utterly mind-boggling catastrophes in the annals of mankind, and this was the reward.

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Tax inspector in the mind’s eye

Thinking my memory was treating the world’s tax inspectors to the respect only they deserved, I plunged first into an Economist article – the headline of which had introduced me to TIWB – and then the  OECD literature on the topic.

I was wrong.

TIWB was founded by the OECD and UN in 2015 around the time the world’s governments started to take international taxation cooperation seriously. Tax administrations with well-developed international tax audit capabilities, as well as retired tax inspectors, are now targeted to assist less fortunate administrations with developing their own tax audit capabilities.

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It just got harder

It turns out there are dozens of these projects going on around the world (there is even a bi-annual newsletter), and it is estimated that, for every dollar spent, a hundred dollars of tax avoiding revenue is collected.

Along with complex changes in rules, much of the stress over the last half-decade has been on transparency and the exchange of information. But, if a cash-strapped tax administration does not know what to do with all the data it receives on international groups  who exploit the system to the full – albeit within legal limits – little will happen. Projects based in the Caribbean, Africa, Asia, Latin America and Eastern Europe are closing the gap. According to the IMF, over 20% of tax revenues were still being lost to the legal playing of the system as recently as 2016.

It looks like it is time to take tax inspectors seriously. When American humorist Dave Barry was chosen for audit in an  IRS sample, he wrote a syndicated article of comical unctuousity to the Service: ‘The truth is that I have the deepest respect for the IRS, and for the thousands of fine men and women and Doberman pinschers who work there….IRS are regular people just like you, except that they can destroy your life.’

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I do, honestly

I have decided to  turn over a new leaf and show respect to tax inspectors whether with or without borders. They are good people. Really good people. Really.

Nexus, shmexus

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What tax advisers think they look like

In my halcyon days as a tax adviser, a client conference meant lots of numbers thrown at a stark white screen via an overhead projector, the small audience looking pale and bored under the harsh fluorescent lighting. We, the professionals, were geeks that nobody wanted to talk to unless we were saving their cash, or saving their hides.

It transpires that  a quarter of a century is a long time in tax, and in recent years we have found ourselves in  conference centers bathed in blue light, no numbers in sight, talking (and talking) about ‘paradoxes’ and ‘paradigm shifts’, and other intelligent concepts that have as much to do with tax as that other famous three-letter word ending in ‘x’. It isn’t that much has really changed. It is just that we have learned to talk-the-talk and walk-the-walk in our designer suits. The meaning of the words – or their dubious relevance – doesn’t really matter. Conferences are all about the sound bytes and the press coverage. The public face of tax has had a makeover.  Meanwhile, real tax consulting – exactly as in the good old days – continues to be undertaken by consenting adults behind closed doors.

It is, therefore, with some trepidation and a shaking pen, that I find myself writing about – what might actually be – both a ‘paradox’ and ‘paradigm shift’  in international taxation.

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When physical nexus made sense

I refer, of course, to the OECD’s invitation for public input on the possible solutions to the tax challenges of digitization. The topic is not new (see Tax Break October 5th 2018), and is, indeed, Action 1 (of 15)  of the Base Earnings and Profit Shifting (BEPS) initiative that has been monopolizing the attention of tax practitioners for the last five years. However, it has for some time been looking like it would be sacrificed on the altar of disagreement and procrastination, as it requires a complete rethink of two of the pillars of the existing century-old system – nexus (connection to a country) and profit allocation (between countries).

On February 13th, the Inclusive Framework on BEPS (comprised of just about every self-respecting nation in the world – not to mention a few others) came up with a Public Consultation Document, the member countries having previously been divided on any way of moving forward. To be clear, it is stressed that the comments are ‘without prejudice’ (which I think means countries are not committed). Different countries have different interests – in the rawest of terms developing countries that are not hi-tech originators have a major interest in attracting tax from digital companies interacting with their populations, while the United States would ideally like to keep as much of Google and friends’ taxable income as possible for itself. The indisputable paradox here is that – in a world veering more and more towards trade wars and protectionism –  they  were able to come up with a series of alternative proposals, any one of which  – if adopted – will represent a paradigm shift in international taxation affecting everybody.

There are three proposals for tampering with profit allocation and nexus, with the aim of ensuring that taxable profit is allocated according to where value is created.

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No comment

The first proposal focuses on ‘user participation’. This is fairly specific to the ‘highly’ digitalized economy –  social networks, search engines and on-line marketplaces, where the activities and participation of these users contribute to the creation of the brand, the generation of valuable data, and the development of a critical mass of users, which helps to establish market power. For this purpose, nexus would no longer be only to where the company physically undertakes its business. but also to  where the users build part of its profits, with suitable allocation of those profits.

The second proposal is based on ‘marketing intangibles’ such as brand and trade name which are reflected in  favourable attitudes in the minds of customers and so can be seen to have been created in the market jurisdiction. There are also other marketing intangibles, such as customer data, customer relationships and customer lists  derived from activities targeted at customers and users in the market jurisdiction, supporting the treatment of such intangibles as being created in the market jurisdiction. Once again the definition of nexus would need to be expanded beyond the physical and profit allocated accordingly.

The third proposal relates to ‘substantial economic presence’ via digital technology and other automated means. Such presence could be evidenced by:  the existence of a user base and the associated data input;  the volume of digital content derived from the jurisdiction;  billing and collection in local currency or with a local form of payment;  the maintenance of a website in a local language;  responsibility for the final delivery of goods to customers or the provision by the enterprise of other support services such as after-sales service or repairs and maintenance; or  sustained marketing and sales
promotion activities, either online or otherwise, to attract customers. Same again, in terms of revolutionary forces in international tax.

As already mentioned, each of the proposed methods requires an overhauling of ‘nexus’, until now based on a level of  physical presence in a jurisdiction, and ‘profit allocation’ which – even in the BEPS world – suffers from the vagaries of the Old World Order.

Pending public comment – the deadline for which has been extended to March 6 – the bets are on  ‘Marketing Intangibles’ over ‘User Participation’, the former catching a wider cross-section of the digital industry in its net. ‘Substantial Economic Presence’ was a late arrival at the ball, and  – if the digital tax revolution is consummated – will likely be confined to the role of chaperone.

Will anything happen? There is no question that the BEPS project has achieved a momentum that could not have been predicted five years ago. The Americans are said to favour ‘marketing intangibles’ – although when they calm down from the sound bytes, soft blue light and dark suits, they might start to run the boring numbers and discover it (and any other change) is not in their best interests.

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‘I am just the greatest ever paradox and paradigm shift!’

So, it looks like ultimate success in achieving the paradigm shift rests on the continued goodwill of the United States, which in the current political climate would be a paradox par excellence. But, we are living in interesting times.

Tales from the Crypto

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There were always a few kids in the class who refused to look at the camera

Kurt Vonnegut famously said: ‘True terror is to wake up one morning and discover that your high school class is running the country’. The G20 summit in Buenos Aires earlier this month spawned a myriad online articles about the international taxation of cryptocurrencies (Bitcoin etc). Intrigued by the efforts of my ‘classmates’ (most of them belong to my generation) to get their heads around a difficult subject, I delved in only to find an even truer terror: ‘To wake up one morning and discover that your children’s high school class is running the online economic press’.

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You could forgive the journalist for missing the nuance of the paragraph break

My suspicions were aroused when I noted that each and every article relied on the same statement of a Japanese news agency ‘drawn’ from the final declaration of the summit. To anyone with a modicum of tax knowledge,  it was clear that the Japanese rumour-monger had got their taxes in a twist. With immense determination unknown to the younger generation, I spared no effort in googling: ‘G20 Buenos Aires final declaration’, the text of which, lo and behold, appeared before my very eyes. A further 5 minutes spent actually reading the entire thing (f-i-v-e whole minutes!) produced the answer. A bland paragraph  including reference to the need to regulate crypto-assets against money laundering and terrorism, followed by another bland paragraph about BEPS that even my classmates could understand. Somebody clearly forgot to tell the Japanese reporter that there is a reason for paragraph splits in the English language, and somebody forgot to tell the on-line reporters – who it appears don’t know what it is to get off their backsides for a story – that they should not blindly rely on every piece of fake news they read online. Bottom line – the G20 summit was silent on the taxation of cryptocurrencies.

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At least the Germans have always understood what money is

In the meantime, cryptocurrencies have been in free fall, and the world’s tax authorities may be about to regret their approach. Although cryptocurrencies have been around for a while, tax authorities were slow to sink their teeth into them. By now, possibly encouraged by price increases in 2016 and 2017, most jurisdictions have come to the conclusion that they are legally assets rather than currencies. As such, the exemptions that often exist  for individuals on exchange rate differences do not apply. In general, capital gains tax will be charged on realized gains (most authorities have at least managed to convince themselves that VAT should generally be avoided).But there is still confusion – as late as October 2018 an IRS Advisory Committee asked for certain clarifications from the IRS, while possible British taxation runs right across the spectrum depending on circumstances. Germany has a slightly different approach, having recognized them as money. At the same time, Israel took a literal view of the definition of currencies in its tax ordinance (cryptocurrencies do not qualify), and is there in the conservative pack.

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And what’s wrong with gambling?

The catch for tax authorities is that, by insisting gains are taxable, they have to recognize losses as allowable – and the losses in 2018 have been horrendous. If that G20 paragraph on regulation is properly acted upon, the days of wild fluctuations may be numbered in 2019 – and the pain of what was a bad gamble by individuals on something totally speculative, will be irrevocably shared by national treasuries. Maybe it is time to pass the baton to my grandchildren’s generation.

FANGs ain’t what they used to be

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Repairs courtesy of the Information Superhighway

Facebook, Amazon, Netflix and Google, the tech giants collectively dubbed the FANGs, are hardly going to be digitally quaking in their virtual boots over British Finance Minister Phillip Hammond’s Budget announcement last week that he plans imposing a 2% Digital Services Tax on their UK related turnover. Hammond himself admitted it would only be expected to bring in around £400 million a year, the amount he coincidentally just allocated to filling pot-holes on Britain’s roads.

The UK is not alone in taking the ladle to the primordial soup of  the evolving digital economy – Australia, France, Israel, Hungary, India, Italy (and the UK itself with its Diverted Profits Tax) are already at the feast, due to be joined by the EU when it is finally sick of wasting its time trying to eat the UK for Brexit.

Hammond’s hammering of the Goliaths earned kudos across the entire spectrum of British society (even the Tory-hating Guardian gave grudging praise) – but nobody seemed to pick up on the gaping irony of the whole thing – the use of a neolithic method to  tackle a state-of-the-art problem.

Egged on by the 2013 G8 Summit in Northern Ireland (to the non-Catholic citizens of which, I unreservedly apologize for using ‘British’ interchangeably with ‘UK’), the OECD and  the rest of the world (apart from a possible few smelly islands once – and probably still – frequented by pirates and other undesirables) have been engaged in tackling the unfairness of the international tax system. I, for one, started out sceptical that anything could be achieved. Country-by-country reporting, the MLI modifying tax treaties, and changes in the Permanent Establishment definition are just some of the impressive advances that have been made in the last six years in the BEPS (Base Erosion and Profit Shifting) project, not to mention (sorry) the automatic exchange of information.

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California is still part of the United States

But, there are two major gaps – the United States’ lack of enthusiasm when it cottoned on that it was a large part of the problem the others were trying to solve, and the reform  of the taxation of the Digital Economy – which happened to be the first of the 15 Actions listed by the OECD.

The international tax system is founded on two principles established a century ago – ‘nexus’ and ‘profit allocation’. The first is supposed to determine where business is done, and the second, how to divide the spoils between the places of business. Fitting the digital economy into this framework is not easy. In trying to establish where value is created, three challenges have been identified: nexus, data and characterization. The first suffers from what is pompously termed ‘ scale without mass’ – you don’t need much physical presence in a country to do business these days; the second raises the question of the interactivity of data exchange – if a social platform is using data gathered from members, where  the income arising from its exploitation belongs; and the third recognizes that the world is changing constantly and the classification of income needs constant updating.

In trying – so far unsuccessfully – to reach a consensus, the participating countries have broadly divided into three groups: those that believe the problem is confined to specific business models involving user participation in data (eg Facebook’s), that need to be dealt with individually; those that believe there is no problem (if you think that is strange – consider how long it took countries to realize there was going to be a Second World War); and those that think everything is completely screwed up, and we need a revolution (hopefully only in international taxation, which can be achieved using pens rather than swords). The OECD has kicked the can down the road (a game my generation played before digitalization condemned children to little screens) with the hope of reaching an agreement by 2020. Given the ‘slight’ differences between the participants, it doesn’t sound like we should be holding our breath – but I have had egg on my face before.

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Which wireless age does the new UK tax belong to?

So, in the meantime, nations like the UK have been driven to adopting recessive taxes that would have been more familiar to the 18th century than the 21st. Its approach to the digital economy is to throw income tax out of the window (or should that be Windows?) in favour of a tax on turnover, that looks far more like the excise duty stuck on barrels of rum that smugglers didn’t manage to secrete in coves along the southern coast of England. (In fairness, it is only to be applied to companies with worldwide turnover of over half a billion pounds, and there will be exemptions for loss making companies and those with low margins).

As an English playwright wrote four centuries ago: ‘O for a muse of fire, that would ascend the brightest heaven of invention’. And I doubt he paid any taxes at all.

Who wants to live forever?

Obamacare

Not quite the tax doctor I had in mind

There was a time, not long ago, when the ideal higher education of a tax specialist was a combination of law and accounting. With the gradual death by asphyxiation of income tax planning, the ambitious young prospective practitioner might  add a third arrow to his bow – doctor of medicine.

Many would argue that, despite frustrating bureaucracy,  the gathering pace of intergovernmental cooperation in the war on tax evasion and money laundering is one of the great advances of twenty-first century society. However, the process has also brought to the surface long dormant legalities that most governments would have been happy to leave as long dormant.

Take American Estate Tax. A foreigner who dies  holding (not literally) more than $60,000 worth of  US securities, invites a bill to his estate in respect of US Estate Tax. That rule has been in place since, I believe, 1913, but has only been inadvertently enforced since FATCA rules forced international banks, on pain of lynching, to handle all withholding tax obligations on behalf of the IRS. The upshot is that savvy investors (especially those past the waterfall three-score-and-ten years) are deserting US securities, or finding obscure ways to invest indirectly.

But the problem does not stop there. In an increasingly negotiable world, where the successful can remain in daily touch with their homebound families and visit regularly, estate and inheritance taxes are often the death knell for staying put. And if that is not enough, some countries impose an insidious wealth tax.

If you wanted an example of a country that has, for years, seemed to encourage their citizens to get on their onion-laden bikes and seek comfort elsewhere, you need look no further than France.

A combination of estate tax and wealth tax (helped along by an aborted 75% top income tax rate) sent packing the likes of actor Gerard Depardieu (Belgium, and thence to Russia with love), and singer Florent Pagny (Portugal, who?). The typically French defense against the mounting exodus (some reports suggest some 10,000  since the turn of the century) was typified by the Defense Minister stating that those who love their country stay in France. Sacre bleu. To an Englishman like me, pro patria mori has never stood out as a French sentiment.

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France’s sixth biggest city

Well, it looks like Fortress France, at least, is finally taking baby steps forward under its exceptionally young new president’s tutelage.

A few weeks ago the prime minister proposed a severe curtailing of the wealth tax – restricting it to real estate. But, there is some doubt as to whether that will be enough to encourage wealthy French to return home – especially given that estate tax still remains.

Ultimately, unless the current passion for Balkanization (Spain, UK, Iraq) takes hold – creating a dampening of global mobility – there can be no room for estate taxes or wealth taxes in the future world order. Despite their political attraction as a component in the fair distribution of everything (optical rather than actual), they create a drain on national coffers.

In the meantime, expert tax planners will try to keep their clients alive long enough to move them out of undesirable post-mortem jurisdictions. Is there a tax doctor in the house?

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