Tax Break

John Fisher, international tax consultant

Archive for the category “International Tax”

Cogito ergo sum

Good old British liberal education

Good old British liberal education

Arguably, the greatest contribution to society of a liberal education is perspective. ‘Dah da dah da dah. DISCUSS’ was the way it went when I was at school, as opposed to the ‘A, B, C, D, E. Tick one’ of the modern era. Today, July 14, is only significant to the vast majority of the world’s population for being the day after July 13 and the day before July 15. In France, it is a national holiday. Back in 1989, the bicentenary of the storming of the Bastille, it was Oxford educated Margaret Thatcher who pointed out in an interview with Le Monde that: ‘ ”human rights did not start with the French Revolution,” a perspective the French were not prepared for.  Fortunately for the Iron Lady, she was guillotined by her own Government the following year, before the furious French could get their act together. Earlier today, the massively anticipated sequel to Harper Lee’s ‘To Kill a Mockingbird’ hit the bookstores. The fictional superhero of my youth ( along with Clark Kent and Bruce Wayne), Atticus Finch, now turns out – in his author’s eyes – to have been a bigot. We all missed that one.

So, with the gradual movement from education to knowledge cramming, it is perhaps no surprise that the entire tax world is out on a fanatically dogmatic witchhunt, not even stopping to breathe and get the whole thing in perspective. And it is embarrassing.

I refer, of course, to the twin tax bugbears of western society, BEPS and Automatic Exchange of Information. Europe (did somebody whisper OECD?) has decided that American (did someone say ‘foreign’)  companies pay scandalously and imorally little tax in their jurisdictions, and the world’s leading economies (did someone shout ‘the entire world’?) are singlemindedly trying to sort this out (with a constant look over their shoulders to check if the Americans are going to throw a wobbler and crush the whole thing). Meanwhile, thanks to the Americans (who feel that – far from taking too much tax away from the Europeans – their taxpayers are hiding their income there),  everybody is trying to make sure that their tax residents declare all their ill-gotten gains.

He tried to take shares in somebody else

He tried to take shares in somebody else

Dogma rules. If this can be sorted out, we are told, the world will be a fairer place. Perhaps. But there are two small issues here that should have been factored in. Firstly, it is by no means clear that companies should pay tax.  While Shylock could ask, ‘If you prick us, do we not bleed?’ joint-stock companies, like Pinocchio, do not have the same luxury. Companies are a legal fiction – the Walt Disney of the business world. As they do not have feelings (an accusation often aimed at me), they cannot suffer taxation. Taxation is paid by flesh and blood people – it is the customers who pay higher prices , the shareholders who make lower profits, and the employees who receive lower income. The company just sails on regardless – and, if it dies, does not even warrant a marked grave. There has always, therefore, been a strong movement to abolish company taxes in favour of taxes on individuals – income tax, withholding tax, value added tax. Company taxes, it is argued, distort economic performance.

Secondly, while the search for the hidden treasures abroad  of individuals is highly laudable,  white man speaks with forked tongue. The latest example of Orwellian Doublespeak is last week’s British budget where non-domicile status (institutionalized tax avoidance) was, with much fanfare, marginally tweaked. Rich foreigners will still be able to enjoy the English weather for substantial periods.

While BEPS and Automatic Exchange of Information are undoubtedly an improvement on the international tax scene that has been around until now, they are not a Utopian goal resulting from deep thought and discussion. They are  the result of an ‘I want’ philosophy of the electorates of the world’s leading nations. The elimination of company tax is controversial and may be totally impractical, but it, and other ideas including a simple move to regressive VAT as the main source of revenue, should have been part of  the debate that never came. Instead, the new world tax order – like so much else in the modern world – is being led by populism. And populism – thanks to a biased, disingenuous and largely ignorant press – is becoming increasingly dogmatic. Look what happened to the French in the 1790s.

 

 

 

Yes we can!

barak_l2014 was the year when ‘Yes, we can’ finally became ‘No, I couldn’t’. It is all over bar the shouting, and Mr Obama is reduced to bumping wedding couples off Hawaiian golf courses so that he can get on with one of the remaining functions of his office.

In fairness, it isn’t just the President who should be swallowing his words. Congress will discover in 2015 that in one area at least –  international taxation – it is being hoisted on its own petard.

The FATCA  ‘spill-the-beans-to-Uncle-Sam-or-he’ll-rip-out–your-windpipe-with-a-pair-of-pliars’ rules  that were conjured up in 2010 have spawned a revolution in international taxation. The big loser is going to be the US of A.

When the Foreign Account Tax Compliance Act was legislated, it was designed to ensure that  income rightly taxable in the US could not be sheltered overseas. Execution involved steamrollering the rest of the world into accepting horrific compliance costs, just so Uncle Sam could relax at the side of his Florida condo pool.

The world, sick of being cowed into submission by the western juggernaut, struck back. What was good for the goose was good for the gander. Countries demanded reciprocal arrangements – which the US agreed to, comfortable in the knowledge that Federal Law did not permit the gathering of such information. America was still riding high.

But if reciprocal arrangements were on the cards, why stop at bilateral arrangements with the US? There was a serious, and soon to be succesful,  move towards the Automatic Exchange of Information between just about everybody.

Golf - Putin style

Golf – Putin style

Aye, Mr United States Congress, there’s the rub. Because, once old orders disintegrate, there tends to be a domino effect. If the game was up for dirty money, why not deal with slightly-soiled money as well? National Parliaments started to make noises. Then came the Base Erosion and Profit Shifting initiative of the OECD, sold to the world by David ‘I play cricket’ Cameron and Vladimir ‘I play dirty’ Putin. All of a sudden, bringing together the international community to ensure that multi-national companies pay their fair share of tax in countries hosting their activities was not just a pipe dream. Meaningful transfer pricing based on real activity, country-by-country reporting, sharing the cake of the digital economy, updating archaic permanent establishment rules and unravelling hybrid transactions, were all within sight. What is more, it didn’t really matter if the BEPS action plan would be formally adopted or not – the international mood was to enact unilateral legislation and take it from there.

The bottom line is that, in 2015,  Uncle Sam’s FATCA is going to turn around and bite him on his bum. Why? Because the vast majority of reshifting of profits will be away from the US. It is true that much of the profits now being claimed from US multinationals by countries such as the UK and France are currently parked offshore – but, were the dysfunctional US Congress and President to stop squabbling like alley cats in a garbage can, they could pull in those earnings at the stroke of a pen. That will not be the case, however, once they disappear legitimately into the coffers of other sovereign states.

A typical 2015 day at the White House

A typical 2015 day at the White House

So, President Obama, Senator McConnell and Speaker Boehner, the message from the world beyond New York Harbor is: ‘Yes, we can’. And we are going to. Anyone for golf?

Christmas Cheer

Charles-DickensThe spirit of Christmas Present materialized in the wake of the sensational success of  ‘A Christmas Carol’. Britain which, despite French whinging, was – in 1843 – the world’s superdooperpower, had been struggling with Christmas traditions and what-not for years. Dickens’s simple short story of a tyrannical, lonely employer mirrored against his put-upon employee (the latter having a loving, but tragic, family life) caught the nation’s mood. In a tale that, to borrow  from John Lennon, is more popular than the Nativity, the eponymous Scrooge eventually sees the light, and everyone – including the sick child that Dickens threw in for extra pathos – lives happily ever after. Amen.

The gifts didn't improve much over the years

The gifts didn’t improve much over the years

For me, a non-Christian, Christmas has long been defined by an event exactly 100 years ago today. The organized football match between the Allies and the Hun is probably apocryphal (nobody can agree on the score), but what is certain is that there was an informal truce on the Western Front for a number of hours on Christmas Day 1914. The Germans seem to have started it (as every good Englishman knows, they always start everything) by singing Stille Nacht (a passable translation of Silent Night). Before long, both sides were out of the trenches exchanging gifts of tobacco, black bread and buttons – and, just maybe, starting the Hundred Years War that has seen Jerry winning four World Cups to our one. (Fortunately, the World Wars went the other way.)

The truce over, the troops climbed back into their respective trenches and spent the next four years ensuring that at least 10 million of their number would never again sit around a Christmas tree exchanging gifts in the bosom of their families. Indeed, in December 1915, the order went out that any repeat of the events of a year earlier would result in a Court Martial and the Firing Squad, not necessarily in that order.

And THAT is Christmas. Once a year, mankind is enveloped in a vague haze that colours its eyesight and addles its brain. For a few short weeks, minds turn to gift-buying and peace and goodwill to all mankind. Come January 2nd, the miserable self-seeking world is back to normal  (from what I am told by Christian friends, it can start on Christmas afternoon when out-of-town guests – like three-day-old fish – start to stink). Someone who in mid- December would volunteer to save the world would, come  New Year, not give the drippings of his nose to a person dying of thirst.

Why do people insist on comparing me to these guys?

Why do people insist on comparing me to these guys?

This is the reason why, perhaps ironically, I believe in Taxation. While there are countless wonderful individuals and organizations out there who help the less fortunate, only the enlightened, collective self-interest of a people delegating the responsibility for its poor to its elected representatives, has the chance of ridding a country of the scourge of poverty. However enticing the Christmas message of peace and goodwill to all men sounds today (December 25th), Scrooge was right when he called it ‘Humbug!’

In any event, a heartfelt Merry Christmas to everyone celebrating today.

And now for something hardly different

Speaks for itself

Speaks for itself

The surviving members of the Monty Python team must be cock-a-hoop over the cover of the (just about) current issue of The Economist. Under the headline: ‘Europe’s Economy’, a parrot lies dead receiving an infusion, while Angela Merkel comments, ‘It’s only resting’. No further explanation required. Forty-five years on, the Parrot Sketch is part of the lingua franca.

The other instantly recognizable  Python sketch is ‘The Four Yorkshiremen”, in which a group of wealthy, aging northerners  each vie for the distinction of  most deprived childhood. In fact, that piece is almost a case of imitation being the sincerest form of flattery. It started life in the 1967 series “At Last The 1948 Show”, was adapted for the radio series, ‘I’m Sorry I ‘ll Read That Again’ in 1969, and only made it to Python in a live show in 1974.  ‘Almost’ imitation, because Cleese and Chapman were co-writers of 1948, together with Marty Feldman (the  most unlikely Jewish Yorkshireman ever) and Tim Brooke-Taylor (who did ISIRTA together with Cleese).

Tax authorities take this imitation business quite seriously, even if their material is far less original than Monty Python’s.

What's in a name?

What’s in a name?

Despite the hammering of Harmful Tax Practices, first more than a decade ago by the OECD and EU, and more recently by the OECD BEPS project and an extensive transfer pricing review, there has been an upsurge in the introduction of copy-thy-neighbour special IP regimes. To fool the enemy, they carry all sorts of different names and precise terms – Patent Box, Innovation Box, and – the latest Irish smokescreen –  Knowledge Development Box.

The ostensible justification for these schemes is the incentivization of R&D expenditure by offering reduced tax rates on associated revenue. But, with the exception of the UK innovation box, which was for self-defense, what countries are clearly doing is standing on street corners raising their skirts above their knees in an effort to attract new clients. Switzerland is proposing a scheme, as it preempts the forcible closure of its House of Ill Repute by undertaking a comprehensive tax reform. Ireland, meanwhile, no longer able to tempt Apple with its harmful double-Irish position, can at least claim not to be plagiarizing – it had the first scheme in the early seventies which it discontinued in 2010.

Innovation boxes are currently, effectively, under a three-pronged attack but are still spreading. There is Action 5 of BEPS dealing with Harmful Tax Competition – and what could be more harmful tax competition than this race to the bottom? Then there is Action 8 which deals directly with intangibles and the concept of value creation.  Finally, there is the long-running saga of OECD Working Party 6 on ‘The transfer pricing aspects of intangibles’. All these projects seek to prevent the maintenance of intangibles in ‘the second draw, third office along’.  Even if the whole caboodle gets caught up in bureaucracy and self-interest, and is not adopted internationally, something is bound to stick. And that something is likely to be the need for boots on the ground in any jurisdiction claiming the right to substantial returns due to intangibles ownership.

Where countries support large workforces of savvy individuals, the on-the-ground development  of intellectual property makes sense. But if all the country is offering is a crisp suit, a law office and a plaque, the whole thing could easily unravel.

Some called this British humour too

Some called this British humour too

A couple of years ago I made a one day trip to England to see Tim Brooke-Taylor and his colleagues doing a live recording of a long-running radio show – ‘I’m Sorry I Haven’t a Clue’. Over its forty-year run, shows have often ended with the announcement of late arrivals at some ball or other. Among the late arrivals at the Aggressive Tax Planning Ball might have been: ‘From the Republic of Ireland, Mr and Mrs O’Vation- Box and their son N. O’Vation-Box.’ You get the idea. It is called British humour. Patent Boxes and Innovation Boxes are full of it.

Viva, Barcelona!

Words didn't come easy to him

Words didn’t come easy to him

‘In the beginning was the word’ might have been the take on things in the Gospel according to John, but by my calculation, the oldest profession has never had much use for words (other than when haggling over price), and the second oldest profession (mine) has always relied on numbers; in any event, some years ago we merged.

The first international tax conference I ever attended was in Florida around twenty years ago. It was one of the highlights of my (now) long career. Closeted for three days in a glorious hotel with some of the best tax brains I have ever met, it was an orgy of diagrammatic flip-charts, 1929 Luxembourg Holding Companies, Belgian Coordination Centres, and ridiculously aggressive globe-embracing tax structures. Numbers and boxes. Heaven.

Of course there was a price. Tax advisors were universally viewed as geeks with psychopathic tendencies who should only be allowed to meet clients if accompanied by a responsible, audit practicing adult.

What a difference twenty years can make.

I am writing this post at 35,000 feet, on the way home from the latest conference in a very wet Barcelona. Nowadays, not only are we allowed to consort with clients, we invite them to join us, unaccompanied, at our get-togethers.

And what events they have become . It was a gradual process. Out went the numbers and flip-charts. In came the sharp spot-lights on a background of blue-haze; and words,words, words. I don’t think I saw a single number over the whole two and a half days except the occasional heart- warming statistic. It seems we have joined polite society.

Unfortunately, he couldn't make it this year

Unfortunately, he couldn’t make it this year

Our gurus talked in sound-bytes worthy of a British news anchor, about the rise of ‘compliance’. Compliance! When did the Detroit of the international tax world become sexy? Any color as long as it’s black! Boring! Not anymore. We listened to the Tax Emperor of one of the world’s very largest companies explain that his compensation algorithm no longer includes the effective tax rate, but instead is weighted towards his level of success in meeting all the group’s international reporting requirements. To put it more succinctly – promiscuity is a thing of the past. Today is all about Safe Tax.

An issue that had a lot of traction was BEPS (Base Erosion and Profit Shifting), about which I wrote a few weeks ago. The latest OECD update had been fortuitously issued a few days previously and this was a chance for sound-byting about the 15 constituent topics. After a panel of talking heads had compromised their integrity to impress the super-intelligent moderator (who is also a genuine ITV News Anchor),  it was left, implausibly, to the Chinese participant to remind everyone that BEPS was not going anywhere without the Americans. And the Americans are not going anywhere. Period. Good night, and good luck.

There was a spellbinding lecture on the mushrooming effect of Big (stored digital) Data on our lives, delivered by a remarkably competent stand-up comedian who triples up as a successful author and university professor. He, too – in what was starting to look like a conspiracy – incredibly avoided numbers, other than those that were so big the conference participants were unable to comprehend them ( a place in their heads previously occupied by lawyers’ fees).

Overall, it was a very successful few days – another strip of asphalt in the long road to acceptance by Society.

Happy New Year to anyone celebrating this week

Happy New Year to anyone celebrating this week

When I get home, I shall put my best suit back in mothballs and hang up my silk ties. Like Cinderella after the ball, it will be back to the daily drudge. No spotlights. No blue-haze. No News At Ten anchor. But lots and lots of numbers. Yippee.

 

 

 

 

 

The Battle Of The BEPS

The storm clouds were already gathering at the G8 Summit

The storm clouds were already gathering at the G8 Summit

A hundred years after the countries of Europe drew their battle lines in France and promptly got stuck in the mud, the Paris-based OECD looks like it is facing a long period of trench warfare. Originally predicted to be half-finished by Christmas, the BEPS plan – if it is to be instituted at all – will almost certainly be wrangled over for months and years ahead.

Base Erosion and Profit Shifting was always going to be an ambitious project, but when the G8 (since deflated to the G7) and, subsequently, the G20 (G19) put their weight behind it in 2013, its prospects  started to look up. At a time when major western nations were hemorrhaging taxable profits to offshore and cheeky onshore jurisdictions, there was unanimous support for clobbering tax avoidance. Although Dave ‘Selfie’ Cameron and Vlad ‘The Impaler’  Putin led the charge (Putin displaying his famed respect for international law and order), it looked clear that the Americans, fresh from their FATCA foreign account disclosure victory, would quickly take over.

There is naive, and there is naive with knobs on.

The Americans, in the persons of Rep. Dave Camp and Senator Orrin Hatch, soon realized that the companies making the most bucks around the globe owe ultimate allegiance to Uncle Sam. Some, like Apple and Google, might have successfully sheltered much of their income offshore pending repatriation to the mainland, but that could be dealt with by Congress and the IRS without recourse to all those Europeans who were not even capable of winning or losing their World Wars on their own. BEPS, while having some strong points, was ultimately an attempt to wrench taxable profits out of the hands of the Americans.

Another hybrid white elephant

Another hybrid white elephant

Battling furiously to meet the September 2014 deadline for the first part of the 15 point project, OECD apparatchiks slogged overtime to produce heaps of words on transfer pricing and country-by-country reporting, treaty abuse, hybrids and the digital economy. While the transfer pricing recommendations were greeted with derision, the hybrid proposals were so complicated that they would require more acumen to implement than went into all the previous hybrid planning. And, as for the digital economy, the OECD more or less came out with its  hands up – apart from a recommendation about raising taxation through VAT (which many of us could have happily told Dave and Vlad back at their first meeting and saved them the money).  If none of this gets off the ground, one good thing that will have come out of  it all is that the Hybrid Mismatch document includes some great ideas for future tax avoidance. Somebody at the OECD also, rather belatedly, woke up to the fact that developing countries may have specific problems implementing BEPS; the technical guys have picked up their pens once more.

The proposals are now at various stages of public consultation – for ‘public consultation’ read ‘being rubbished’.

google taxMeanwhile, thanks to FATCA, the Automatic Exchange of Information project , which is running parallel to BEPS, continues to advance rapidly through the battlefield. It may well be that,  taken together with enhanced domestic anti-avoidance legislation by individual countries, this will bring a real solution to much of the tax avoidance and profit shifting that BEPS aims to stop –  in addition to dealing with tax evasion which is its raison d’être. As we have already seen in the wake of the British Parliamentary inquisition of Google, Amazon and Starbucks, although their practices were totally legal, the ability to ascertain and publicise their financial information led to a public backlash. Modern multinationals cannot afford the bad publicity – times they are a changin’.

Will the coming months herald the Battle of the BEPS, as the OECD  Task Force breaks through enemy lines on its way to victory? Or, will they usher in the Great Phut (one day, when the OECD tries the same gambit again,  to be known as the First World Phut)? Without the Americans joining in the war, and with professionals engaging it in hand-to-hand combat, the prospects are not high that the OECD staff will be home for any Christmas soon.

 

Go ahead punk, make my day

The good old days

The good old days

“This tape will self-destruct in five seconds.” In the 1960s, while the mission may have been impossible, information protection was very possible. Burned, swallowed or – until a bunch of  bored  students  were looking for something to do at the US Embassy in Teheran – shredded, there was no difficulty eradicating the evidence from the face of the earth.

How times have changed. I stayed late in the office last night to complete a compulsory on-line course on “Information Protection Fundamentals” concerning  the myriad risks to information confidentiality. Once upon a time you could buzz through the fifty-odd slides  (would I do such a thing?) and home in quickly on the test at the end. No more. Now you have to listen to a computer-generated Australian woman reading the entire caboodle at the speed of someone who really wants to inflict mental anguish. And just in case you were thinking of letting the lady talk away while you carry on with seriously chargeable time – should you forget to remind her regularly of your existence, she will self-delete and send you back to “Go”.

The presentation included a loveable rogue showing how easy it is to steal information. Although I am sure I must have missed something, it appeared to me that the deliverable was that you need to take the entire contents of your office with you (including the wastepaper basket) when you go out to lunch. Passwords must never be written down but should be so complex that they are impossible to remember in order that, in the event of the employee being waterboarded by representatives of a foreign government, his lips would remain sealed (however much he might like to spill the beans).

But what caught my eye was the bit about keeping the door open for strangers.

I was brought up to always check behind me as I went through a door and, if anyone was there, hold it open until the follower was able to take my place. Back in the 1960s they called this politeness. Not any more. Before letting anyone follow you without slamming the door  in his face, you are supposed to, albeit politely, make sure the visitor has a valid office pass. If not, you are instructed to escort him to the security officer who will then wrestle him to the ground and tie his arms behind his back before discovering he is the CEO of the firm’s biggest client.

No sooner had I completed the test with the unbelievable score of 90 (please don’t wake the neiighbours with your standing ovation) than I heard somebody trying to force the door of my floor. I ignored this at first on the grounds that this is what you expect to happen in an accounting office at 9.30 at night, but eventually decided to go and investigate. As I approached, I saw a rather unsavoury type  a few years younger than me (not your run-of-the-mill Big 4 client) rattle the handle one last time before passing an employee tag over the electronic sensor, thus gaining entrance.

Armed with my fresh doctorate in Information Protection Fundamentals, I politely asked him if I could help him. He looked at me nonplussed.

“Are you an employee of the firm?” I ventured firmly but respectfully (knowing full well that, even the most  Generation Y member of staff would have learnt on his first day how to use an electronic tag).

No answer.

“Could you tell me who is hosting you this evening?”

“I am with somebody out there.” At least it spoke.

What I thought I was doing

What I thought I was doing

I continued my friendly interrogation: “Can I see the name on your electronic tag please, or, I am afraid, you will have to leave the building?”

“I want to p***, you retard”.  He stared me down in absolute fury. “I am going to p*** and you can call the police if you want.”

Why is it that courses, online or otherwise, as well as Hollywood movies are always theoretical? The undesirable either comes quietly, runs off, or shoots the inquisitor in the head. The inquisitor is never left with the moral dilemma of whether to let the suspect relieve himself.  Not having much choice in the matter, I watched him thunder off in the direction of the bathroom and decided to await his return (the risk that he would make off with the faucets under his shirt did not reach the level of ‘more likely than not’). On his way back, he did his best to break another door before remembering what the electronic tag was meant for, and proceeded along the corridor towards me screaming insults directed at myself and my late mother. I genuinely believe he was about to hit me when a Y Generation employee – and owner of the tag – turned up and grabbed his arm.  It turned out, thankfully, that he was not a client (I remember an unkempt jeans-clad bloke once wandering into my office by mistake, and my treatment of him with mild but friendly sarcasm, assuming he was a workman who had lost his bearings. It turned out he was my next meeting – an extremely wealthy player in the local market. Fortunately, he took it well). This creep was involved in some project or other that we were checking – and I was relieved (sorry) to learn that there were no plans for him to darken our portals  again.

Who needs him?

Who needs him?

Although Information Protection in our technological world is absolutely crucial, I do wonder whether the practice can ever match up to  the theory. This has been particularly on my mind since the OECD reached a long-expected decision on May 6 that there is to be automatic exchange of information between members. Financial Institutions will be required to provide the tax authorities with information on foreign investors which will then be automatically transferred to their counterparts in countries of residence. Although miscreants may think they can take comfort in the authorities’ inability to deal with mounds of information, with the rate of progress of Data Analytics – sorting the wheat from the chaff – they are probably gravely miscalculating. As for the world’s tax authorities, although there will be conditions of confidentiality, the wide circulation of such information is bound to lead to horrible leaks  on the principle that “three people can keep a secret as long as two of them are dead”.

 

Whole in one

"YOU are teaching ME the Old Testament?"

“YOU are teaching ME the Old Testament?”

“I said: ‘Remember Lot’s wife. Never look back.’ I don’t know whether Henry had read the Old Testament or not, but I had, and he got the point.”

Thus spake that most Nietzschean of US Presidents, Richard Milhous Nixon, to Sir David Frost  back in 1977, mocking his former Secretary of State’s qualms about invading Cambodia. Knowing, as we now do,  Mr Nixon’s eloquent way with words, we can make an educated guess that what he actually said was: ‘Remember Lot’s ******* wife’. However, Mr President, we too got the point.

No fire and brimstone raining down on this house

No fire and brimstone raining down on this house

But for Nixon’s conceit, he might have realized that, born into an Orthodox Jewish family, Henry {Kissinger} would have learned the story of  the Pillar of Salt in the Hebrew original  long before studying   “Fun with Dick and Jane” or its German equivalent (and Dick and Jane did not have nearly as much fun as they had in Sodom and Gomorrah).  Posterity does not record whether Kissinger retorted by congratulating his boss on his command of the early chapters of Genesis while asking whether the paranoid President had ever made it as far as the story of King Saul.

Had Nixon’s line come up at the impeachment of President Andrew Johnson a century earlier, it would have been reasonable to  assume that everyone hearing it would have immediately understood its context without the need for mentioning not to look back.  A third of a century on from the  interview and Generations X and Y would now most likely miss the point entirely until saved by that artificial memory facility, Wikipedia.

An increasingly secular world has substantially lost its Biblical “lingua franca” and, even allowing for a huge dollop of atheism, as we celebrate the 450th anniversary of the birth of  the Bard an increasingly prosaic secular world has lost its Shakespearian “lingua franca” too.

Who has time to read the Bible?

Who has time to read the Bible?

Which brings me to the single question that frames Generations X and Ys’  deeper thinking: “Who cares?” or, to be more precise, “Who gives a ****?’ (and that is as precise as I am going to be). Well, boys, girls and those of you Xs and Ys who have yet to decide what you are, apart from the ability to communicate in something more elegant than two syllable grunts, such universally shared texts allow  sometimes complex thought processes to be shared in a flash.

Reading the OECD’s relatively tame  “Public Discussion Draft: BEPS Action 1 : Address the Challenges of the Digital Economy” published a few weeks ago, it occurred to me how important this lingua franca thing is and how, until now, I may have been barking up the wrong tree in advocating a complete recalibration of the international tax system.

As readers know, the OECD in conjunction with the G20 (or G19 as Russia is currently standing outside the Headmaster’s office) is pursuing an ambitious goal of straightening out everything that is crooked on the international tax scene. One of the biggest challenges is dealing  with the Digital Economy because, in the succinct words of  the milkman philosopher Tevya in Fiddler on the Roof: ‘It’s a new world, Golda’. In my heart of hearts I continue to believe that there needs to be a fundamental change in the basis of taxation including abolition of company tax. However, the Draft, which impressively analyzes the components of the digital economy, while opening the door to substantial changes on such issues as the definition of a permanent establishment, reduces the issues for treatment to the well-worn existing norms of international taxation.  That, after all, may be no bad thing.

Nobel Laureate Daniel Kahneman in his book “Thinking, fast and slow’  talks about “expert intuition” – a Fire Chief who senses exactly when to leave a burning house before it collapses or a Chess Master who can instinctively advise the next three moves in somebody else’s game. It turns out that this comes from enormous practice and experience  and not some magical eureka moment- a combination of System 1 (automatic) and  System 2 (conscious) thinking. This allows for quick, highly complex, thoughts.

When an experienced tax advisor is asked to analyze a situation of, say permanent establishment status, he or she will often intuitively know the answer immediately and then spend the next 25 hours (at premium charge-out rates) proving it right. The terminology is then used as  a lingua franca between members of the tax advisory team who can concentrate on producing a holistic answer based on the initial “findings”.  If the system were to be fundamentally changed we would, at least in the short to medium term, lose that hard-wired expertise and be forced into fully conscious thought processing taking one step at a time.  Apart from the additional hours required to deal with new situations (Yippidoo!), there would be significantly increased risk of  not catching the full picture. Insurance claims would increase (along with the number of disclaimer lines on memos and opinions).

And if you think the above is a load of nonsense, an experiment I and my colleagues were once subjected to (spoiler alert: If you like making a fool of yourself in public, do not read on) involved watching a video of a white-clad team and a black-clad team passing basketballs. We were told to count the number of passes made by the white team.  Concentrating so hard on the number of passes, we all failed to notice the pantomime gorilla walk across the middle of the screen, stop, beat its chest, and carry on.  In tax advisors’ parlance that gorilla could have been VAT, disallowable interest or a host of other tax planning side dishes that today would serve themselves up as expert intuition.

I still believe that one day the system will need to fundamentally change, but – just as  St Augustine (with whom President Nixon was doubtless better acquainted than was Kissinger) beseeched his Creator: ” Give me chastity and continence, but not yet” – I would rather wait a while (preferably, until I  retire).

nietzsche-is-deadIn the meantime, while reading of the Bible may be at an all-time low, new-release Hollywood blockbusters like “Noah”, “Son of God” and “God’s Not Dead” may get the lingua franca going again. Mind you, judging by the wholesale reworking of the Noah story, I hate to think what they would do with Sodom and Gomorrah.

Bits in pieces

It doesn't get any easier when they get older

It doesn’t get any easier when they get older

“Look mum. No hands!” It is every parent’s nightmare to be forced to watch helplessly as their 7 year-old, with the new-found independence of two wheels, goes careering fearlessly along the uneven pavement in front of the house.  Thanks to a guardian angel, the escapade normally ends with nothing more than a toppling skid or collision with an ancient lamppost that the child’s pride leads him to insist was not there yesterday – painful but, mercifully, not tragic.

Bitcoin, the virtual currency that has taken the  world by storm, is like a bike with no handlebars being ridden by a reckless kid with a pair of cheap tyres thrown in for free.

A friend of mine, a financial adviser by trade, told me the other day that one of his clients was considering investing in some Bitcoins. I expressed genuine delight as someone could now finally explain to me in non-binary language how the Mining process works. Not so fast. His face glazed over as he offered me another whisky. Had he heard of the Mt Gox collapse or the thefts from Flexcoin and Poloniex? Yes – but everybody seemed to agree that these were local  problems, not a systematic issue. “Everybody” would appear to consist of the Lower Manhattan Chapter of 7 year-old bicycle-mounted Hells Angels.

For the uninitiated, Bitcoins had the internet equivalent of an immaculate conception about 5 years ago, appearing on the scene as an orphaned concept, the creator not known until this very day. The idea was to produce an alternative currency to those currently maddening the world that would not be dogged by regulation of Central Banks and Governments. The ostensible genius was in the way – in the absence of all that regulation – the system would regulate itself.

There go another 25 Bitcoins. Time to buy a supercomputer

There go another 25 Bitcoins. Time to buy a supercomputer

In the beginning there was the Algorithm and  a digital Bible that had fallen from the Heavens telling the first punters how to play. In the maturing market participants are required to open accounts, generally through brokers (they are even given virtual wallets to keep their Bitcoins in) and are given two codes – one private and one public. When they undertake  a transaction, they only provide the public code (surprise, surprise). Privately held increasingly powerful computers then race to calculate, by trial and error, the single solution for a block of transactions that is attached to the Block Chain (which includes the entire history of Bitcoin transactions). Every 10 minutes a single computer finds the solution, it is verified by at least 50% of computers (or computer power) extant in the system and the winner is rewarded with 25 newly mined Bitcoins. This process will continue until a predetermined maximum number of bitcoins are mined (I believe around 2030).

This all sounds very clever and infallible but, let’s face it, to err is human, to really screw things up requires a computer. Lo and behold, in the recent Mt Gox, Flexcoin and Poloniex debacles Bitcoins have been disappearing into the ether. But, being the computer dinosaur that I am (I once had to plead with a New York hotel computer help line not to ask me if the computer was plugged-in) my reasoned reservations are entirely analog.

When I studied Monetary History – if my children are to be believed, around the time people were bartering pigs for firewood – I learned what defines money (not as bloody obvious as you think, clever clogs). It must be three things: a “medium of exchange”, which can reliably be swapped for goods and services; a stable store of value, enabling users to hold it for a while  more or less maintaining its purchasing power; and it should function as a unit of account against which value in an economy can be measured. Throwing all three conditions into a basket,  Bitcoin is not looking too respectable. Leaving aside the recent insane fluctuations in value which might sort themselves out eventually, realistically until such time as citizens of the world are paid in Bitcoins and pay for their daily needs in Bitcoins, their value is always going to be measured against other currencies.

Then, even if all the conditions were somehow met ( which they will not), the Bitcoin economy will need to operate according to a very narrow, and largely discredited, “Monetarist” regime. Monetarism, adopted by Thatcher at the end of the Inflationary Roaring 70s and given lip service by Reagan a few years later, claimed control of the money supply as the critical factor in the macro economy. But the money supply had various definitions that went well beyond notes and coins. Only real whackos believed it was about keeping the supply of notes and coins constant – effectively aping the gold standard. Looking at the recent successful use of Quantitive Easing – resort to the printing presses – by the world’s central banks (most recently the ECB) to stimulate the economy it is easy to realize how futile a fixed narrow money supply would be. But that is precisely what Bitcoin is about. The only way for it to work long-term, even if it were adopted as a regular currency, would be for the system to develop an override which would have to be regulated by dreaded humans – a Bitcoin Central Bank. Back to square one.

Having got all that off my chest this is one of the rare moments when I find myself praising the IRS. They issued guidance last week on how Bitcoins should be treated for tax purposes. Instead of giving them the longed-for special status of money (not defined in the Code) they decided that Bitcoins are property. Hence, increases in value will be liable to capital gains tax (or, in some circumstances, income tax on sale of inventory). This treatment also exposes transactions to possible  Sales Tax at the State level.  The IRS approach is in line with several other countries that insist on charging VAT on transactions – a noted exception being the UK.

Real men don't speculate with Bitcoins

Real men don’t speculate with Bitcoins

With complex reporting requirements and huge dollops of VAT, it means that there is – thankfully –  little hope of Bitcoins being more than speculative assets in the foreseeable future. Of course, if circumstances change as the digital economy expands tax treatment could be altered. But a cautionary tale – we are 20 years into the Information Revolution and only now are tax authorities beginning to try to find solutions to the basic problems, while as I noted last month, they are over a hundred years behind with the central tax concept of management and control. It is a “bit” too soon to throw away your dollars.

“Action!”

A supertramp is born

A supertramp is born

Eureka! A mere week shy of a century since Charlie Chaplin first stumbled onto the Silver Screen, the world’s Tax Supremos  finally discovered the wonders of  Moving Pictures. Watching the  OECD Centre for Tax Policy and Administration’s first webcast on Base Erosion and Profit Shifting  (BEPS) on January 23rd, there were times when I wished the new media stars had gone through the normal evolutionary process of testing the primordial soup with a Silent Movie.

This was gut-gripping stuff, dealing with progress on the now famous BEPS 15 point Action Plan endorsed last year by the G20 group of nations. It is an attempt to hammer the growing tendency to double non-taxation in international corporate tax planning which,until recently, starred the very silent Google, Amazon, Starbucks and Apple with various other companies in supporting roles. The CTPA was charged with an incredibly ambitious timetable to change whatever is in the hands of the OECD to change (Model Tax Conventions, Guidelines,  new Multilateral Instrument) and provide recommendations for whatever is not. If all goes to plan – and the webcast kept its audience glued to their iPads with optimism on this – the operatives of the CTPA will all be home in their beds in time for Christmas 2015. The boys in the trenches have heard that one before.

Tax people never used to look like this

Tax people never used to look like this

The broadcast had an international flavour. It was chaired by an American Carl Reiner lookalike with depressive touches of Woody Allen. His performance indicated that he was clearly aiming at an audition as AT&T’s next Speaking Clock. The four person panel sat in a row bolt upright reminiscent of a 1950’s election broadcast where the suspicious politician always looked scared he (it was almost invariably a he in those days) was going to be shot between the eyes by the strange thing pointing at him called the TV camera. The star of the show was the photogenic Director of the CTPA, Pascal Saint-Amans, sporting a Yasser Arafat five-day growth, chic suit and “I am going to seduce you with my French charm” thick-framed glasses. He was joined by the perfectly coiffed Raffaele Russo, head of the BEPS project, who was either talking to the wrong camera or thought he was lecturing to the sound-man standing a few feet to the right of the cameraman. Marlie de Ruiter, Head of Treaties Transfer Prices and Heaven knows what else,  added gender diversity to the proceedings and would have made a perfect partner for Saint-Amans in  ‘Strictly Come Dancing’.  Completing the line-up was Achim Pross, Head of the International Cooperation and Tax Administration Division, a middle-aged  natural bald who reminded us all that, at the end of the day, this was boring tax. The speakers had clearly been trained at the Katherine Hepburn school of drama; as Dorothy Parker said of her: “She ran the whole gamut of emotions from A to B”. Before recording ‘BEPS – The Sequel’, they should watch a few Egyptian Soap Operas where nothing moves EXCEPT the faces.

Nice place for BEPS & Breakfast

Nice place for BEPS & Breakfast

This was, of course, bureaucracy par excellence. We heard about task forces, programmes, global fora (no fauna), public consultations, white papers, questionnaires, discussion drafts and – could international organizations live without them – meetings in exotic places. There were acronyms (not finding HTP in the Action Plan’s glossary, I googled it to discover that the only reference was the document I was trying to decipher – go figure), diagnoses, deadlines, reporting templates and working parties. What there was not, was any talk about anything concrete actually happening (no worries, the first deadline is eons away in September this year).  As to  bringing on board any countries other than the 34 rich-world members of the OECD and stray members of the G20 – the only mention was of Latvia and Colombia which, I assume I have understood incorrectly, now represent that hard-to-put-your-finger-on-it “Rest of the World”.

A promising star in the firmament could be Australia’s Tony Abbott – this year’s chairman of the G20. Refreshingly the Aussies have no time for European sophistry  (they would probably use another word) and Abbott has already said he doesn’t want a talkfest (that was not the word I had in mind and, what is more, it doesn’t actually exist). If he can get Obama on board – and with all the Action Plans and Acronyms it is still the Americans that set rules as has been obvious with FATCA – there could be interesting developments in 2014. Otherwise, that first tax broadcast being almost exactly a hundred years on from Chaplin’s debut may prove more than a coincidence. Chaplin’s film was “Making a Living” in which he played a swindler pursued by the incompetent Keystone Cops.

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