Tax Break

John Fisher, international tax consultant

Archive for the category “Israel”

When tax legislation bombs

Why did the RAF bother?

In his bestelling book, ‘Churchill’s Ministry of Ungentlemanly Warfare’, Giles Milton tells the story of the destruction of Peugeot’s factory in Occupied France. The facility had been commandeered for German military production. One night, Bomber Command ordered the dropping of a massive amount of ordnance on the plant, only to discover the following day that they had missed their target completely and, instead, razed a number of French villages with several hundred innocent civilians providing a tragic statistic of ‘collateral damage’. The next attempt, which was as successful as the bombing raid had been a disaster, involved a handful of saboteurs placing plastic explosive at key points in the building.

Israel’s trust tax provisions, that largely took effect in 2006, could have been orchestrated by Sir Arthur ‘Bomber’ Harris himself. They are so far from perfect that they look like   the Knesset Finance Committee opened its bomb hatches and peppered them over the taxpaying public. It is well known that the authorities were so concerned about the capacity to use trusts to evade taxes, that they legislated to nab the heinous few, while causing collateral damage across the local and international economy.

Sifting through the debris, an example of legislation that appears to have been totally lacking in precision is the instruction that ‘the provisions of the third chapter of Section III’ will not apply to trusts. References like that are what Churchill might have called, ‘ A riddle wrapped in a mystery inside an enigma’ – obscure enough to be missed by anyone but the most obsessive tax wallah. Well, lo and behold, the chapter’s sections deal with the very human provisions of deductions and credits, such as those applying to pensions and the personal status of the individual – the stuff that amorphous trusts should be rightly excluded from. Indeed, the tax authority’s explanatory circular gives such items as the examples.

Bah humbug

However, somebody at the drafting stage obviously became bored, and didn’t notice the tax credit for charitable donations tucked away in the chapter. An individual is entitled to a 35% tax credit for donations to Israeli recognized institutions up to the lower of 30% of taxable income and around 9.2 million shekels. That is quite an incentive to donate. The trouble is that, according to the law, a trust (technically, the trustee) – that pays tax in Israel like an individual – cannot avail itself of that credit.

There is collateral damage, and there is collateral damage. Trusts , by character if not by definition, make charitable donations. In countries where tax efficient, those donations might be by way of making the charitable body a beneficiary. But, in Israel there is generally no tax on distributions anyway – the tax is on the annually earned income. So, by denying benefits at the trust’s taxable income level, they are being denied absolutely.

The bottom line is that it is not tax efficient for trusts to make charitable donations. That smacks less of collateral damage, and more of insane carpet bombing. It is almost as crazy as the Germans deciding to make their vehicles in France, and putting a man by the name of Porsche in charge of  the Peugeot factory.

Succinct summary

As WWII proved, it’s a mad, mad, mad, mad world.

Trust the taxman?

Perhaps not as bumbling an idiot as he looked…

My first suspicion that authority wasn’t all it was cracked up to be was at the age of 10, when I saw Lionel Bart’s newly released Oliver! Between the catchy numbers and faux-dirty actors there were two clear messages – the inhumanity of the workhouse system and Mr Bumble’s ‘The law is a ass, a idiot.’

Workhouses had blessedly long gone even then, but I have had many occasions in my long career to echo Mr Bumble’s sentiment. And if Dickens meant the term ‘ass’ in its asinine sense,  I am sometimes tempted to go with the American usage.

There have been many occasions when a sloppily drafted law has been saved by the tax authority, with liberal and, sometimes, downright anarchical interpretations that could only be strictly justified by a completely new interpretation of the letters of the alphabet used in the drafting.

There are often a lot more forms than substance

But, more often than not, it is not the case. While they will invoke ‘substance over form’ in incidences to their advantage – fairly confident that the courts will back them up if matters get that far – the authorities will fight hammer and nail to impose the letter of the law, hiding (possibly fairly) behind the excuse that they cannot ignore the written word.

And, just occasionally, they go a step too far.

If we are to believe the myriad reports of a case at the end of July, one of those steps is on the way.

I won’t dwell on the details of the case which has already been reported to saturation point, but suffice it so say, trust tax law – largely legislated with effect from 2006 – generally considers the contribution of an asset to a trust as a non-taxable event (a gross oversimplification, if ever there were one). The problem is that, for purely anachronistic reasons, Israel has a separate law for the capital gains from local real estate transactions. It, and its predecessor, simply predated Israel’s taxation of capital gains and for reasons I sadly suspect many of us understand, the situation has never been put right. The real estate law stayed silent beyond some existing archaic provisions that were essential for real estate transactions. The taxpayer argued that the transfer of real estate to a trust should not be a tax event – in logical line with the treatment of all other assets, as must have been the clear intention of the legislator – and the tax authority disagreed.

Blessedly, the committee appointed under the law  to hear the appeal of the taxpayer, comprising two respected accountants and a senior judge, found in favour of the appellant. The ruling was reasoned and well-presented doing what I, in my recurring naivety, thought  was what the tax authorities found difficulty with – filling in by stealth the missing bits of the law that should have been, but were not, there.

I assumed that would be it. The tax authorities were given a peg on which to hang their coat, and the world could carry on. The judge even recommended that the legislature add the relevant provisions to the statute so as not to permanently be required to rely on case law.

Dickens was quite obsessed with the failings of the legal system

Well, according to the professional ‘press’, I got it wrong. The tax authority is expected to blow a raspberry at the decision and pursue an appeal in the High Court.  Apart from the relative certainty that they won’t win, I don’t begin to understand what they are reported to be contemplating.

It would simply not be fair.

Hoisted with their own petard

The good old days

In Tudor times it was traditional for condemned gentlemen to pay their own executioner. The equivalent in my world is the statutory requirement to report any of a series of positions taken in a tax return that the tax authorities do not agree with. The tax inspector no longer needs the deductive powers of a gumshoe – he or she can just sit in the comfort of their torture chamber picking their victims off one by one. The good news is that you need to be making quite a packet from your planning to be forced to the block – 5 million shekels in the current year or 10 million shekels over 4 years. The bad news is that there are 57 varieties (or positions) to choose from.

Although the list came out in December last year, the form for reporting – which is just really an index of the December headings, and could have been put together in half one of the many hours saved investigating – finally hit the presses earlier this month, just in time for some to miss the filing date of their  tax returns. What is most interesting is that most of the ‘positions’ could better be described as the ‘law’. The tax authorities seem to have taken a leaf out of US Immigration and Customs Enforcement‘s book: ‘Do you seek to engage in or have you ever engaged in terrorist activities, espionage, sabotage, or genocide?’ Like someone is going to announce they have been evading tax.

Some parents live in obscure faraway lands

However, one that caught my eye concerned the profit to be reported on the sale of trust assets. The pronouncement by the authorities (already back in 2017) was not controversial – the sale of an asset that had started life outside the Israeli tax net was subject to capital gains tax on the full gain – painful, but common international practice (and the clear law). The explanatory notes, however, included an exception relating to ‘Relatives Trusts’.  When the legislature took its last swing of the axe at trust tax planning in 2013 making everything taxable, there was one small sweetener. While distributions to Israeli beneficiaries would face a tax bill, Ma and Pa who had set up trusts in the obscure faraway lands where they still lived, would – together with their trustees – be largely let off the hook from reporting in years when distributions were not made (unless they chose otherwise). The explanatory notes spread the bonhomie further by making clear that relatives trusts set up before 2003 would get a step-up in value for capital gains tax purposes to January 1 of that year. The explantory notes were cross-referenced to the tax authority’s notes on the trust law. The only problem was, they didn’t fit. Where did 2003 come from? In fact, what the blazes did 2003 have to do with trusts at all – It was the one area actively ignored in the great tax reform of that year. The explanatory notes were silent.

They could always try and take it with them

But, if we are already talking about relatives trusts, there is sadly no happy ending. The authorities were nice to Ma and Pa. They even decided not to mess things up until not one, but both, of them were safely tucked up in their faraway graves. Then the fun would start. A relatives trust would become an Israeli resident trust – facing full taxation even of the bits heading to foreign siblings. While there were regulations offering solutions (potentially painful) for trusts to carve out foreign beneficiaries’ income from the Israeli tax system, the wording didn’t comfortably include relatives trusts which started life as something statutorily amorphous.

So, as with so much in Israeli tax law, assessees grieving their parents now find themselves at the mercy of the tax authority. In fairness, the authorities do their best to produce a sharp result from blunt legislation. But it can take a lot longer than a Tudor treason trial.

Relatives trusts need tender loving care if their beneficiaries are to avoid the ignominy of the scaffold.

An actor walks into a Bar

Not all Penguin books made it to court

At Penguin Books’ 1960 obscenity trial in the matter of DH Lawrence’s steamy novel ‘Lady Chatterley’s Lover’, the prosecuting counsel famously asked the jury of randomly picked men and women, ‘Is it a book that you would even wish your wife or your servants to read?’ The jury found in favor of the publishers, and both the judge and prosecuting counsel were laughed out of court, as out of touch with the modern world.

The appeal filed last week by supermodel Bar Refaeli’s lawyers against a decision of an Israeli District Court to side with the tax authorities in her disputed claim of  non-Israeli tax residence, appeared to suggest that the judge had also not learnt to move with the times. It argued that, had Refaeli been married to American actor Leonardo DiCaprio, rather than simply living with him in the U.S., there would have been no question that her center of life, and hence tax residence, was outside Israel. His Honor’s failure to recognize her ability to maintain her Israeli connections – while not her residence – in a world of social media, cheap telecommunications and affordable air travel was also seen as archaic.

However, as opposed to the Penguin prosecutor, who really did seem to have fallen out of the Downton Abbey woodwork, the judge was receiving some pretty unfair press here.

Hardly the first actor to walk around in a hat

When he was trying to get to the bottom of the couple’s relationship, the judge heard quite a bit of bizarre stuff from witnesses including Refaeli’s mother and a bosom-friend actress, whose embarrassing incoherence on the obscure subject of DiCaprio’s ubiquitous hat, as well as his lack of intimate communication with the supermodel’s friends, left me wondering whether actors are programmed never to come up with their own lines. (This, of course, was not a problem for Refaeli, who – thanks to the way she is programmed – doesn’t need to communicate verbally at all).

The issue that really needs to be examined is whether superstars should be treated like the rest of us at all when it comes to taxes.

Once upon a time, it was the aristocracy that filled the ranks of superstardom. Monarchs, who until not so long ago were considered to rule by Divine right, have not traditionally paid taxes. The Queen (there are many queens, but only one Queen) has paid some tax VOLUNTARILY since the early nineties, but she could change her mind if the housekeeping bill got out of control. Here in Israel, with a wink to the British Mandate, the president is exempt from tax on his presidential income.

Back in 1923, Virginia Woolf’s Mrs. Dalloway wondered excitedly– along with everyone else in sight – whether the mysterious occupant of a blacked-out limousine was the Prince of Wales, Britain’s future king. Faced with a similar scene in 1999, the Mrs. Dalloway of Michael Cunningham’s tribute novel, ‘The Hours’, hoped it might be Meryl Streep.

Divinity has passed to the superstars. Their irregular conjugal behavior – which the judge found hard to comprehend – is perhaps because they are extra-terrestrial beings, flitting from country to country and not bound by the rules of us mere mortals.

Even the OECD’s  model convention on double taxation singles out sportsmen and entertainers as the only professions with a specific article (17) to deal with their out-of-the-ordinary  international tax issues.

A sensible solution, based in part on Article 17, might be to only tax these gods and godesses in the countries where they work – one day here, one day there etc., without assigning them a tax residence. The downside would be that – thanks to those in my profession – before long, all movies would be made, and sports events held, in countries where there was no income tax.

Where shall we do this scene?

The movies could get over the obvious problem of ‘location, location, location’ with the latest CGI technology. But what about sports? Have you ever thought about zero income tax Qatar for the 2022 Football World Cup?  Not a blade of grass or pint of beer in sight. But, there will be. In abundance.

In the absence of  a foolproof alternative, it is probably wise to treat them like the rest of us. I believe that is what the judge was trying to do.

 

English as a very foreign language

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One word would have been a start.

Several years ago, I returned from a quick trip to Paris on El Al Business Class. As everybody knows, El Al’s security measures are peerless, but just before the gate at Orly airport, the French insisted on putting us all through a second metal detector. I buzzed. Now, I am a big believer that there can’t be too much security, and would normally have been happily compliant as they played hide and seek with my belt and shoe heels (this was before shoe heels were a real security item). But this was France. And this was a security officer pulling on white gloves. And he was French. He barked at me in his Gallic tongue, and – despite five wasted years at school doing my bit for the Entente Cordiale – I just looked at him like a gentleman would look at a barking puppy. He barked again – and that was it; I flipped:

‘Speak to me in English! There is only one international language today, and you will speak to me in it!’

He barked again, this time signaling I should turn around. Not likely with those damned white gloves, Pierre!

I then did something rather disingenuous for the first and only time in my life:

‘I am an Israeli. I speak English. Why don’t you?’

At this point, the El Al security officer who had interviewed me earlier, and had suffered my heavily accented Hebrew, together with her two colleagues who were standing nearby, actually burst out laughing.  Suffice to say, not wishing to spend the weekend in the Bastille, I did ultimately comply. I have no idea why he wore the white gloves – he went nowhere near my Maginot Line.

What made me raise this now in a tax blog? A few weeks ago, the OECD uploaded the latest version of Israel’s Transfer Pricing Country Profile. The document involves, in the main, ‘yes’ or ‘no’ answers with a space for the reference in statute law. So far, so good. But, here and there, a few short sentences are necessary. Aye, and there’s the rub.

lets_eat_grandmaHardly any of it was in grammatical English. I had difficulty even understanding some of the sentences.

This is a disgrace, and I don’t think it is restricted to Israel.

One of the principal reasons the OECD has been able to advance its BEPS international tax agenda so efficiently is that the world has learnt to communicate in a common language. This is not about triumph or ego. It is about efficiency.

And, of course, the advantages go far, far beyond tax. There really is no reason today why the sine qua non for any function in the international sphere should not be relative fluency in English. The only exception would be a prime minister or president who is elected by the people (mind you, the current president of France seems to have a better command of English than the current president of the United States.)

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My fecund imagination is starting to run away with itself

And, as for the written word, if I were the OECD, I would put red ink all over the Israeli (and any other unacceptable) entry and send it back marked; ‘Not good enough. Try again’. That is how we learnt English in school.  The stick also helped – but I wouldn’t put that in the hands of any organization based in Paris.

The long and winding road

They even had a fab song called ‘Taxman’.

Given the plot of the recently released movie ‘Yesterday’, it is ironic that I can’t get the Beatles out of my mind. A ruling published by the Israeli tax authority around the time the latest blockbuster hit the screens sent me on my own magical mystery tour.

What, I hear you ask, could tax have to do with ‘magic’ or ‘mystery’, or anything anybody ever associates with ‘interesting’? Hold onto your seats.

The ruling was basic to the point of bland – in other words, the sort of thing you knew all along, you wondered why it was published, and you self-flagellated for wasting the time reading it twice to try and find the catch.

An Israeli resident individual set up a foreign company in 2000 which held all of the shares of an Israeli company. He now requested a tax-free transfer of the Israeli company from under the foreign company to a new Israeli company fully owned by him. There is a provision in the law that allows such transfer, subject to a request to the tax commissioner and a myriad conditions to ensure the Israeli tax authority is not deprived of tax. Big deal (Google translate: no big deal).

The dividends boomeranged back to Israel

Then, all of a sudden, it hit me between the ears. The big deal was in what was not written. There was no mention of the tax saving on the ‘circular’ dividend. Until the reorganization, dividends paid by the Israeli company to the foreign company would have been liable to withholding tax.  Leaving aside any foreign tax, when the foreign company distributed dividends to the Israeli resident individual – according to statute law – he would have been liable to tax on receipt of the dividend without credit for the tax previously withheld to the foreign company. The reorganization meant that, going forward, he would receive dividends direct from the new  Israeli company, tax being paid once on the dividend (no tax would apply on the  dividend between the old  Israeli company and the new one according to Israeli law).

The fact that the tax authority did not even mention it as a back-patting gesture signaled that – in keeping with a long tradition, and despite the deficiencies of the law – they appear to take it for granted that a ‘circular’ dividend should not be liable to double tax, giving a credit to the individual receiving a dividend from the foreign company for the tax withheld originally by the Israeli company.

The history of this is quite remarkable.

Since the beginning of time – 1 YTO (Year of our Tax Ordinance), corresponding to 1961 CE – there has been a clause (s163) that solved the problem of double taxation on ‘circular’ dividends in the manner described above. The only problem is that it deals with a tax that, since 32YTO, no longer exists. For reasons possibly best known to somebody, it was never knocked out of the Ordinance. Indeed, at the time of the Great Reforming Flood in 43 YTO (2003 CE), when so much was destroyed and replaced, I discussed the matter with a senior tax official who couldn’t explain its survival.

Arks were a bit passe by the third millennium

Meanwhile, in 42YTO (2002CE), when the rising water of the reform was already at the door and Israelis investing abroad were praying for salvation, the tax authority surprisingly issued a non-legally binding  circular dealing with foreign tax credits under the soon to be drowned system (they even stated clearly that another circular would be issued dealing with the postdiluvian  situation). That circular included a reference to s163 implying, in circular fashion, that credit on a circular dividend could be claimed. There was no reference to the fact that s163 clearly no longer applied. Somebody was sleeping in the biblical Land of Nod. Interestingly, when the new circular was finally issued in 44 YTO, there was no mention of s163. We were back on dry land.

As the years passed, the tax authority was known to give private rulings solving the double dividend tax on the basis that it just wasn’t fair in a two-tier system (corporate tax plus tax on dividend) to hit people with a triple-tax. But, as advisors we were always reticent – one never knew when the spring would go in a tax official’s head.

Then, in 54 YTO (corresponding to 2014 CE) a case concerning a sister provision in s163 came before the courts in the form of an appeal against the tax authority’s decision. The judge threw the appellant out on his ear – and that was what was widely reported at the time. But,  there was incredibly important ‘obiter’ in the case. Part of the appellant’s argument had been that the tax authority should be consistent in allowing a credit according to the  semi-relevant circular mentioned above from before the Flood. His honour made a few things clear. Firstly, despite the language of the law clearly not applying any longer, the intention of the original law was to avoid triple-tax in a two-tier tax system. Hence, interpreting the current law widely in that vein, was appropriate. Furthermore, even if the authorities were working ‘beyond the letter of the law’ in their circular it would only apply where there was triple tax – which was not the case before the court.

Unpredictable

So, where does that leave the matter? The tax authorities appear consistent in their approach, and there is obiter in a District Court case. But, that does not mean that the situation is closed  hermetically. There could always be an official  who wakes up one morning and conveniently forgets ‘Yesterday’. So, it appears that anybody contemplating circular dividends still needs to work it out with a little help from their friend the professional tax advisor. The advisor, hopefully, won’t let them down.

Fair fight?

The tough guys are in charge

Underdog Andy Ruiz’s technical knock-out of world heavyweight champion Anthony Joshua in their fight on June 2 was one of sporting history’s great surprises.

Similarly, civil court cases against the tax authorities are rarely won by the underdog, generally ending with a knock-out – technical or otherwise – of the assessee.

There was an exception back in February (I will explain shortly why the item is topical). It involved three flesh-and-blood Israeli residents who claimed a capital gains tax reduction on the sale of shares in the company they controlled. The basis of the claim was an article in the tax code declaring, in certain circumstances, that the part of the gain  reflected by retained profits in the company would be taxed as if those profits were distributed as a dividend. The company in question had a special tax status that offered a reduced rate of tax on dividends. The tax authority said ‘No Way Jose’ (pugilism and wresting belong to the same family of sports), and they ended up badly matched in the ring.

That’ll tell ’em

The advantage that the tax authority’s lawyers had going into the bout was that this particular article was enough to leave the fittest of fighters punch-drunk. It had been updated twice in the early years of this century – in both cases in response to serious tax reform – leaving assessees and their advisors swaying in confusion.

But, the referee was having none of it. The assessees convinced the referee with their parrying of a barrage of alternative arguments. And it was the referee himself who applied the killer blow,  sending the authority crashing onto the canvas.

The authority had declared in a non-legally binding circular some years back, that – while companies selling the shares of other companies with special status would benefit from the reduced ‘dividend’ tax, individuals would not. Earlier in his judgment, His Honour had already dismissed the entire argument as nonsense, but here was a circular offering no explanation or excuse for the bald-faced indefensible differentiation. Hoisted with their own petard. Count to ten, and out?

Not quite.

The tax authority sought leave to appeal. But, as they gathered their teeth from the canvas, they must have realized that – however low their chance of overturning the reasoned judgement that had floored their arguments one by one – they would be pummeled over their out-of-the-ring circular.

So, in the evident hope that nobody would notice them changing sports – they moved the goal posts. Earlier this month, the authority issued an uncharacteristically terse notice to tax representatives stating that companies selling their investments in other companies with a special tax status would not longer be entitled to the special dividend rates.

While – when the appeal is heard –  that may take the sting out of the judge’s most humiliating punch, there remans plenty more there to sink them.

Don’t worry, he won’t notice a thing

In any event, the authority’s action reeks of chutzpa – doubled by the fact that when  queried about it, they claimed not to understand what the fuss was about as the clarification was about companies rather than individuals There is sophistry, and there is circumlocution.

Were I the judge handling the appeal, I would invite the assessees to join the authority in the  witness box and give them leave to sort it out among themselves.

Who stole the punch line?

Not all double acts know they are funny

I am rarely amused by the pronouncements of the Israeli tax authority – au contraire, they often rile me. But, last week a public ruling had the effect of diverting my mind to the comedy double acts that had their origins in America’s Vaudeville and Britain’s Music Halls. Laurel and Hardy, Abbott and Costello, Morecambe and Wise, The Two Ronnies. The list goes on and on.

The ruling concerned an oldie but goodie in the international VAT sphere. It contained absolutely nothing new (I will rant about that shortly – I am still at the amused stage), but did serve as a reminder to international tax advisors everywhere (in Israel) that corporate tax planning cannot be done in isolation. Corporate tax and VAT are a double act, with the direct tax as the funny guy, and the indirect tax as the straight man. If an international tax advisor does not deal with the two in tandem, they might just as well send in the clowns.

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I just don’t get it

There is a peculiarity in Israeli VAT law not shared – to the best of my knowledge – by the EU or other major operators of the tax. Services provided to foreign residents who are outside of Israel generally attract zero-rate VAT (a doublespeak way of saying there is no VAT). However, there are exceptions – particulary where the service agreement benefits, in addition to foreign residents, Israeli residents. And, as the 17% VAT is on the gross amount, and as the foreign residents cannot reclaim the VAT in the absence of a taxable presence in Israel, advisors need to pull their hair out thinking of structuring solutions.

The matter considered by the authorities involved a local company operating a Hebrew website to provide marketing services (and a little bit more) to foreign suppliers of goods. They charged a commission  for this service to the foreign suppliers. The  authorities were asked to rule that the charge should be zero-rated, as it was a service to a foreign resident. Despite also being  to the benefit of the Israeli resident customers,  the law has a  Get Out of Jail Free card –  VAT is zero-rated  if the marketing charge is included as part of the customs value of the subsequently imported goods (it wouldn’t work for imported services, and hence the need for careful structural planning in this sphere).

The ruling makes the zero rate conditional on proving, inter alia,  that the price of the imported goods is included in the import price. “Nothing wrong with that,’ I hear you mutter. Aye, but there’s the rub. There is a reason the tax authority has a ruling process – it provides certainty where there was doubt. And there is a reason the tax authority publishes condensed and sanitized versions of those rulings – so that the certainty exists across the board. All very noble.

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Have you declared the marketing charge?

The published ruling provided no information that was not known already. The law – as represented in the ruling – is entirely clear. What has never been clear – and why I read this document with keen interest – is: ‘What constitutes proof that the service is included in the value of the imports?’  ‘Ah! I hear you say; it is obviously included because it is one of the costs directly related to the sales to Israel’. All I can say is, that it is at times like this that you need a sense of humour. In discussions with the authorities over the years, they didn’t necessarily think it was so obvious if there wasn’t a specific reference in the import documentation to that element of cost (‘included in the import price’ – get it?)

I want to see them get out of that one.

So, if – as I suspect – the ruling request was seeking clarity on that issue, either it was provided and then excluded from the published summary, which would be scandalous; or it was not given at all, which would mean the whole process was a waste of taxpayers’ money.

Either way, it’s time for the tax authority’s scriptwriters to have a rethink about their material.

Tales from the Crypt…

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Cryptowhat?

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

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

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We really have come a long way since the Stone Age

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

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

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

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

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How I learnt Economics

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

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

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

 

 

 

 

Hand it over and nobody will get hurt

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Automatic exchange of information between governments has been suspected for years

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

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

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Not a word about tax evasion

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

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

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

The solution is so simple, it hurts.

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

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

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

 

 

 

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