Tax Break

John Fisher, international tax consultant

Archive for the category “International”

…for the people?

And a system of government…

‘Plutocracy’ is viewed generally as a dirty word. The idea (if not the practice) of government by the wealthy is anathema to those who treasure democracy.

At first whiff the OECD Secretariat’s proposal for a unified worldwide approach to the taxation of the digital economy, issued for consultation earlier this month, failed the plutocratic smell test. The second whiff was, perhaps, less pungent.

The OECD-led BEPS initiative has, since 2015, produced some impressive solutions to many of the problems of the international tax system – most would agree far beyond initial expectations. Predictably, however, the biggest sticking point has been the taxation of the digital economy – Action 1 on the 15 point list. And it has not been for want of trying. The OECD and G20 gradually coaxed into the BEPS decision process no less than 134 countries, in what came to be known as the Inclusive Framework, each jurisdiction entitled to an equal vote.  The Inclusive Framework has been busy during 2018 and 2019 issuing an interim report, a policy note, a public consultation document and a programme of work. The aim is to have everything in place (the remaining BEPS issues are also dealt with, but separately compartmentalized) by the end of 2020.

Another example of one nation one vote

The work of the 134 member countries sounds very impressive; there is only one fundamental problem – they are split into three factions with significantly differing views as to what needs to be done (see Taxbreak November 5, 2018). In good democratic fashion, they were instructed to achieve consensus before the ball falls on  December 31, 2020.

O ye of little faith!

The OECD Secretariat – the executive branch of that venerable club of 36 rich nations – saw chaos on the way, and has now ‘gently’ suggested its own solution, taking into account the three differing views. Although the 134 can ignore the ‘suggestion’ (or should that be the 98?), the clout of the wealthy has surely been enhanced. So, at first whiff, plutocrats rule, OK?

The proposal is, as might be expected, eminently sensible. The definition of ‘Nexus’, around since the 1920s, would – in certain circumstances – be modified to include in the tax net of a country situations where no physical presence (permanent establishment) exists. There would also be a new profit allocation rule that diverges from the traditional arms-length transfer pricing. Profits would be split into Amounts A, B and C. Amounts B and C would be fairly traditional in approach – a fixed return for marketing and distribution activities (B) with the option for a jurisdiction to claim a greater return for enhanced activities if warranted (C). Amount A is the magic ingredient, allocating a portion of the deemed residual profit of a multinational group – the non-routine profits – to the market jurisdictions after stripping out that element attributable to other factors such as trade intangibles, capital and risk. The concept is only to apply the rules to large multinationals using a suitable key – probably revenue, and to try and keep the allocation of residual profit as simple as possible.

Taking a second whiff, It is just possible that the OECD Secretariat’s motive in issuing the proposal is entirely anti-Plutocratic. The jurisdiction with the most to lose from the digital tax reform is the US which has nurtured the likes of Facebook, Apple, Amazon, Netflix and Google (the FAANGS). Realization of that fact has been reflected in that great nation’s approach to countries going it alone (eg France with its Digital Tax). The support of the No 1 international tax body is likely to give smaller nations (not to mention the not-so-smaller ones) the courage to resist pressure and ensure there is ultimately compromise rather than steamrolling. The alternative would be no agreement, and further spreading of the unilateral  taxes that have been popping up recently, undermining the underbelly of the entire system.

2020 should be an interesting year.



The British University of Glue

The English language often lags scientific progress. We still ‘turn on the radio’, even if none of us have seen a dial in years. When my kids were growing up, I always reminded them to ‘pull the chain’ even though toilet flush mechanisms had long been more user-friendly. And today, our computers offer us the opportunity to ‘cut and paste’ when there isn’t a pair of scissors or tube of glue in sight.

Early in my career, cutting and pasting was the standard way a kidnapper combined letters taken from a newspaper into a ransom demand, and a tax adviser pulled the disjointed components of a document together into a work of art that could demand a ransom. As we went (the ‘we’ being tax advisers rather than kidnappers), we deleted and replaced inconsistencies of language with red biro, and sent the resultant scrolls down to the soon-to-be-cursing typists.

Well, thanks to Word, those days are long numbered – but something close is going to hit the tax world like a tsunami next year (in fact it has already hit – but in very limited circumstances).

The Multilateral Instrument (MLI) – that won wide praise for the fact that it happened at all – is going  to make a lot of people’s lives (including mine) a misery, and no amount of Microsoft wizardry is going to lift  spirits; the Gettysburg Address was a magnificent eulogy – but it didn’t help the poor fellows buried there.


Lost. Full-stop (Google translate: Period)

For the uninitiated, the MLI is a 49 page document of semi-comprehensible English and French that modifies bilateral tax treaties without the need for excruciating bilateral negotiations. Over a hundred countries signed up to the basic wording (the latest entries into force, in the last fortnight, are Malta and Singapore), with multiple choice opportunities for certain clauses, the right to exclude other clauses or sub-clauses that are satisfactorily covered in a specific bilateral treaty, and the right to ignore yet other clauses. There is also a right not to include another country (Israel has, for example, so far excluded the UK, and only the UK). The document deals – as part of the BEPS project – with hybrid situations, treaty abuse, avoidance of permanent establishment status, dispute resolution and arbitration. If you want a feel of how complicated it is – the section entitled ‘Simplified Limitation of Benefits’ runs to four and a half pages.

But that is not the difficult bit. If, for example, an Israeli adviser is going to consider a transaction with one of Israel’s 54 treaty partners that are not the UK, after establishing whether and when  that partner has signed up to the MLI, it is necessary to shoe-horn the relevant sections into the bilateral treaty, update specific sub-clauses, and then try and make sense of the different language styles and terminology without the benefit of a red pen – each change depending on the options the other side has chosen along the way. Cutting and pasting gone mad.

311fe468b42dace6de2e60adefc53918The OECD is making efforts to make it all easier with an MLI Matching Database (Beta) which,  at least, should obviate the need to view both country’s details with a split screen. Mind you, the OECD’s I-know-nothing disclaimer means it will also all need to be checked manually anyway. And, in any event, the cutting and pasting as well as different language are still there.


Poor chap

The only long-term answer will be for some enterprising professional (probably a legal and tax publisher) in each country to produce updated treaties that read in one go from beginning to end.

I suppose we should be grateful that, with the United States not on board and the UK leaving Europe, they didn’t just do the whole damn thing in French.

Doing it the people’s way

BESTPIX  U.S. President Barack Obama Visits Ireland

‘You’re not drunk, if you can lie on the floor without holding on.’ Dean Martin’s witticism has haunted me over the last couple of years as I have watched the impending self-destruction of the country of my birth (Brexit, the inevitability of a future Corbyn government), the temporary set-back to the United States (The Donald, the quack Republican leadership), and the reckless election of a National Assembly of Jeanny-come-latelys in France to rubber-stamp a completely untried new president. The world is becoming totally sozzled (heaven knows what is going to happen in the German and Italian elections) – and the tipple is the obsessive thirst of the mob for raw ‘knowledge’ that is used and abused to satisfy a primeval urge to thump those who thought they were in power.

It is no surprise that the parallel tax world is not immune to this troubling phenomenon.

Back in the good old days (four years ago, to be precise), when the British had a stable government and the Americans had a president who could string two words together without having to resort to ‘great’, the G20 of (then) sane countries instructed the sane OECD to come up with a sane framework for combatting tax avoidance and evasion, while individual members came up with a few ideas of their own. This call to action came in the wake of disclosures of perceived unsavory international profit shifting by certain multi-nationals. BEPS Action 13, dealing with Transfer Pricing, and the Automatic Exchange of Information had one thing in common – information was to be exchanged discretely between the tax arms of governments who would give it their expert attention.

Even then, there was a small breach in the wall of discrete sanity– Cameron decided on a Beneficial Ownership Register OPEN TO THE PUBLIC. It has been downhill ever since.

The EU Parliament – about which Kipling might have said: ‘Power without responsibility: the prerogative of the harlot throughout the ages’ – this month legislated for PUBLIC AVAILABILITY of multinationals’ country-by-country transfer pricing reporting, as well as recently delivering on Cameron’s dream of an open Beneficial Ownership Register.

If you are not a tax specialist, this may all seem eminently sensible. Make public as much information as possible, and then use the public sphere to bash the avoiders and evaders to ensure that everyone pays their fair share of tax. You are in good company – Brexit, Trump, Corbyn and Republique-En-Marche seem eminently sensible to large swathes of the populations of three of the most advanced nations on Planet Earth. But, my hunch is that most of the discerning people reading this don’t think much of the large swathes.

There is a fundamental problem here. Feeding the mob with incomplete information, or information they are not programmed to fully analyze, will create distortions that are bound to affect the efficiency of the markets, and lead to loss of privacy in totally legitimate situations. In short, public, populist, semi-informed opinion will almost certainly get it wrong. Is tax planning automatically wrong, even when it (legally) irons out patent errors in half-baked legislation? Do a Scandanavian’s potential in-laws need to know how much money he has when planning a wedding? Is hiding ownership from public view undesirable in countries where ‘kidnapper’ is a school leaver’s career opportunity? Far better to leave it to the regulatory authorities (tax or banking) of the world’s nations to share and compute the information, and do the work of their masters, the representative governments. It is in the interest of each state to ensure they receive their fair share of revenues, while clamping down on money-laundering. Can Mob Rule beat that?


Alexander Pope said: ‘A little knowledge is a dangerous thing’, Dean Martin’s Ratpack colleague sang: ‘I planned each charted course; Each careful step along the byway.’ The world could do worse than heed the words of both gentlemen.

Taking axes to taxes


How Hungary chose its tax rate

En route to a tax conference in Malta earlier this month, circumstances led me to muse about the renewed race to the bottom of international corporate tax rates. Donald Trump had not yet surprised the world with his election win, so his promises of madly reduced US corporate tax rates were the stuff of fantasy. But lowly Hungary had just come up with the first single digit rate in the EU, leapfrogging on its way down the traditional cut price nations of Ireland and Cyprus. And since Britain’s decision to ditch the EU, its surrogate Prime Minister Theresa May and her Cabinet have been titillating the markets with talk of even lower rates, though this week’s Autumn Statement reiterated the, once promiscuous but now modest, 17% target for 2020.

All sounds wonderful? Well, here was the first lesson in Tax Policy 101 at 35,000 feet. A certain Italian international airline, which shall remain nameless, was offering the cheapest Business Class travel to my destination. This was not the first time I had flown with them, but triumph-of-hope-over-experience is my middle name.

As Milton Friedman famously said: ‘There is no such thing as a free lunch’,


It took their minds off crashing

but in the case of this airline, for the first hour and a half in the air, there was no such thing as a free glass of water. The single attendant assigned to Business Class clearly felt the need, inspired by his socialist Prime Minister Matteo Renzi, to redistribute his time to the proletariat at the back, and offer free access to the Business Class toilet because – as he pointed out – he had 150 people on the flight needing facilities; Airbus (and the Italian airline) obviously hadn’t taken that fact into account when configuring the seat lay-out. The meal would not have disappointed a five year old kid with a five dollar budget at McDonalds.

But it wasn’t all bad. The plane did manage to stay in the air for the entire three and a half hour flight – no small feat when considering Italian aviation history, especially in the early 1940s.

At the end of the day, it is simple economics that if you cut the budget something has to give. In the case of the Italian airline, it was service that flew out of the window. In the case of countries recklessly hacking corporate tax rates without stopping to think, they are condemning their populations to austerity today, or austerity tomorrow.

Of course, what each government is trying to do is bring in more foreign investment, expand employment and, thus, the tax base. However, while there is considerable evidence that free trade, by forcing nations to concentrate on their areas of comparative advantage, potentially leads to an increase in the size of the overall pie, tax competition is, if anything, distortive to international trade leading to suboptimal results, at the same time delivering reduced public investment that may have been needed to expand the economy.


Where is he when we need him?

After years of careful planning following the 2008 financial crisis, we are now entering a period of knee-jerk decisions in international economics alongside knee-jerk decisions in international affairs.

At least it will not be boring.



Don’t Mention The War

It is comforting to know that the western world is in safe hands....

It is comforting to know that the western world is in safe hands….

1/1/14. Typing the date, I am paralysed with fear as I imagine myself, pencil in fingerless-gloved hand, writing home from a rat-infested trench in the fields of Northern France (rats are one thing – but France?). Even the quality press has added to my waking nightmare. Both the New York Times and The Economist got in early last month, running articles explaining the clear similarities between 2014 and 1914 and cautioning against complacency that might lead to history repeating itself. This is potty nonsense –  First World War Redux would never be as frightening as the original because, apart from anything else, it would be in colour.



But even those Yuletide broadsheet offerings were positively sane when compared to the leader The Economist ran for – what I think was – the 90th anniversary of the Great War in – what must have been – July 2004. Heading for our summer haunts,  we readers were requested to look around the crowded beaches and spare a thought for all those never born due to the 1914-18 carnage who, otherwise, would presumably have been sunning themselves on the sand next to us. There are lots of reasons that people are not born, or should not have been born,  but I wonder if those poor Anzac soldiers landing on the beach at Gallipoli in 1915 realized they were sacrificing themselves so that future generations of sun-worshippers could slop on sun-screen and frolic around on that self-same beach in their Speedos and Bikinis.

I prefer to try to look ahead to 2014 a little more hopefully. Today there are massive threats, very different to those of a hundred years ago, but since the end of the Blockbuster sequel to World War I ( imaginatively named World War II ) there have been major strides forward in international cooperation leading to peace and brotherhood among men.  There was a small, but not insignificant, step forward in the dying weeks of 2013 in the Doha Round of Trade talks held in Bali, Indonesia.

End of the Kennedy Round

End of the Kennedy Round

The General Agreement on Tariffs and Trade (GATT) was established in 1947 to deal with issues of trade and, specifically, break down the barriers caused by tariffs, quotas and import bans. Each “Round” of talks, often with exotic names like The Kennedy Round and The Uruguay Round, has specific goals which, when achieved, mark the end of the Round. In the early days, when a relatively small number of  countries could dictate to the world, Rounds lasted a matter of months.

Well, the Doha Round has been going since November 2001 and involves 159 countries (the GATT morphed into the WTO during the previous Uruguay Round). Charged with a long list of goals including tariff reductions, non-tariff measures, agriculture, labor standards, environment, competition, investment, transparency and patents, as at the beginning of December 2013 it had achieved…. precisely nothing. Then came the breakthrough. Under the expert guidance of the new Brazilian WTO Director-General, the 159 countries compromised their way to an agreement on trade facilitation which essentially meant cutting red tape and, hence, trade costs – a move that some estimate could raise global output by $400 billion annually. It remains to be seen what effect this will have on the number of Customs Officials in the Green Lane at airports around the Globe, so don’t hold your breath.

Moving forward, the Doha Round  is expected to concentrate on the less controversial issues (I am not quite sure what it has been doing for the last 12 years) and support Plurilateral treaties (involving blocks of countries ) such as the proposed Free Trade Agreement between the US and EU.

Of the 9 Rounds so far, the most efficient, measured by length of time over number of participating countries, was the Torquay Round in 1951, lasting 8 months and involving 38 countries. I have a sneaking feeling I know why.

In case you are not aware, Torquay is an English seaside resort. I last visited Torquay in 1965 and until thinking about this Post had no interest in ever going back. When John Cleese and the Monty Python  team filmed on location in  Torquay in 1971 they stayed at the Gleneagles Hotel, which had been established by Donald and Beatrice Sinclair in 1964. It is quite possible that some of the delegations to the 1951 opening conference stayed at the Sinclair’s other hotel, Greenacres, opened immediately after the War. In TV  interviews John Cleese and Eric Idle later told of Sinclair’s eccentricities: not liking a comment by one of the team, Sinclair threw his suitcase out of an upstairs window; in reply to a guest who asked when the next bus was due, he chucked a bus map at him. Cleese said he was the rudest person he had ever met. But, thanks to that chance encounter, arguably the greatest sitcom in the history of television was born – Torquay’s own Fawlty Towers, with Basil Fawlty playing Donald Sinclair (Cleese told interviewer Sir Michael Parkinson that the only adjustment he needed to make to Sinclair for the part was his height).

Was it something he said?

Was it something he said?

Sitting here now, I can picture a bunch of post-war Continental Europeans partaking of their meal  in the dining room of Greenacres while Donald Sinclair  goose-steps around declaring: “Don’t mention the War”. It would be enough to get everybody to agree about everything just as long as they could check-out and get back behind the Maginot Line as soon as possible. A Happy and Peaceful New Year to us all.

Starbucks gets roasted

This is what the women remember

It is a tribute to the emotional power of poetry that, when I think of “Four Weddings and a Funeral”, I remember the single funeral rather than the multiple weddings. “He was my North, my South, my East and West” – Matthew’s rendition of  WH Auden’s Funeral Blues as he eulogized Gareth,  lent  pathos to one of the most memorable scenes of British cinema.

Dame Judi Dench, doyenne of the British stage, was somewhat less convincing quoting Tennyson towards the end of her inquisition at the hands of a Parliamentary Committee in the latest James Bond movie: “That which we are, we are”. But then, in fairness, Bond movies are never really remembered for their dialogue (this one even has the barmaid, at the start of a shot, shaking the vodka martini so Bond doesn’t  have to state the obvious). With names like M, Q and 007, far from poetic, the whole experience is not even prosaic  but, rather, algebraic.

On November 12th one of those Parliamentary Committees was in action again (this time for real) and its three hour session did not fall short of Skyfall for entertainment value (and, make no mistake, I loved Skyfall).

The Public Accounts Committee invited representatives of Starbucks, Amazon and Google to assist them in their understanding of the tax paid by multinationals in Britain – or, to be more precise, the lack of it.

“Don’t worry. I never used to pay any tax and the British forgave me”

Amazon and Google were, sensibly, represented by senior Brits who could, at least, bridge the culture gap. Starbucks, evidently thinking that an invitation to appear before the legislature meant tea and cucumber sandwiches with the Queen, sent their global CFO. Poor guy.

The meeting, expertly chaired by Lady Margaret Hodge, an MP  in her late sixties who (WARNING: SPOILER ALERT) would have been a far better replacement for M than Lord Voldemort, started with the usual British niceties – smilingly apologising for the poor layout of the room and thanking the three gentlemen for agreeing to come. As I watched the parliamentary broadcast and the three stooges sitting side by side, all I could think of was the upward crawl at the start of a roller-coaster ride with one kid in the cart who has never done this before. You want to warn him of what is coming next but you are so scared yourself that you can’t.

In age-old British tradition, Lady Hodge “suggested” that they start with specific questions to each company and then move to general issues; a bit like “suggesting” to the condemned man that they start the hanging.  And – surprise, surprise – she started with the American. Needless to say, it was all downhill and hairpin bends from there.

Hapless Mr Bean was not going to have a chance justifying losses in 14 out of the last 15 years when, a year after they made their only profit (2006) of £6 million on a £4 billion turnover, the UK CEO was promoted to a senior role in the US HQ due to his great performance. “We are not accusing you of being illegal, we are accusing you of being immoral.”  ” You are either running the business very badly or there is some sort of fiddle going on”.  Apart from trying to invoke the lunacy of accounting differences between the US and Britain, about the best the CFO could come up with was “profitability challenges” which is a beautiful term right up there with “transparent wall technician” as a euphemism for  window cleaner.

Google and Amazon, protected to varying degrees by the – impossible to fathom – internet aspects of their business and the fact that they were British and therefore knew how to handle sarcasm, fared somewhat better. However, when the Google CEO asked Lady Hodge to clarify that a series of quotes of senior politicians expressing disgust at the lack of tax paid were not aimed specifically at those around the table, she replied that, no, they were indeed aimed directly at them.

Meanwhile, a widespread populist movement to boycott Starbucks has got underway with some branches requiring police protection. An article in the Guardian, a centre-left quality newspaper, by the improbably named Jemima Kiss put it all down to a “practice known as Transfer Pricing” which sounds like some shady underworld trick. Are Transfer Pricing practitioners now to be sought out and lynched from the nearest palm tree?

The whole thing is a load of populist codswallop. Trying to pin legal and transparent transfer pricing practices (and in that, Ms Kiss was spot-on with  the root of the problem) on the question of morality defies belief. It is not that morality has no place in the tax world – it can be strongly argued that the technically legitimate planning of individuals and companies to avoid tax in their countries of residence, where they and their fellow residents and citizens benefit from public expenditure, has elements of  morality and conscience. But when it comes to international taxation, it simply has to be down to the legislatures of individual countries and international organizations like the OECD and UN to establish tax rules that ensure fairness as defined by them.

How is the Tax Director of a multinational supposed to decide his or her transfer pricing policy on the basis of morality? After completing an analysis of assets, functions and risks, even if he would send each Transfer Pricing Study to the local Priest, Rabbi, Imam or Witch Doctor for a blessing – who says that the moral authorities of the other countries affected would not take a different view. And what about wonky-minded States who could play their Joker and roll out Nietzsche’s Übermensch to justify steamrolling the rest?

In 2010 the OECD announced the commencement of a project on the transfer pricing aspects of intangibles. A scoping paper was published on the OECD website for public comment. In the interim, three public consultations have been held with interested parties. The writing on the wall suggests that R&D cost-plus operations in the future will require a much higher “plus” justifying the enormous human input and, also, that the parking of IP on desert islands will only be acceptable if a significant number of the IP company’s employees on said island are first sent to Harvard or Oxford to study for an MBA or PhD. Furthermore, individual countries need to ramp up their CFC legislation to make sure they are catching the right foreign income even when, as is the the case with the vast majority of OECD countries,  they have adopted a system of territorial taxation.

Pure Poetry

Poetry may not be Skyfall’s strongpoint but there is one scene that, for people of a particular generation (mine),  had all the immediate emotional force of a great poem (WARNING: SPOILER ALERT). Fleeing certain death with the aged M, Bond swaps her state-of-the-art Jaguar for the legendary Aston Martin DB5 used in Goldfinger almost 50 years ago. As aerial shots showed the car wending its way along country roads to the Bond ancestral home, for a brief moment sitting in the darkened cinema I found myself  watching the movie through the eyes of a youth (me)  dreaming of an exotic Bond-like future. The rest (of course) is boring beancounting history. But I wonder what my two teenage sons  sitting next to me were thinking?

Territorial expansion

“You ain’t seen nothing yet!”

M.A.D. has to be the best acronym ever. “Mutual Assured Destruction” is what the world looked like it was heading for 50 years ago this week when the young John F Kennedy faced down Nikita Khrushchev in the Cuban Missile Crisis. October 16, 1962 has gone down in history as the morning National Security Adviser McGeorge Bundy walked into the Oval Office to show the President the images captured of missile sites being constructed in Cuba.

Well, it turns out that US Presidents don’t get their priorities in a twist that easily and, despite the general impression that from that point on until the Soviets backed down 12 days later,  there was a “Do not disturb” sign hanging on the White House door, JFK did in fact manage to multi-task throughout.

“What have I done?”

One of the things he succeeded in doing that very day whilst contemplating the potential death of an estimated 200 million people on both sides of the Atlantic, was sign into law the Revenue Act of 1962. This would not be worth mentioning had it not been for the fact that the Revenue Act of 1962 has probably had more lasting effect on the world than those bases in Cuba. It was that piece of legislation that introduced the American people to Subpart F of the Internal Revenue Code. The non-deferral of  Controlled Foreign Corporation (CFC) income was born.

The US tax system that has been  the vanguard of   tax development since the early 20th century, has been through an evolutionary process as regards international taxation.  Starting in 1918, at the end of the First World War, the authorities introduced a system of  credits for foreign taxes paid so as to avoid double taxation. As they perceived breaches in the system they sealed them while, at the same time, showing increased fairness with underlying credits for taxes paid by the US owned foreign corporations that existed here and there.

Following the Second World War and introduction of the Marshall Plan to help get Europe back on its feet, there was an explosion in the number of US owned foreign corporations and Congress started to wake up to the possibility that US corporations, faced with massive taxes at home, might be shielding their profits in low tax jurisdictions. Hence, in 1962 – just in time for the possible destruction of mankind as we know it – legislation was passed to prevent the deferral of tax in foreign corporate tax planning strategies.

It has been downhill ever since. Countless changes in the law have led to a labyrinth of regulations that, it is generally believed, have left the US Treasury none the much richer while leaving  tax lawyers and CPAs very much richer (I always had a soft spot for Kennedy). Meanwhile, much of the world has caught on to CFC which has become the byword in my profession for “This is complicated – we will need to give you a quote”.

What is of keen interest is the gradual move internationally away from a worldwide system of taxation, as practiced in the US, to a modified territorial system. The Territorial approach, which is also gaining traction in the US, broadly does not seek to tax or give foreign tax credit for dividends received by resident companies from foreign affiliates. The arguments in favour of a territorial system are broadly that they will allow companies to be entirely competitive in foreign markets and there will be free repatriation of income leading to increased investment at home. Against the territorial system is the argument that more activity and income will be moved offshore creating permanent tax advantages.

Astute readers will have noticed that somebody here, by definition, must be  dancing with the fairies. The kindest explanation as to why both sides are able to claim that a territorial system will cause capital flows in precisely opposite directions, is that nobody really has a clue  but they want to find support for their chosen philosophy of international taxation. The Worldwiders are firm believers in creating tax equality among resident taxpayers. The Territorials believe that you have to equalize the tax costs between international competitors that operate in the same jurisdiction, so that everybody is competing on a level playing field and capital can flow to where it obtains the best after-tax returns. It is worth noting, by the way, that the place where the best after-tax returns are achieved is likely not to be the place of most efficient exploitation of capital since the lower tax rate distorts the return.

Just get off your backside and do something!

Now, I like my dose of Kant and Descartes as much as the next man, but – in the real world (and that is the political world) – philosophy is to international taxation what a bicycle is to a fish. Governments need to balance budgets. Ask the Greeks – they gave philosophy to the world, and sadly not much else. Socrates, Plato and Aristotle will not save them  from drinking economic hemlock. Governments do what they have to do and hope that some thinkers somewhere will support them.

In practice  – and that is definitely the most important term in the taxation lexicon – 27 of the 34 members of the OECD (The “I am rich and couldn’t give a sod about the rest” club of wealthy nations) have adopted some form of territorial taxation – 10 of them since 2000.  The most common features are: a reduced corporate tax rate to make the home country more competitive; the creation of a simplified CFC system or something similar to prevent blatant artificial siphoning of profits to low tax jurisdictions (Britain, a new convert to territorial taxation,  is at the forefront of new developments on this); preferential tax treatment for the exploitation of local   R&D since much of that siphoning of profits previously mentioned relates to dubious IP ownership in low-tax jurisdictions; preferential tax treatment of group finance companies to keep the finance income onshore;  restriction of interest expenses at head office level to those used in the production of head office income so as not to unfairly reduce the home country tax base; and strict transfer pricing legislation to bayonet the wounded.

Meanwhile, real business profits from foreign operations are repatriated free of charge, or close to free of charge. Repatriation can still be a bummer where dividend withholding tax from the foreign jurisdiction is prohibitively high – but there too, several countries are moving  towards low withholding taxes on substantial corporate holdings.

According to the statistics (I don’t believe I said that) this practical hybrid territorial system is working well which fits in with the one piece of tax philosophy I do subscribe to in my day job- “If it ain’t broke, don’t fix it”. On the other hand, the US system appears totally broke. Whichever way the election goes in November, the President and Congress should look closely at the experiences of their OECD colleagues. Fifty-odd years after the revolutions in Cuba and the US international tax system, it is time for legislators to show real courage and do what they were elected and paid to do.

World without borders

German parachutist infiltrates London Olympics

Blitzing Mannheim last Tuesday in advance of a meeting the following morning, I soon tired of the centre of town with its Water Tower, Paradeplatz  and street names like P3 and Q5. Settling  into my hotel room, I turned on the TV. Confronted by Mary Poppins dubbed into German – at least in British war movies they made the Germans speak English with a middle-European accent – I decided to chance my luck with the radio embedded in the dashboard next to the bed.

Where is the Turkish music?

The radio was an experience in itself, bringing back memories of the car radios of my childhood. By rotating a knob a red plastic marker glided along the horizontal dial – there were no pre-tuned stations. Trying FM first and fully expecting to be blasted by Beethoven or Bach at every stroke of the knob, the only music I hit upon was a Turkish pop channel. My opinion of Turkish music was formed in the era before public voting in the Eurovision Song Contest when Turkish singers were considered national heroes if they scored any points at all; evolution definitely rid Turks of the music gene. But it was medium wave where the fun really started. As I moved between wavelengths in the hope of colliding with the BBC World Service, I listened to the whistles and wooshes as stations slowly appeared out of the audio fog and then receded again into obscurity. It occurred to me that seventy years ago across that embattled continent many would have searched for Alvar Lidell broadcasting from London with the only reliable news of the day, as Goebbels’s propaganda machine churned out its incessant lies.

In fact,  as competitors from CNN to Sky to Fox entered the market, the BBC  always managed to retain its name as the world’s number one reliable news source in the broadcast media. A quarter of a century after leaving the borders of that green and pleasant land, the BBC is still for me, in the words of WH Auden, “My north, my south, my east and west”.

Bond Girl – born 1926

However, a foul wind may be blowing through the Beeb’s corridors. There was the mildest hint at the spectacular opening ceremony of the London Olympics last weekend. In a move that would have done justice to the Beijing Olympics four years ago, the allegedly Marxist director Danny Boyle managed to ignore the Empire (too insulting to some) and  World War II (too insulting to one) even though, thanks to the former, London is today the most truly cosmopolitan city in the world and, thanks to the latter, it was not difficult to find a site for the Olympics in East London since the Luftwaffe had done a pretty good demolition job seven decades earlier. Meanwhile, Boyle took  neatly choreographed digs at some British sacred cows – the Queen and the BBC among them.

Bond Girl – born 1925

Few non-Brits or those under 40 would have paid any attention to a flash of legendary BBC weather forecaster Michael Fish from 1987 publicly informing a woman who had called that day that she need not worry about a rumoured Hurricane on its way to Britain – you see, there had not been a Hurricane in Britain for some 300 years. Well, when I woke up the following morning and ventured outside, I discovered  that a tree had taken root in my neighbour’s roof and the street was littered with debris. Miraculously, the Hurricane – hitting around 3am in the morning – had killed nobody.

The BBC’s continuing fall from papal infallibility came home to me a few weeks ago when they ran an item on the news declaring that, according to a new study, at least $21 trillion of assets are being managed in tax havens. The item went on to explain that this was bigger than the US and Japanese economies combined and this tax black hole could solve lots of the world’s economic problems. We were told that the study was written by James Henry, former Chief Economist of McKinsey and Co for the influential Tax Justice Network.  And to make sure that the BBC would be viewed as thorough, they even interviewed a British tax expert who said that, while he could not disprove the figures, they seemed very big (rocket science collides with taxation once again).

His brain hurts

As an international tax geek this item was clearly of real interest to me so, hard-wired with my 20th century education that insists I independently check all facts, I went searching for the influential Tax Justice Network and this important study. Well, the website can best be described as the on-line equivalent of “Behind the wash basins at Waterloo Station”. Getting a real feel for who and what this organization purports to be was not easy (although I think I got there in the end). Most worrying of all, the study “The Price of Offshore Revisited” was not yet available. What was there (after a virtual treasure hunt) was a  brief press release which the BBC seemed to have quoted faithfully and mindlessly. Taking a look at the BBC website version of the item, I realised that the tax expert consulted as possible counterweight to the report, had clearly seen even less than the BBC. All he seemed to be saying was – “Blimey, that number is too big to make sense”.

I kept revisiting the site in search of “The Price of Offshore Revisited” until, last week – Eureka! – I found it , albeit off site. Mr Henry’s study was, indeed, interesting reading  and he is clearly a serious dude. While he arrives at some interesting conclusions, including that – in the absence of an offshore industry – emerging nations that are currently debtor nations would turn into creditor nations (which, Mr Henry, I don’t think would have a causal effect on credit unless, horror of horrors, exchange restrictions were imposed or, as you seem to discount, material sums found their way back as investment in the source country), his central thesis is something known to everyone – that the amount of tax being avoided or evaded in emerging countries would potentially have a major positive impact on their economies.

One-man balance of payments problem

I took something else away from this study, however. It is a regular chant of the Libertarians that use of offshores in tax avoidance (as opposed to tax evasion) schemes is highly moral since any diversion of funds from Big Bad Government to private hands will increase the efficiency of the economy. Even leaving aside the specific woes of emerging countries stripped of basic tax revenues it appears, according to the report, that money parked in offshores is generally invested in low-risk investments – if a wealthy investor wants to take risks he is happy to do that in the full view of his government (of which, he might be a member). So, while these trillions of dollars may serve to lower interest rates in the world economy they are essentially crowding out private investment by pension funds, insurance companies etcetera that need low risk investments while depriving the world of much needed risk capital – potential “creative destruction” that  Joseph Schumpeter declared so critical to the future of a free market economy.

Overall, the BBC, along with some American news companies that picked up the story at the same time,  did a pathetic job here and would have been well served to wait for the report. It is perhaps not a coincidence that the BBC has adopted an American term in recent years: “BREAKING NEWS”. As an expatriate who relies on the BBC, would it be too much to ask that it keep the News WHOLE?

Raising the energy bar

Ancient artefact circa 1968

In my salad days, apart from holding down a regular job as an elementary school student, I had some house jobs. Returning home in the freezing dark each winter’s eve, my chafed thighs burning from the cold, I would make straight for the soot encrusted scuttle standing guard outside the kitchen door. Carrying it across the yard to the squat  bunker opposite I would scoop coal into the scuttle and then return it to its post ready for an older pair of hands to commit the contents to the boiler that spread warmth around the house.

…and another

In the mornings, after breakfast, when the teapot was empty, it was my task to take it into the garden and spread the tea leaves around the roots of the rose bushes to help them grow.

Every day, before the empty milk bottles were washed and returned to the doorstep for collection by the milkman, I used to gather the silver and gold metal tops. When I had a sufficient quantity, I would post them to the BBC Television Centre and await the following Monday’s Blue Peter programme when they, along with millions of others,  were transformed by the wonders of alchemy into a Guide Dog for the Blind. The dustmen (oldspeak for “city cleansing department”) only had to come once a week.

All innocent stuff you might think. But judged by modern standards it is not clear to me whether, on balance, I was an ecological saint or a child soldier pressed into service  by the Lord’s Resistance Army as an Earth Murderer. Fossil fuels do not get a good press these days.

I would love to meet the joker who invented the word

In the last few months alone we have had Australian legislation against carbon emissions, EU legislation over airline polluters, Canadian protests against shale gas fracking and British centralization of future power policy.

Dealing with the greenhouse gases that lead to global warming is, of course, not a new concept. The main “incentives” to reduce the release of carbon dioxide (the main culprit) into the atmosphere have been carbon taxes and cap-and-trade schemes.

Crime against humanity?

Carbon taxes are quite simple in that the social cost of a specific measure of carbon emissions is estimated and emitters are taxed accordingly. There are two main problems with this system . Firstly, while university professors may have had a field day devising the concept, nobody has the foggiest idea how to objectively calculate the social cost – so prices vary madly. Secondly, it is impossible to predict how much effect the tax will have on reducing emissions. In addition, there is the philosophical (and, if you happen to be poor, highly practical) problem that the tax is regressive. That means that if affects the poor more than the rich because, on the assumption that the cost is passed on to consumers, they  are hit comparatively higher. On the other hand, as long as a government applying the tax (as Australia this year) undertakes to ensure that the tax is dished out to lower income households as subsidy or tax break as well as supporting industry’s efforts to reduce emissions, this last problem is mitigated.

Cap and trade schemes, in contrast, control the reduction of carbon emissions by setting limits and the government issuing permits for those emissions. That is where the fun starts. Schemes have tended to start with “grandfathering” the permits free of charge to emitters on the basis of past emissions. They are then free to trade these permits. The concept is that a market price will be reached where those emitters who can most cheaply reduce emissions will do so.  This has produced windfall profits for some of the biggest culprits while there is little government revenue to aid the lower income sufferers of price hikes.  A more morally acceptable  (but less politically practical ) scheme is to auction the permits and use the revenue in a similar manner to the carbon taxes.

And now to the real world. Both types of scheme do not appear to be working too well. Carbon taxes have been set too low and permits have been distributed too freely.

While both systems, especially the cap and trade, appear quite clever on paper, both lack bite. When you take into account the countries that do not play ball, the potential leakage as companies move operations elsewhere is positively frightening.

Perhaps it is time to take a look back at the world before the Industrial Revolution when  the only greenhouse gases emitted came from the extremities of grazing cattle.

Hanging maybe. But drawn and quartered?

In those days there was a lot of lawlessness. As today, many only respected the law to the extent it was enforced but then society was not sufficiently organized to ensure its enforcement. So, what did the authorities do? They terrified the population. If you stole a sheep you were hanged. If you deflowered the wife of the heir to the throne you were hanged until you were half dead, dragged through the streets and then forced to watch yourself being disemboweled, castrated and quartered before being sent off to meet your Maker at a number of addresses around the country.

Where greenhouse gases are concerned, we are back in the good old days. Nobody (hmm..) would suggest executing factory owners for spewing out a bit too much smoke but, instead of making all those nice academic calculations to establish the fair cost of these heinous crimes, carbon taxes should be set at punitive rates (lets call it what it should be – a fine) and cap-and-trade permits made more scarce with a minimum price in the primary market. The revenue raised should principally be returned to the pockets of those in lower income brackets as well as being employed to assist companies to reduce carbon emissions.

Do you think he separates his wet and dry rubbish?

Coming downstairs one morning about a month ago without my glasses I noticed, stationed outside every house in my street, an absolutely motionless heavily tanned sentry. After turning on the radio with the expectation of being greeted by martial music but instead having my ears harassed by yet another castrato Bee Gees song in tribute to the late Robin Gibb, I found my specs and realized that the sentries were in fact brand new standard issue chocolate coloured slop buckets. The green revolution had finally come to my home town and we were to split the dry rubbish (green coloured bin) and the wet, rotting, stinking  rubbish (poo coloured bin).

After drinking my early morning mug of tea I decided to christen our new acquisition and went out to deposit my teabag. We might not have any rose bushes but we do now have a bloody ugly brown bin littering our doorstep.

L’entente cordiale?

De Gaulle once told Churchill’s wife Clementine, “France has no friends, only interests”. This could have been the motto for his great creation, the Fifth Republic or – for that matter – the Fourth, Third, Second or First. Nicolas Sarkozy is at it again.

Spurred on by the threat of his presidency being guillotined at the French elections later this year, Sarkozy has been in the driving seat, with  Angela Merkel riding shotgun , in pushing for the imposition of a Financial Transactions Tax, popularly known as the Tobin Tax, across  the European Union. So obsessed has he become with the idea that he even suggested earlier this month that France would consider going it alone to get the ball rolling which was remarkably un-French  given that it would spell untold suffering for the French financial sector. Not likely.

The realistic proposal for an FTT that would, in Sarkozy’s (and Merkel’s) view,  ideally include all 27 EU members is far more French – let the surgeon inflict a little pain on the French (and German) patient  while performing major surgery without anesthetic on the British one. Let me explain.

The Tobin Tax, a miniscule tax on the value of spot foreign exchange transactions, was first mooted in the 1970’s by Nobel Laureate James Tobin  as a means of calming the volatility of exchange rate movements arising from massive numbers of speculative transactions.  The idea did not immediately find traction but, with the global financial crisis of 2008 and the widespread demand for the public disemboweling of bankers and punitive reparations from the banking system, it received a major boost – this time with the express purpose of raising revenue.

With London at the epicenter of the financial world, the British government had to tread carefully and, along with a string of new major regulations, expressed support for the FTT if it was applied on a truly worldwide basis. Egged on by the French (and Germans) the European Commission issued a Council Directive Proposal in September 2011 for an EU-wide tax of 0.1% on stock and bond deals and 0.01% on derivative contracts between financial firms irrespective of what the rest of the world decided to do. Conspicuously absent were spot foreign exchange transactions (the original raison d’etre for the tax) as they ran foul of the EU principle of the Free Movement of Capital.

Doomsday predictions were that there would be an exodus of banks and, because of London’s dominance, upwards of 70% of the tax cost would fall on the UK.  Faced with loss of business and a  tax which would directly fund the EU – and at least partly earmarked for bailing out the Eurozone countries that do not include the UK – Mr Cameron’s government’s flat refusal last December to buy in was understandable.

But beyond the headline catching spats between the leaders reservations about the FTT run deep. A report by the Institute of Economic Affairs, a prominent free-market think tank in the UK, cites an  EU Commission survey that concluded that a 0.1% tax would lead in the long run to a 1.76% fall in GDP (subsequently revised downwards)  – at the most crude level, the additional tax will result in less tax. In considering who bears the burden of this fall the report particularly criticizes the “cascading’ nature of the tax – that because it is imposed at the corporate level, and corporations not being human beings, cannot ultimately bear the cost, the true cost is borne by workers, shareholders and customers in a combination of lower wages, lower returns and higher prices. Adding to that the mobility of the business out of London the result is a global fall in GDP accompanied by a redistribution of jobs and income to non-European centers  (sprinkling a little of the London fall-out in  Frankfurt and Paris along the way) while placing funds directly in the hands of the European Commission to be doled out to recalcitrant Eurozone countries, thus saving the French (and Germans) a lot of dosh at the expense of the British.  Not on David’s watch, mes amis.

Mr Cameron, ostracized by his EU partners, has a tough time ahead but he can take heart from his most illustrious predecessor. “We shall fight on the beaches, we shall fight on the landing grounds, we shall fight in the fields and in the streets, we shall fight in the hills” was, arguably Churchill’s greatest speech. Delivered in the darkest days of World War II it drew its strength from the exclusive use of Old English  Anglo-Saxon words.  There was, however, one exception in the last line, taken from Norman French : “We shall never SURRENDER”. There is evidently no equivalent in Old English.

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