Tax Break

Who said tax is boring?

Archive for the category “United States”

The Unsatanic Taxes

funnyroadNobody who has read Salman Rushdie’s classic ‘Midnight’s Children’ can be indifferent to the juxtaposition of India and Midnight in a phrase or sentence. So, the recent announcement that India’s new GST law (VAT by any other name would smell as sweet) would come into effect, amidst much fanfare, at midnight on July 1 was enough to make my heart flutter like a punkahwallah’s punkah.

The world’s biggest democracy has finally joined the vast majority of the globe’s tax-setters in a cross-twenty-nine-state system that, when the technological problems are sorted out, should improve India’s tax-raising efficiency and, thus, help that great country in furthering its economic growth.

That is not to say that VAT is the Mother Teresa of all taxes. Its biggest problem is that it is regressive –  it taxes consumption at the level of the poor-man-in-the-street who, the poorer he is,  spends a higher proportion of his income on surviving. This is traditionally combatted by lower rates or exemptions on basic things like food. Indeed, India – in keeping with its tradition of making everything as complicated as possible – has introduced five rates of VAT  plus a stratospheric concoction for dealing with untouchables like luxury goods and tobacco.

Of course, there will still be those who manage to get round the tax, legally or otherwise. Time will tell whether devious residents latch onto the ubiquitous Carousel Fraud phenomenon (involving the import and export of the same goods multiple times – a bunch of Brits were caught a few years back when they got lazy and stopped changing the plugs on phone chargers between France and England). And then there was the hard-to-believe wheeze of the Spanish theatre that sold VAT-exempt carrots for admittance to its performances together with a worthless piece of paper called a ticket. The only problem (apart from the Spanish tax garrotters catching up with them) was that hungry patrons couldn’t prove their right to re-entry to the auditorium after a toilet break during the intermission.

At the end of the day, VAT works. One of the few countries that does not seem to agree is the ‘biggest’ democracy (as opposed to the ‘biggest democracy’). A few years ago, at lunch at a conference in Berlin, a group of American experts were discussing ways of plugging the impossible US deficit, coming up with all sorts of supply-side ideas. Thinking that V.A.T was the sort of acronym (actually sayable, like M.A.D – Mutual Assured Destruction) that Americans would die for (especially when said with an English accent), I suggested that imposition of such a tax would surely solve all their problems. I was completely frozen out. V.A.T is a dirty acronym in the eyes of Uncle Sam. My luncheon partners looked like they wanted to drag me in front of Senator Joseph McCarthy’s Un-American Activities Committee. The irony, of course, is that while V.A.T undermines the ‘redistribution of income’ philosophy of most of the ’red’ nations (such as Britain and Europe) imposing it, the American belief in ‘equality of opportunity’ is completely at peace with its workings.

The Indians still have a long way to go. Their direct tax system leaves much to be desired – the witch-hunt of Vodafone to cover the seller’s capital gains in an offshore purchase a while back, and its treaty-defying Dividend Distribution Tax being but two examples of the rot.

As Rushdie put it in Midnight’s Children, ‘I admit it: above all things I fear absurdity.’ Thankfully, his beloved India is finally taking steps in the right direction.

Going it alone?

It would appear Americans have long preferred blondes

It would appear Americans have long preferred blondes

Ever since Marilyn Monroe’s less famous namesake, James, came up with his Doctrine almost two centuries ago, America has toyed with isolationism. They tried it in the First World War, and it didn’t work. They tried it in the Second World War, and it didn’t work. And Barack Obama has spent his presidency unsuccessfully trying to raise the drawbridge to the Middle East.

But there is a bit of isolationism going on at the moment that is not catching everybody’s eye: Tax Isolationism.

As the nation fires its engines for the four-yearly circus that is the Presidential Election, candidates for the Republican nomination are outdoing each other in unpassable and unworkable tax reform proposals. Meanwhile, the nominee-presumptive for the Democratic ticket has made her own comments on the issue.

What is remarkable is that all the candidates have concentrated on lowering tax rates and closing loopholes, conjuring up numbers they each know they will not have to justify. After all, America is one of the few countries in the world where the Government’s Budget is a wish-list rather than a statement of intent (Congress never passes Budgets as proposed). They are looking at America as if it were a self-contained island. Their sole material tip of the hat to other countries is the universal objection to inversion transactions, which have been rife in recent years and serve to reduce the US tax base.

In the meantime, BEPS is fast taking shape, and the US Treasury is belatedly realizing that, as European nations apply the rules and import more profit to their shores, in a zero-sum game the big loser is the U.S. of A. which is by far the busiest player in the international economy.

The big question now is whether the US will try and torpedo part of the BEPS program. At this late stage that would not go down well internationally. As regards automatic exchange of information, America may end up trailing much of the world since the Federal authorities evidently have limited legal right to demand States’ statistics.

What did he see in her?

What did he see in her?

On the other hand,  America’s antithetical view to John Donne’s meditation, ‘No man is an island,’ may not be all bad. As Mrs Arthur Miller herself once observed, ‘If I’d obeyed all the rules, I’d never have got anywhere’.

Putting a Price on Morality

The only relationship between morality and tax?

The only relationship between morality and tax?

‘If you prick us, do we not bleed?’ Well, not if we are a company. This was the point on which I was reduced to a state of heckling at the Lisbon conference described in my previous post. A Breakout ‘Conversation’ – Breakout ‘Sessions’ are SO last decade –  on ‘Tax and Morality’ was irresistible. (Look, when you are choosing between ‘Documentation requirements under BEPS’ and ‘Tax and Morality’,  irresistible is a relative concept.)

That the first question was simply whether tax and morality went together like a horse and  carriage (not precisely those words, but definitely the idea) was unacceptable. Corporate Tax and Personal Tax, as conceded by the moderator in dealing with my outburst, needed to be treated separately, even if the ultimate conclusion might be ‘yes’. Companies are Children of a Lesser God (their shareholders), and it is nigh impossible to pin anything high and mighty on them.

To me, all this populist corporate morality  posturing over the last few years, embarrassingly sparked off by a British Parliamentary Committee chaired by the alleged beneficiary of a Liechtenstein trust, has been one long yawn of poppycock. The most convincing argument regarding Corporate Morality came from a British colleague and old friend, who managed to dredge up the Parliamentary Proceedings leading to the enactment of certain joint-stock companies in the 17th century, that included some kind of public purpose. (I have been unable to confirm this in independent research, but he is a good bloke, so he probably knows what he is talking about.)

On returning home, thanks to an obituary in The Economist, the issue of Morality and Personal Tax was placed into focus. Irwin Schiff, who died in a Federal Prison last month, was a self-styled libertarian who refused to pay Federal Tax in the United States and, often with time on his hands in various open facilities financed by the idiots who did pay their taxes, wrote several books on the subject.

What was remarkable, and so typical of the different approaches of Europeans and Americans to tax, was that his lifelong struggle had nothing whatsoever to do with morality. In America, to this very day, morality is to taxation what a bicycle is to a fish. You pay taxes because the law forces you to. If the law is an ass and doesn’t close a loophole that allows you not to pay tax, you are an ass if you pay. C’est tout.

The late (literally, and with his tax filings) Mr Schiff attacked the income tax on the basis of it being unconstitutional. Now, I admit to not understanding this (and, neither, it appears did various US judges over the years who sent him to cool off in correctional facilities). The income tax was never popular. It was instituted during the Civil War when, to get at citizens clearing off from the land of the free and the home of the brave, it wasn’t escaped by leaving the US – a price still being paid by US Citizens overseas , and currently copied only by that other regional superpower, Eritrea. It was removed in the 1870s and only made it big-time when Congress passed the 16th Amendment to the Constitution in 1913 (the wrangle in recent years over Obamacare revolved around whether the required federal payments by individuals fell within the Amendment).

I personally do believe (as discussed in a number of earlier posts) that there is a moral responsibility on individuals to pay personal tax. However, there is something simple and attractive about the American approach. We Europeans could not begin to understand Mr Schiff. He lived (when not incarcerated) in Nevada, who few would dub the moral capital of the world. He dressed like a second-hand car salesman and represented himself in court (presumably because no self-respecting lawyer thought he had a case – his arguments  drew heavily on ridiculous sophistry).

Promo or mugshot?

Promo or mugshot?

Schiff made a fortune with such Pythonesque titles as ‘The Biggest Con: How the Government is Fleecing You’ and ‘How Anyone Can Stop Paying Income Taxes’, but the bit I find hardest to comprehend could best be summed up in that wonderful exchange between the legendary Jack Benny and a thug: “Your money or your life?….Look bud, I said ‘Your money of your life’.” …”I’m thinking, I’m thinking!” Forget morality, it seems even freedom has a price in the land of the free.

 

 

The spotlight beside the golden door

When did she renounce her first religion?

When did she renounce her first religion?

Fifty years ago today, the New York Times announced that Elizabeth Taylor  had failed in her attempt to renounce US citizenship. Required to disavow ‘all allegiance and fidelity’ to the United States, she found herself  unable to do so. Now, allegiance and fidelity are terms Ms Taylor had a lot of experience disavowing – eight lots of experience, to be precise: Mr Hilton, Mr Wilding, Mr Todd, Mr Fisher, Mr Burton (Take one), Mr Burton (Take two), Mr Warner and Mr Fortensky.

Ms Taylor, somewhat disingenuously, declared her reason for renouncing her citizenship as wanting to have the same citizenship as her then husband-for-the-first-time , Richard Burton. Had Burton, by reason of his birth, been a Welsh Nationalist (which he was patently not), the argument may have had some traction. But Taylor did not need to seek the same British citizenship as her husband for the convenient reason that she was British, born and bred.

The only reason that the Cleopatra star wished to be rid of her American passport was that she was living and working in Europe at the time, and she did not want to have to pay tax in the US.

Nothing has changed in fifty years. People are renouncing their citizenship right, left and centre (although, on this occasion, I suppose that should be ‘center’). Whereas, in the conscience-ridden and patriotic ’60s ordinary people had understandable difficulty in renouncing allegiance and fidelity – nowadays, if it will save a buck or two, who the hell cares about such outdated emotional claptrap?

Thaddeus Stevens who roomed with Al Gore at Harvard

Thaddeus Stevens who roomed with Al Gore at Harvard

But, of course, as in so many other respects, this aspect of  US Tax Law is insane. Eritrea is the only other nation that taxes income on the basis of citizenship. I admit that I have never been to Eritrea (in fact, I would not know where to find it on a map, so it is just as well I have never tried to get there), but my assumption is that Fifth Avenue it is not. One can almost sympathize with successive Eritrean governments trying to plug their fiscal hole with takings from comparatively wealthy citizens abroad. One could also sympathize, if one were living a hundred and fifty years ago, with Thaddeus Stevens and his House Ways and Means Committee wanting to clobber Yankees escaping the Civil War. But things have moved on since then. The  dysfunctional American tax system allows multi-national corporations to shelter profits overseas, provides countless tax breaks to domestic taxpayers and has enough loopholes to fill whatever you can fill with loopholes. So, choosing to chase expatriates not currently benefiting from the public spending of tax revenues is barmy.

Beyond the idiocy of citizenship-based taxation, it is the offer of a ‘Get out of jail free’ card by relinquishing citizenship that I, a non-American with no aspirations to become one, find distasteful. I am very proud and happy that I became an Israeli citizen a quarter of a century ago. This is my home. This is the place where  I raised my children and the place where they are now raising theirs. But I am also proud of being British. It was Britain that offered my grandparents refuge when, over a century ago, they had to escape the stink-hole that was, and possibly still is, Ukraine. It was Britain that stood alone against the greatest evil yet known to man in 1940 and 1941. It was Britain that gave me the education that enabled me to get on in life. Britain does not present me with a dilemma. There is no reason for me to consider giving up my citizenship.

Expatriate Americans, on the other hand, faced with horrendous annual reporting requirements, as well as potentially horrible taxes, have to make a real decision. For those with a conscience, it is an almost impossible situation. How does a native-born American disavow ‘all allegiance and fidelity’? Even I, a non-American, would have difficulty making a  statement like that about the one nation on the planet that, when push came to shove,  has held it all together for the last hundred years.

Still liable to tax

Still liable to tax

Come on Uncle Sam. This year marks the 150th anniversary of the end of the  Civil War. If you can make peace  with Cuba, you can  make peace with your expatriates. They are the best ambassadors you’ve got (although I’m not sure about Liz Taylor – she was a bit of an embarrassment at times, even for an American).

 

Yes we can!

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

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

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

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

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

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

Golf - Putin style

Golf – Putin style

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

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

A typical 2015 day at the White House

A typical 2015 day at the White House

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

Taking the mojo out of inversions

By now, everybody has heard of the aborted takeover of  British pharmaceutical firm AstraZeneca by US giant, Pfizer. The latest in a series of US corporate inversions, the new corporate structure was  to be headed by the smaller UK company, thus largely spiriting the merged group beyond the lascivious tentacles of the US Internal Revenue Service.

Fascinated by the subject, I trawled  the quality press and professional literature for relevant articles. As I will explain later, despite the extensive coverage of the topic, I was utterly frustrated by the universally poor standard of reporting. The experience brought back vivid memories of  my first fresh-off-the-production-line car.

Twenty-five years ago, I took delivery of a sparkling white  Austin Montego. To be precise, by that stage in Austin’s long and painful decline as part of the government-owned British Leyland, it was simply a Montego: an orphaned car, no make or mark  willing to admit parenthood.

The ultimate driving machine

The ultimate driving machine

I think I realized there was something wrong when I first clapped eyes on it. Arriving at the delivery point, and after completing the relevant paperwork, I was confronted with a neat row of identical vehicles. I noticed that one of the newborn had a white spot of paint disgracing the otherwise pure black bumper. I prayed but to no avail. That was my car. A black blob hurriedly splashed onto the offending area, the car was soon heading for home with yours truly at the wheel. By the time I reached our car park, the driver’s mirror had fallen off the windscreen. By the end of the 12 month guarantee period the car was on its fourth alternator. Driving the Montego made me imagine piloting a Spitfire in the Battle of Britain. Before the car was finally towed away for the last time from under our house some twelve years later, anything that was not bolted to the exterior had fallen off and the lining of the ceiling had sagged down as far as the dashboard, giving the impression that the car was a mobile bordello.

Some years later I saw a documentary about the, by then defunct,  factory where my car was built. A group of former production-line workers sat in the pub explaining how it all worked. It turned out that, if someone was sick, late for work or needed a pee, the production line did not stop. When it got to fitting their part, either one of the other workers  did a rush job or, if the part was not considered critical by the professors manning the production line, it would simply be omitted. This was related without humour or bitterness – just that confident matter-of-factness that is the mark of the unmitigated moron.

Which brings me to my point.

Financial journalist phoning in his copy

Financial journalist phoning in his copy

Every single article that I read about US corporate inversions (and there were many) had critical parts missing or not properly connected to each other, resulting in the whole being incomprehensible (even after trying to put the jig-saw puzzle of articles together with all the pieces laid out on my dining table).  Had the articles been my Montego, by the time I got home on that first day I would have been driving an engineless go-kart .

The thinking behind inversions is that, since US corporate tax is punitive and there are loads of  planning schemes on how not to pay tax on unremitted income from abroad – there is a clear advantage in a US group having its parent company in a convenient jurisdiction beyond the shores of the United States. Enter the corporate inversion which, once upon a time, enabled the shareholders to quite simply insert a foreign holding company between themselves and the US company.  Convenient locations were the usual suspects that had the common virtue of never having heard of income tax.  In 2004 the US authorities woke up and imposed anti-avoidance legislation that effectively ignored the inversion to the foreign jurisdiction if at least 20% of the ownership in the new parent did not pass to third parties. The exception to this rule was if there were substantial business activities in the foreign jurisdiction which led companies to start looking at slightly less sunny jurisdictions such as Switzerland and Ireland where tax could be magically reduced to manageable proportions.

With the recent wave of mergers of the Pfizer – AstraZeneca type (the UK is still a lot more favorable tax location than the US) which meet both the 20% rule and substantial business activity test, Congress is now considering upping the 20% to 50% and tightening up the substantial business activity rules. Loss of control is expected to be just a little too much for the average US multinational.

The problem with the available literature on the subject is that, while inversion transactions are presented (on an amalgamated basis) as dark acts of genius to escape the draconian levels of US tax while avoiding US CFC legislation  and enabling tax-free repatriation of cash, it is far from clear how any of this is to be achieved.

Firstly, the transfer of the US company under the new foreign parent appears to be a s367a transaction which only escapes tax if a Gain Recognition Agreement is achieved with the IRS (under the circumstances I don’t know if that is a slam dunk).  Next, if the US company wants to avoid CFC legislation  it needs to sell/dividend/transfer its foreign subsidiaries to the foreign parent – which would generally involve a lot of tax. As regards ‘repatriation’ of cash trapped abroad, unless the US company’s foreign subsidiaries are transferred to the foreign parent,  the profits still have to pass through the US company – incurring the same US tax as before the merger plus likely withholding tax to the foreign parent.

While some articles clearly state that the CFC problem would remain, others hint at the US company disappearing into the new foreign parent. One states that the main advantage is that the foreign parent could loan extensive amounts to the US company enabling US profits to be cut by half due to interest expenses. When it comes to repatriation, I found one truly beautiful and incomprehensible graphic that has the merger involving cash payments to the US company and subsequent loans from Barbados through the foreign parent to the US company. I discussed all this with two US international tax experts who sympathised and went off to lunch.

My take on all this is that inversions must be very complicated and financial journalists cannot afford to burn copy when they realize they are out of their depth.

Vorsprung durch technik. Almost

Vorsprung durch technik. Almost

I do wonder, however, whether with Congress hot on the tails of multinationals (Senators also presumably do not understand what is going on), the planning may be a little too clever for comfort. In that same documentary about British Leyland, there was a piece about the Triumph Stag. The Stag was a cabriolet designed in Italy, the contours of which were generally considered to be thirty years ahead of their time. It was a truly magnificent driving machine. While Triumph’s sister mark, Rover, fitted  Buick 3.6 litre engines in its top-of-the-range model, the executives at Triumph decided they could go one better. Triumph had a boring family saloon called the Dolomite that just happened to have a 1.8 litre engine. You guessed it. They took two Dolomite engines and fused them together. This explains why, throughout my youth, when traveling on motorways I would regularly see Stag owners lounging luxuriously in their Italian leather seats, waiting to be towed. There has to be a lesson there somewhere.

 

 

 

Tracking tax avoidance

"You drive"

“You drive”

” U.S. Lawmakers Slam Caterpillar Over Tax Avoidance”. That headline last month in one of our drab but professional  trade mags brought a sardonic smile to my face as I imagined a black-windowed Hummer careering around Capitol Hill jam-packed with Senators. At the vehicle’s wheel was Carl Levin who suddenly screamed “Ya-hoo” ,or whatever 80-year-old  Americans from Michigan scream when they are excited, as he pushed his foot to the floor so as not to miss the multipede innocently sauntering across Pennsylvania Avenue in search of a tax-free leaf.

Of course, if they had tried that schtick with the Caterpillar the lawmakers had in mind, what was left of the Hummer would have been humming sweet melodies while the occupants queued at St Peter’s Pearly Gates.

The April 1 hearing of the Senate Homeland Security and Governmental Affairs Permanent Subcommittee on Investigations smacked of deja vu-vu-vu. Having belatedly discovered that half the American Economy has taken up skiing in Switzerland or boozing in Ireland, rather than dealing with the root of the problem, the Senate appears to be picking the multinationals off one by one to ‘out ‘ them – this time, Caterpillar.  The  heavy machinery group’s international tax planning looks pretty standard fare for US companies in the last twenty years (Switzerland, IP, Transfer Pricing – you can join the dots yourselves) and, although nobody would suggest comparison,  it is interesting to note that that very committee, in a former guise, was chaired in the early fifties by one Senator Joseph McCarthy of Wisconsin.

That committee has, however, come a long way since the Witch-hunts  and this was no blanket kick in the pants.

Regular readers will recall that, around 18 months ago,  the British Parliament held an auto-de-fe for Starbucks, Amazon and Google in which I do not recall hearing a single word of dissention as Margaret Hodge fanned the flames.

What interested me was how the members of the committee quoted in the article showed once again just how divided American politicians are on you-name-it-they’ll-argue-it.

Carl Levin (Democrat) implied that this sort of thing had to stop, John McCain (Republican – Sarah Palin’s side-kick) said that it was the law that needed changing, while Rand Paul (Tea) apologized for dragging the company’s representatives there in the first place.

On the other hand, at least nobody came out with the claim that Caterpillar is immoral, which has become the mantra of every self-respecting  European legislature, even the French one.

I found myself sympathising with all three senators – American companies paying minimal taxes has to stop, the law needs a radical overhaul and why drag busy people to Washington when they are only doing their job of maximizing profits for their shareholders?

2016?

2016?

Maybe there is hope for the American political system after all.

Bits in pieces

It doesn't get any easier when they get older

It doesn’t get any easier when they get older

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

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

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

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

There go another 25 Bitcoins. Time to buy a supercomputer

There go another 25 Bitcoins. Time to buy a supercomputer

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

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

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

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

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

Real men don't speculate with Bitcoins

Real men don’t speculate with Bitcoins

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

In Memoriam

There would be no problem if one of these boys delivered our newspapers

There would be no problem if one of these boys delivered our newspapers

Venturing downstairs at the crack of dawn every weekday morning, my first conscious daily act is to open the front door and hunt for the newspaper. Invariably within a five yard radius of the letter-box, it is pot luck if it is in pristine condition on the path, lying face-down in a puddle in the self-irrigating flower-bed, or sporting a black tyre-mark right across the front page.

Everybody has their set order for reading the newspaper and I am no exception  – after a cursory glance at the front page I spread-eagle the broadsheet over the kitchen table and go straight for the bottom of Page 2 – the Obituary. It is the same thing when the Economist arrives – only this time it is the back page (the whole delicious expanse of it).

The discerning Obituary buff will know that  obituaries do not come in a one size-fits all format. One day it can be a serial murderer, the next a long-forgotten statesman and the following day a combination of the two.  With  the Great Reaper inundated over the last few weeks with politicians leaving the world stage – Adolfo Suarez, the former prime minister of Spain (one of my 1970s heroes), Anthony Wedgwood Benn, an off-the-wall  British cabinet minister (one of my 1970s bogeymen) and Ahmed Tejan Kabbah, former president of Sierra Leone (nice to know Sierra Leone had a government), I was intrigued by a piece a few days ago devoted to Randolph W Thrower who died at the tidy age of  exactly 100. Mr Thrower’s main claim to fame was that, for a brief moment in history, he was IRS Commissioner.

Thrower was clearly a decent man. As a young lawyer in Georgia in the late 1930s he defended blacks facing the death penalty on trumped up charges. In a speech on legal ethics  towards the end of his life  he stated “Every lawyer in the South was not an Atticus Finch of “To Kill a Mocking Bird”, to refer to one blemish of the past”; but he clearly was, and the point was missed by every serially plagiarizing obituary I read.

The acceptable face of taxation

The acceptable face of taxation

In his short 18 month tenure as Commissioner he was instrumental in reforms that helped the black community and the poor. However, it was his ouster that won him his place in the New York Times death column.  Reminiscent of a recent witch-hunt of political not-for-profit organizations that cost the Acting Commissioner and other senior officials their jobs, Thrower was not comfortable with the pressure coming from the White House to investigate the tax affairs of journalists and politicians. Not being armed with the benefit of hindsight and sure the President would be disturbed by the actions of his staff, he decided to request a personal  meeting. Unfortunately for Thrower and – it would later transpire – the entire American people, the President at the time was  Richard M. Nixon, himself a lawyer born the same year as the Commissioner, who would not have wasted his valuable time defending innocent blacks in the 1930s when there was far too much work to be done preparing to lynch the entire country. Thrower never got the meeting, but he did receive a personal phone call from John D Ehrlichman firing him.

Those infamous White House Tapes record that, when they were looking for a successor to Thrower, Nixon demanded “I want to be sure he is a ruthless son of a bitch, that he will do what he is told, that every income tax return I want to see I see, and that he will go after our enemies and not go after our friends.” Now that is fighting talk (in fact the sort of talk you would expect from gentlemen managed by another very recent deceased – world famous boxing promoter Mickey Duff). King Richard Nixon  playing President Richard Plantagenet (try reading the Soliloquy – “Now is the winter of our discontent etc etc” imagining Nixon as Richard III –  it works). This was Machiavelli without, as Kennedy pointed out to Ted Sorensen on the night of the 1960 election, any Class.

Evidently, Thrower’s problems with the White House started in 1970 when they sent him G Gordon Liddy as candidate to head the Bureau of Alcohol, Tobacco and Firearms. “He was a gun nut,” Mr Thrower said. “They wanted me to put a gun nut in charge of guns.” In the event Liddy later had a celebrated short-lived career planning the Watergate break-in. No shots were fired.

Rehabilitation gone nuts. Look who got centre stage

Rehabilitation gone nuts. Look who got centre stage

If I am not mistaken, whilst in the country whose yoke the Americans shook off a couple of hundred years ago taxes are technically paid to the monarch, in America they belong to the people. Mr Nixon, who was busy at the time creating the Imperial Presidency, evidently lost sight of this, as – to a lesser extent – other executive officers (but perhaps not presidents) have done since. Nixon really did represent just about everything that could go wrong with democracy and it was a remarkable act of courage, tolerance and, perhaps, folly on the part of Bill Clinton to eulogize him at his funeral.

Reading Thrower’s obituaries, another line  from that late-life speech of his seemed appropriate. It was a quote from Robert Browning:”Ah, but a man’s reach should exceed his grasp, or what’s a heaven for.”  As for Nixon, back in 1968 when he was running for the Presidency, both  he and the utterly decent Hubert Humphrey made  compulsory appearances on the zany show of the day “Rowan and Martin’s Laugh-in” which launched the careers of, among others, a bikini-clad Goldie Hawn. After much debate among his advisers he performed Judy Carne’s weekly catch-phrase. Staring into the camera Tricky Dick exclaimed: “Sock it to me!” More’s the pity one of  Mickey Duff ‘s clients didn’t hear his request.

Rest in Peace, Randolph W. Thrower, a man of integrity. The Tax World is indebted to you.

A dope makes a hash of things

Not funny? Charlie Chaplin was a genuine fan

Not funny? Charlie Chaplin was a genuine fan

Depressingly, whenever I mention British Humour (sic) to an American  I receive the stock response: “Benny Hill!” I used to fight back, arguing that Hill’s humour was cheap smut eventually only permitted for export (to America), while true British Humour was a cerebral affair of the utmost sophistication. Balderdash!  I was kidding myself. Benny Hill was a late 20th century take on the Bedroom Farce genre that had been highly popular since late Victorian times and reached its zenith in the 1960s in the person of Brian Rix and his famously dropping trousers. One of the main ingredients of a Bedroom Farce is that the acting is frenetic with the audience  not given time to think; all laughter is on impulse, à la Benny Hill.

They are generally a lot worse

They are generally a lot worse

The one and only time I attended a Farce was at the impressionable age of 14,  in August 1972.  All I can remember is that “The Man Most Likely To..”  staged that summer season at the end of Bournemouth Pier, involved lots of slamming bedroom doors and Henry McGee, Benny Hill’s long-suffering straight man, displaying his naked derrière to a guffawing audience. On leaving the theatre, apart from a roaring trade in beach balls and rock candy, there was an ample selection of Robert McGill’s saucy postcards featuring cartoon depictions of leering men and buxom ladies from a bygone era – quintessentially British smut. (If you are ever looking for a sure way to get an Englishman to snigger, just say the word “Bottom” in a suggestive tone – disappointed punters guaranteed their money back).

While Lord Rix’s 90th birthday next week would be reason enough to bring Bedroom Farces and Benny Hill to mind, I admit that the recollection  had more to do with the antics of the current hapless occupant of the Élysée Palace. It is apparent that President Wheredidiputmyshoes  has – Ooh La La! – been banging rather too many bedroom doors in the course of his career, and has lately been having acute difficulty  deciding where to wake up. This moral confusion must surely be taking its toll on his already abysmal record in running the country. Take, for example, his New Year speech in which he had an epiphany and all of a sudden said that everyone was paying too much tax. A noble line for any sane Frenchman but, lest we forget, he is actively clobbering high income earners this year with a 75% marginal tax rate (albeit levied on employers) that was finally approved by the Constitutional Court as they kissed goodbye to 2013. This ordinary man  never actually married so, technically free to wander, does not appear to have any guiding star. If France is not careful, he could lead the entire nation into the River Seine (the Left Bank of which God is unlikely to split for those Gitanes-smoking Parisian intelligentsia).

"I said POT Shop!"

“I said POT Shop!”

Across the pond, the Americans are having their own problems with their moral compass. On January 1, Colorado became the first State to permit recreational marijuana. I don’t know whether  weed is a good thing or not (I do really, but I don’t want you to think that I am a narrow-minded tax accountant). What is clear , however,  is that this thing has not been thought through. Because growing, processing and selling pot are still Federal offences, and despite Washington stating that the Feds will hold off – if you are a Coloradoan wanting to feed your habit with a little sideline in cultivation, you will not be able to open a bank account due to federal money laundering rules. If you cannot open a bank account, you will have difficulty running a kosher business in the stuff – meaning that you are unlikely to pay tax. And while we are on the subject of tax, Big Brother has to decide where pot should be classified in the  excise tax hit parade. Does the fact that alcohol leads some people to kill while marijuana leads others to float, mean that it should be taxed more lightly than alcohol, which for some (like me) is a little hard to swallow? At present the state tax on cannabis is much higher than on alcohol. And what about when comparing a joint to a publicly ostracized cigarette?

When I read about Western Government decisions these days – from muted reactions to Syria and Iran to juvenile brawling on Capitol Hill – I  picture the entire Western World on its back  floating calmly down a river late at night, reefer in mouth and girl at each side, not quite managing to focus on the shining stars in the clear night sky and blissfully unaware of the waterfall ahead. There must be a moral in there somewhere, or maybe not.

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