Tax Break

John Fisher, international tax consultant

Archive for the category “United States”

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?



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.

Dallas, Taxus

"The Kennedys"

“The Kennedys”

According to a study in the influential “British Medical Journal”, if you are looking for a safe profession (leaving aside Accountant or Lawyer), you would be better advised to plump for Bomb Disposal Expert or Formula 1 Racing Driver than Soap Opera Star. The BMJ informs us that characters in these B-TV sagas have three times the normal mortality rate across age groups. Taken together with the other essential ingredients of a Soap – halting scripts, multiple rambling semi-plausible plots, and the occasional totally implausible shock occurrence (remember when the entire 9th series of Dallas turned out to be a dream?) – “The Kennedys” could have easily qualified for a grant from the Soap Opera Arts Council.

With newsprint and screens currently full of the  tragic moment in Dallas  exactly 50 years ago next Friday, my unhinged thoughts drifted unwittingly to other Reality Soaps and, particularly, those of the Taxploitation Genre.

The ink is not yet dry on the OECD Base Erosion and Profit Shifting Action Plan and hurriedly drafted scripts, including those of various tax authorities, are already prophesying the impossibility of reforming the taxation of the digital economy, which is so essential. Flashbacks remind us that the whole international tax mess started after the First World War, when  the Gentlemen’s Club of Europe and America decided that taxation should follow residence – so that profits did not remain in the hands of the off-screen Colonial extras who had their hands on  the raw materials , but flowed up to the stars at centre-stage.

The public and their governments now scream that , with the onset of internet maturity,  it is time to upset the digital world order – a rare Soap moment calling for  Tax Armageddon. Surely the time has come to look more closely at where transactions are being consummated –  recognizing that data-collection should be taxable where the data is collected?  But no, it is noted that there is absolute connectivity between the digital and old  economies – if we change digital, we have to change everything – and that exclusive Gentlemen’s Club seems to be saying: “That will not do. We cannot flash the bat outside the left stump”. They prefer to carry on with the same script tweaking it over the long-term trying to achieve governments’ stated goals.

Marilyn is far left, Carlos is far right (he was, after all, from Franco's Spain)

Marilyn is far left, Carlos is far right (he was, after all, from Franco’s Spain)

This brought back memories of my favourite soap during my formative years – the low-budget, cardboard-walled “Crossroads” about a Midlands Motel, which ran without interruption from 1964 to 1988. In its early years it followed all the normal rules until, in 1968, sometime around the assassination of RFK, the scriptwriter must have had enough of writing his daily drivel. In an act of devilish inspiration, and right under the noses of the sleeping producers, he decided to marry-off the extremely “working-class” Motel waitress, Marilyn Gates, to the local vicar, Peter Hope. I can picture the scriptwriter the night before the announcement  (episodes were filmed in a single take) on a bender in his cheap hotel (motel?) room, poring over the ubiquitous Gideons’ Bible hoping for an epiphany,  hitting on the enigmatic Mary Magdalene, and the deed was done.

When the producers woke up and realized that, while evolution is the thing with Soap Scripts, this one was going to end in tears, they probably did contemplate contributing to the statistics on which that BMJ article was based. However, they had a problem. Only a few weeks previously they had killed off Carlos, the beloved Spanish Chef who died saving children from a burning Orphanage. Another cardinal rule of Soaps is – you can’t kill people off too often; (they may have killed off the scriptwriter, but he would not have been missed unless he was planning the first Miss Crossroads competition for the Christmas special.) The solution was, literally, unbelievable. With the raising of a middle-digit to their intellectually superior viewers (including 10-year-old me),  one bright evening a few months after the wedding the episode opened with an announcement: “From today, there is a new Marilyn Hope” and, in keeping with the miracles promised by her Faith,  the said Marilyn Hope appeared as a prissy, blue-stockinged, Queen’s English-speaking, Vicar’s wife…….and they all lived happily ever after (or, at least, until they were buried by budgetary cuts in 1988).

And that is what the scriptwriters of the tax world might be trying to do to their governments and  us. Cornered in a dead-end without a feasible storyline, instead of bumping off the entire cast, they may just try and dress digital taxation up in a different pair of stockings (a bit of consumer jurisdiction VAT here, a service Permanent Establishment there).

john_f__kennedyOne cold Tuesday afternoon a few years back, I stood shivering on the Grassy Knoll. It was one of the most unremarkable places I have ever made a special point of visiting. Apart from the anonymously named “Sixth Floor Museum” behind me, the only indication of what happened that terrible Friday were two metal studs in the approach road marking where the bullets hit. Whatever Kennedy was, or wasn’t, he inspired new frontiers. The Tax World could do with another JFK right now. Obama’s policy wonks and speechwriters should get to work on their laptops.

Tax that must not be named

Big Brother

Big Brother

Standing in the Great Hall of Hogwarts one day this summer in the company of my youngest son and half of the picture-popping population of Japan, I was the only muggle who, when asked by the Warner Brothers Studio Guide which House I would want the Sorting Hat to direct me to, did not reply Gryffindor. To my offspring’s  immense embarrassment, I went for Slytherin which produced by far the most interesting characters in the Harry Potter pantheon.

As Halloween loomed ominously over the foggy horizon last week, I had reason to rejoice over my unconventional choice of House, as an old colleague dropped by the office to drain my brain over a cup of steaming coffee. He just happens to be the kid brother of Lucius Malfoy, Lord Whatshisname’s trusted lieutenant. (If any parseltongue speakers happen to be passing by this blog on the way to spying on something more interesting, I wish to state categorically that my old colleague is an exceptionally nice guy whom it is always a pleasure to meet. Any relative of Lucius Malfoy is a friend of mine – really.)

If you fancy scaring someone this Halloween and you happen to be passing through Washington DC, creep up on a member of the House Ways and Means Committee and whisper “V.A.T.” in his ear.

Washington does not like VAT. In a city that breeds acronyms with pride, VAT is a dirty acronym.

Republicans and, to a lesser extent, Democrats  will – while frothing at the mouth – provide an excellent list of reasons not to impose a VAT in America: it hasn’t proven itself; the tax is regressive (clobbers poor more than rich); it will lead to less spending in the economy and hence recession; it will lead to inflation; it is not transparent; it will encourage Big Government. They have a point – the point at the top of their wizardy Dunce Hats.

Obama's Healthcare Halloween Costume

Obama’s Healthcare Halloween Costume

If these politicians would strain their heads for a moment to see beyond  the Atlantic Seaboard, they might notice that VAT has been successfully adopted in around 150 countries (It will surprise American politicians that there are more than 150 countries. They used to think there are only 4  – America, Canada, Russia and Abroad). The tax is, on the face of it, regressive (wealthy people spend less of their annual income on consumption)  but this is countered by the freedom to introduce negative income tax for lower-income groups (or at least raise the threshold for paying tax) as well as the fact that VAT is effectively a lump-sum tax on wealth – over a lifetime even the wealthy tend to spend a large chunk of their dosh and so their capital (which is otherwise free of tax) partially goes on VAT. Moreover, governments often exempt transactions considered basic living expenses (food, clothing, stay at the Kensington Hilton). While experience has shown that the imposition of VAT leads to a one time increase in prices which could have an effect on demand, as part of a government’s macroeconomic policy that can be offset by decreases in corporate and income tax rates which boost the economy. There is little evidence of inflation as a result of VAT and transparency can be guaranteed by insisting on the VAT amount being included on price tags (which some countries have actually outlawed in supermarkets and retail stores because it confuses the consumer – just like the abominal sales tax in the US). As regards the fear of Big Government, VAT is a relatively efficient tax, the rate of which can be adjusted at a stroke – but while during the inflationary 1970s major increases did occur, nowadays – in normal economic circumstances – increases tend to be incremental (a recent exception is Japan, where the tax has been historically exceptionally low).

The real reason that US politicians do not go for a federal VAT appears to be none-of-the-above. The American political system is too populist for its own good. Because of the Primaries system in US elections Members of Congress have their eyes permanently fixed on re-election (especially in the House of Representatives with two-year terms) so that the Whips have limited power to rein them in (they also have nothing to offer them by way of patronage since they cannot serve simultaneously in Congress and the Administration).

Not-So-Sweet Nutcracker

Not-So-Sweet Nutcracker

To understand the contrast with Britain: my favourite Whip story comes from 1979 when the Labour Party was reduced to ignominious opposition by the Thatcher juggernaut. Newly elected Jack Straw (much later Labour Foreign Secretary) was confronted by the fearsome Walter Harrison. Without saying a word, the legendary Whip grabbed Straw by his privates and squeezed hard (I shall refrain from the graphic details as my kids read this). Shocked and in pain, Straw managed to gasp: “What did I do?” The reply from the blunt Yorkshireman was quick in coming: “Nowt, but think what I would do to you if you ever crossed me”.

Overall, the Americans do not seem to have much of a choice in the long-term. Even if they get beyond the current recurring gridlock, the dream to slash corporate tax rates while slashing the deficit will surely not be achieved without a VAT. As opposed to Japan, the US still has the luxury of controlling the printing presses of the world’s reserve currency. The threat of that position being taken by the Euro seems to have subsided by default (literally). Whether the Yuan, too easily controlled by an authoritarian government, could take its place is doubtful. But the party surely cannot go on for ever.

US politicians would do well to come to terms with a federal consumption tax before the burgeoning deficit consumes them. Wishing you all a gruesome Halloween.

What’s in a name?

View Of A Pig

View Of A Pig

The first poem I studied in secondary school began: “The pig lay on a barrow dead, motionless”. Poet Laureate Ted Hughes’ ensuing nine sickeningly graphic, non-rhyming stanzas made me want to vomit and scuppered any chance that Wordsworth, Byron or Shelley might offer the  key to my romantic soul.

It was not surprising, therefore, that the death of Nobel Laureate Seamus Heaney a few weeks ago caused nothing but a slight flutter in the iambic pentameter of my heart.

Heaney,  like  many modern poets who had studied the works of William McGonnagal – the world’s worst practitioner of the art – did not feel constrained by the need for the perfect rhyme-ending. He would happily plump for the partial rhyming of assonance (rhyming vowels) such as: “Between my finger and my thumb/ The squat pen rests; snug as a gun” or consonance, which is the same concept but with the consonants matching rather than the vowels: “We trekked and picked until the cans were full”. Assonance and consonance are, evidently, great ways to get a message across into the readers subconscious. Had I started my poetry appreciation career with Wordsworth’s “On Westminster Bridge” rather than Hughes’ pigswill, I might now be in a position to explain this – but I didn’t so I aint.

In recent years the heavily oil dependent economies of the western world have been energized by the development of “FRACKING” – the hydraulic fracturing of underground rock formations by the high-powered injection of water and other liquids to free enormous quantities of shale gas and oil. The Americans, particularly, have discovered that by widespread FRACKING they can raise the proverbial digit to the medieval dictatorships of the Middle East who have, for 40 years, been able to periodically  hold the world to ransom for a barrel of the black elixir. FRACKING is helping to fuel  the US economic recovery.

What is interesting is that  British hunting for shale gas has been less successful than in America. This has been largely due to greater public discourse on the subject and a much more significant populist backlash than across the Atlantic.

The Economist ran a leader a couple of weeks ago on the successful protests in a South East English village against FRACKING. Objections are based on environmental issues – there is a fear of greenhouse gas emissions and water pollution (not to mention earthquakes and the implosion of the earth’s crust), as well as the disruption caused by the diviners. The free-market Economist dismissed the environmental thing as balderdash (and who am I to argue?) but chose to understand the NIMBY (Not In My Back Yard) argument.

The neighbours make less of a fuss about this

The neighbours make less of a fuss about this

The reason FRACKING has worked in America, the Economist claims, is that landowners own the rights to what is under their fields and the States (rather than the Federal Government) tax the extracted oil and gas – pumping the revenue back into the local economy.  In Britain the State (strictly, the Crown, which is the thing the Queen wears on her head sometimes) owns the rights and almost all tax revenue flows to the central government coffers. Thus, the NIMBYs do not feel any advantage rising from the ashes of their disadvantage. As with so much else in the Tax Conundrum, ordinary people need to feel ownership of their taxation  – be it fracking, health care, education or bombing Syria – to make the system work. For once, the British should take a leaf out of the Americans’ book.

However, I think there is more to it than that. What’s in a name? For a word that does not officially exist (you try and find it in a respectable dictionary), FRACKING has penetrated the English language most effectively. In its various fictitious forms it is a noun, a transitive verb, an intransitive verb and, even, an adjective, closely shadowing its most infamous consonantal relative.

To the delight of the protesters, FRACKING even has a construction as a phrasal verb in the imperative  form followed by a particle. As a result, the protesters have been winning support waving banners with a short, punchy message that gives  more bang for its buck.  For those of you who spent your time in school studying the various metres in English Verse rather than English Grammar, the imperative in this case is FRACK and the “particle” is “OFF”. A hyphen between the two words is optional.  By association, FRACK is not a nice word, FRACKERS are not perceived as nice people and, as for FRACKING – absolutely “Not In My Back Yard”.

Perhaps the Power of Speech has taken on a new meaning.  Could it be that Consonance is helping to screw up the recovery of the British economy?

Till IRS Do Us Part

Now I know why they needed 15 in the gang. What genius.

Now I know why they needed 15 in the gang. What genius.

My first coherent memory is of an event  50 years ago this month when Ronnie Biggs and his South London mates pulled off the Great Train Robbery – a straight, plain vanilla crime involving stopping a mail train (hence the title), coshing the poor driver and making off with the booty (two and a half million pounds) to a nearby farmhouse. Simple, really. Since then, of course, crime has become more globally sophisticated – drugs, people-trafficking, money-laundering, electronic fraud – you name it, they’ve done it.

International tax has followed the same slippery slope of sophistication in recent generations. When I first committed International Tax Planning, I drew a load of boxes, triangles and circles with connecting lines on a flip-chart and then used a different coloured pen to move them around the sheet and, hence, the world. It was easy and mechanical. You could invest from England in Belgium via Singapore at the stroke of a pen – a feat even Freddie Laker’s discount Skytrain airline  couldn’t match. The fun really started when I mixed the boxes and triangles forming “hybrid” things which clients just gaped at in awe. Although professionals paid lip-service to ‘substance’, that was something people generally associated with drug abuse and ignored accordingly.

I knew things were going awry when I first joined a team presenting the preliminary results of a TESCM (Tax Efficient Supply Chain Management) project in Amsterdam. Our proposal was to move the European Headquarters of a multinational client from the Netherlands to Switzerland. By now, instead of the flip-chart we had a super-impressive Powerpoint presentation. We also had an audience of Dutch senior managers who had no intention of abandoning the Low Lands for the Alps and related to us accordingly. Substance was now, partially, something called People – and people didn’t conveniently fit into boxes unless they happened to be dead. And dead people don’t make good corporate tax planning tools.

International tax has been a gradually accelerating people-centric roller-coaster ever since. We, emotionally stunted, tax advisers are not really built for this but we attend courses on how to be human and learn to cope. The OECD is now busy placing stress on “People Functions” in establishing where profits should reside, which means that, in future, companies will either have to pay more tax or their managers will need to live in increasingly remote corners of the Globe.

In a world where substance is everything, American multinationals in particular have been scrambling to find the solution to their international tax problems. While, long before the people obsession, many countries included “business purpose” as a sine qua non for sufficient substance in not disregarding a transaction, in the past satisfactory responses  often fell into the philosophical category of “I like it ‘cos it’s good”.

Well, in recent years, things have been tightening up and last month the Barnes Group got hammered by a US Tax Court for establishing uninhabited companies in Delaware and Bermuda in a complex tax-free cash repatriation plan the business purpose of which it could not adequately explain.

So, in this increasingly sophisticated and strangling world, where lack of people and business purpose threaten to thwart the best-laid plans,  what are US tax advisors supposed to do?  With more than a nod to Hollywood, enter touchy, feely, international tax planning 2013 style.

She and I were born a week apart and she still looks nearly as young as me

She and I were born a week apart and she still looks nearly as young as me

Over the last quarter century, Hollywood has produced at least two blockbuster movies on the subject of immigration through marriage of convenience. The most recent was “The Proposal” with Sandra Bullock, but the more successful was  “Green Card” starring Andie McDowell ( I am always reminded of Dorothy Parker’s comment about Katherine Hepburn: “She ran the whole gamut of emotions from A to B”) and that Russian patriot with a French name (and French everything else),  Gerard Depardieu. In both movies the couples were interrogated by immigration officials under threat of being thrown to the dogs if their intentions were revealed to be less than honourable. In both cases they were found out, only to subsequently fall hopelessly in love.

At the same time as the Barnes Group was being burnt at the stake, Perrigo, a US provider of healthcare products announced  a merger with Elan, a much smaller Irish biotech company. The new company established to effect the merger will be an Irish Co with the name….waitforit….Perrigo.

Despite the fact that the two companies are both in healthcare, they produce entirely different products. What they are set to produce going forward are significant tax savings as Perrigo successfully inverts part of its operations beyond the clutches of the horrific US tax system. While decade-old anti-inversion rules have successfully slowed the expatriation of US companies, IRS expatriation officials will presumably have little to say when Perrigo and Elan can successfully show they are in bed together. But is this true love? Who knows? Certainly not the IRS.

Did you know that Phil Collins could also act?

Did you know that Phil Collins could also act?

I often look back nostalgically on the good old days when tax planning was simple and everything was possible.  As a young professional I used to regularly pass through Waterloo Station on the way back from lecturing courses. As I dashed from the Main Line platform I would pass a well endowed flower stall manned by a cheery fellow from South London.  The fragrant smell of the flowers and his friendly manner always gave me a good-to-be-alive-and-young lift. I later learned that the florist’s name was Buster Edwards. In an earlier life he had been one of the Great Train Robbers. Simple, really.

No representation without taxation

Temple of the Western World

Temple of the Western World

Ex-nun Karen Armstrong writes in her iconoclastic book “A History of God” that the rationale behind sacrifice of the first-born child in the ancient pagan world was the replenishment of the strength of the god believed to have begat it (begetting is what gods and men did in those days). In the intervening years mankind has made strides with the invention of the wheel, the plough and the iPhone but, as has been shown for the umpteenth time over the last fortnight, human sacrifice is still alive and well and living in Washington DC. I refer to the sacrificial dismissal (euphemistically called a “resignation”) of the Acting Commissioner of the Internal Revenue Service, Steven Miller, over bias against Republican organizations in the period prior to his appointment when the Service was under the command of a Bush Administration appointee.

The story so far.

If they had been denied 501(c)4 status, they would have shot the bastards

If they had been denied 501(c)4 status, they would have shot the bastards

Back in 2010, when Barack Obama was a lame-duck president looking at  his prospects for a second term (as opposed to today, when he is a lame-duck president not looking at his prospects for a second term),  the Cincinnati Ohio lair of the Internal Revenue Service was busy checking applications for 501(c)(4) status. 501(c)(4) is one of those rare teaspoonfuls of the milk of human kindness hidden in the Internal Revenue Code that grants tax-free status to organizations established for “social welfare” purposes. This is not quite the same as Apple  which spends lots of money on tax attorneys and accountants to achieve a similar result. In examining applications, the junior level IRS team charged with rooting out dodgy applications made the unfortunate mistake of scanning the  list of 2400-odd requests for potential abusers rather than putting on a blindfold and stabbing a pin in the sheet. Snuck amid the Aid the Aged, Help Our Heroes and Welfare for Warfare Widows organizations were Superpacs and suchlike aiming for the social welfare of Tea Party Members and other such weirdos standing for election to Congress. They rather naively used “Tea Party” or “Patriots” in their names – in their reactionary zeal they would have done well to take a leaf out of Mr Waverley’s book in the sixties’ series “The Man from U.N.C.L.E” – he ran his operation from behind a Chinese Laundry.

Anyone who has ever departed an American airport knows that “profiling” is not in  Homeland Security’s oxymoronic lexicon. I, an overweight  Jewish Accountant with a British passport, have on more than one occasion been subjected to a rigorous search while jealously observing prima facie candidates for Guantanamo Bay breezing past on the way to an early rendezvous with the Duty Free shop and its tempting illicit alcohol.

Jumping over the murky bits, two weeks ago at a meeting of the American Bar Association Steven Miller, the Acting Tax Commissioner,”planted” a question to Lois Lerner, the now suspended head of  the  Tax Exempt Organizations Division of the IRS, that solicited a pre-planned apology for procedures that had singled out organizations that were trying to deprive the nation  of its rightful taxes. Second mistake: if you work for the IRS don’t try to be too clever – it later transpired that, in making the apology, the IRS were trying to dampen down the effect of a Treasury audit that was about to be made public.

The time was now ripe for the Republican gum shoes on Capitol Hill to put the boot in. Who gave the orders? Who knew what? When did they know it? Why did they shut up? Did the White House know? Did someone tell President Satan-Incarnate?

Dragged before a Congressional Committee, the Acting Commissioner. who had not even been in office at the time, was forced to resign. His predecessor, Douglas Shulman would have been made to resign but he couldn’t because he had already gone, so he just got dragged before the Congressional Committee. Joseph H Grant,  the IRS tax exempt organization supremo, suddenly remembering that he had always wanted to take up fishing,  took early retirement . Lois Lerner – she of the apology to the Bar Association (how  anyone could choose to apologise for anything to a forum of lawyers, I will never understand) – took the 5th Amendment  and was promptly sent on a paid vacation in the hope that she would regain her power of speech.Meanwhile, Attorney-General Eric Holder did what Attorney-Generals were appointed to do – look serious and announce a criminal investigation.

This seems something of a storm in a teacup. I can understand the Republicans’ indignation at being caught with their hands in the till while freeloaders with names like “Hospices for the Terminally Ill” and “GLBTs for Congress” got away with it, but the wholesale sacrifice of senior competent personnel who had personally done little or nothing   wrong  in order to assuage the fury of the gods is primitive. It is also counterproductive – giving a boost to the careers of those it was designed to destroy.

No longer do we slaughter and burn our sacrifices. As recently as 1759 Voltaire wrote of the execution of Admiral John Byng for not managing to do more in battle with the inadequate resources placed at his disposal by the British Government. Nowadays, we send them out through the revolving door. I had previously never heard of Steven Miller or Lois Lerner (when her name came up, my first thought was of a lovesick Superman). When, in six months time, they almost certainly appear as senior partners in major Washington Law or Accounting  firms, their 15 minutes of celebrity will have provided them with years of  client-pulling power (only time will tell if Joseph H Grant can be tempted away from fishing and playing golf).

Even 40 years ago, Goodbye was Goodbye. He never made it back

Even 40 years ago, Goodbye was Goodbye. He never made it back

Although I am no fan of Barack Obama (despite still believing he was the better of the two candidates in the 2012 election), I sincerely hope this issue does not escalate into a high level scandal. The Watergate misdemeanour 40 years ago led to spin-offs such as Irangate, Monicagate and at least a hundred others. I don’t think I could cope with scandals with names like Amazonfiveohoneceefour and Applefiveohoneceefour.

In the meantime please join me in saying one hundred times: “Daniel I Werfel”. The new Acting IRS Commissioner may never hit the headlines, but he is surely entitled to as much fame as Douglas Shulman, Steven Miller and Lois Lerner.

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