Tax Break

John Fisher, international tax consultant

31 Dec 2019

Auld Lang Syne

Some cops will do anything not to be kissed on
New Year’s Eve

On New Year’s Eve, a man’s thoughts turn to the year that has just flown by. On the eve of a new decade, a man’s thoughts turn to the decades of his life that are lost. What has happened  since I sat glued to my grandparents’ gogglebox at five to midnight on Hogmanay in 1969? I wonder if that drunk lying on the roof of my car pretending his arms were a pair of windscreen wipers, as I inched away from Trafalgar Square in the first hours of 1980, is still alive? (Come to think of it, I never looked back to see if he was still alive when he fell off.)

Israel got back to agriculture in the end

Nostalgia was not quite the word that came to mind when I noticed the other day that the Israeli Income Tax Authority had once more extended Annex 1 to Instruction 34/93, while renewing a sweetener as a sop to the modern world.

When, early in my international tax career in this country, 34/93 hit the scene, it was something of an eye-opener. The instruction dealt with the requirements for deducting tax at source on payments abroad and, for the first time, included the country’s banks as gatekeepers. The upshot was that, with some specific exceptions, if you wanted to get money out of the country without resorting to a suitcase, it needed a request to the tax authority and, regularly, a long wait. 1993 was before the dotcoms and real estate tycoons lit up Israel’s economy internationally, so the parochial 34/93 was a bearable nuisance. There were two ‘get out of jail free’ cards – the special company (annex 1) which allowed largish companies to handle their own foreign withholding tax, and Certified Public Accountants, who could authorize many types of payment. The trouble was – and the reason special company status was used sparingly, and any sane Certified Public Accountant said ‘thanks, but no thanks’ – was that the responsibility for getting the withholding tax right rested on the payor – if the foreigner in some greasy foreign land did the unthinkable of lying, the noose was round the Israeli’s neck.

Fast forward a quarter of a century and 34/93 is still there. A small, but convincing, international economic superpower has to grapple with a system devised by those who dodged the comet that wiped out the dinosaurs. To add insult to injury, the authorities can’t even hide behind the bureaucratic safe harbor of ‘we are just renewing it’, since this year they reconfirmed an earlier change (I suppose we should be impressed that they managed to find a copy of the original instruction – it isn’t on the tax authority’s website). Whereas payments to a foreign resident for services provided abroad (the absolute ‘what the hell do I have to ask permission for this?’ payment) used to be permitted up to $60,000 without the need for approval, the sum was raised to $250,000 a few years back. ‘Not bad, what is he complaining about?’ I hear you mutter. What many companies and banks miss is that the sum is the total of all payments a specific company can make in the year for services abroad. From personal experience, that is about as daft as the original $60,000.

The sane approach, that many of us have been advocating for years, is for the recipient to be required to fill in a form with their details and their claim for treaty benefits etc. The onus would be on them to tell the truth. In the modern world, if they were found to have made a fraudulent statement, the authorities could claim the additional tax and penalties through future payments, or make contact with the tax authority in the recipient’s country of residence.

Where 34/93 belonged

Of course it is not all bad news in the Start Up Nation. Around two years after the Instruction was issued, I was asked to lecture a group of bank clerks on the rules. Around five minutes into my talk, there were fireworks. ‘If we do that, the customers will just trundle off to the bank down the road.’ End of lecture. I spent the rest of the half hour listening to what they actually did. Fascinating.

Happy New Year (God preserve us).

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19 Dec 2019

Miracle in the Holy Land

Choose one

Chanukah and Christmas – which coincide this year – are both, in their distinct ways, about miracles that took place within theoretical walking distance of where I am now sitting. Another miracle that took place last week would have needed the car – the Lod District Court ruled against the Israel Tax Authority (ITA) in, what should become, a landmark case.

That doesn’t happen often. The tax authorities are normally clever enough to strong-arm a compromise on issues where they are not steady on their feet, so that a large proportion of the cases that come to court are no-brainers to the detriment of the little man (who was just wasting his money and everybody’s time).

What was doubly miraculous about this case was that it involved a real multinational group (not like the open and shut case a few years ago involving a holding company in Holland that produced directors’ meetings minutes in Hebrew). From experience, multinationals don’t run to court. A combination of maintaining good relations with the government and its offshoots who provide handsome incentives for investment in Israel, the small amounts of money involved looked at globally, and the geographical complications of pursuing a case from thousands of miles away, encourage the good old compromise – paying to make the ‘problem’ go away.

Not this time. The case involved an international business restructuring ie moving activities around within an international group. The group is involved (successfully) in something incomprehensible (to me) to do with Broadband technology. The previously independent Israeli subsidiary licensed its intellectual property to a foreign group company (not strictly corporate restructuring, but the tax authorities thought it was), signed a cost-plus agreement with another group company for marketing services, and signed another cost-plus agreement with its parent company for R&D services. The business had changed.

These are the rules. Don’t argue.

The tax authorities waded in with their hot-off-the-press professional circular from 2018 on Multinational Enterprise Business Restructuring, the 34 pages of which most of the time boil down to a  simple message: if an Israeli company is part of an MNE (multinational enterprise) which enters into  business restructuring, changing the Israeli company’s business model, expect a capital gains tax bill for transferring part of the business abroad.  The ostensible basis for their position was the OECD’s mammoth ongoing Base Erosion and Profit Shifting project, and specifically its ‘Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2017’, together with a recent Israeli court case.

If there is one word that comes to mind in all OECD professional announcements it is ‘nuance’. There is seldom an absolute conclusion that applies in all cases. The ITA appeared to miss that point. Fortunately, the judge seems to have had a better grasp of what the OECD was not saying, as well as an infinitely better grasp of the recent court case the ITA was referring to – after all, he was the judge on that case, too.

The MNE won the case and the ITA was ordered to pay costs.

Although the case has been clearly decided correctly, it is worrying. If it deserved to come to court at all, the arguments should have been different – more ‘nuanced’. Instead, it was left for the judge to give a lesson in OECD guidelines and pure logic, which is not his job.

Did someone say ‘Bar’? ‘Miracle’?

It can only be hoped that this will prove a sobering experience for the professionals at the ITA, which will  serve to raise the bar in transfer pricing disputes going forward.

Miracles do happen (sometimes).

Happy Chanukah and Merry Christmas

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10 Dec 2019

Not subject to tax

Corbyn must have been thinking of her

‘It’s on in the morning, usually we have it on some of the time’.

That was the answer, a couple of days ago, to the question: “Do you sit down to watch the queen’s Christmas broadcast, Mr Corbyn?’ For the uninitiated, the Christmas message to the monarch’s subjects has been a cornerstone of British tradition ever since the present queen’s grandfather, George V, delivered the first radio broadcast, written by Rudyard Kipling, in 1932. Mr Corbyn, the man who may be kissing Her Majesty’s hands this Friday morning, might be forgiven for getting the time wrong – after all, the speech hasn’t ALWAYS been broadcast at 3 o’clock in the afternoon; in 1932 it went out at five past three.

In short, Britain’s possible next prime minister doesn’t seem to buy- in too much to the ‘monarch’ and ‘subject’ game.

Perhaps presciently, the recently ratified protocol to the Israel/UK double taxation treaty (see Tax Break January 27, 2019) which will come into force in 2020, dropped the word ‘subject’ in wholesale fashion.  That appears to be a blessing for Brits transferring their tax residence to Israel.

Why?

Aimed at the Labour Party, we hope

The treaty, ratified in 1962 and updated by the previous protocol in 1970, suffered from two nasty blights that together offered a highly effective stranglehold on tax planning. The first was a clause near the beginning that relieved the paying country from offering treaty relief (reduced withholding tax or exemption from tax) to the extent that the income was only taxable in the other country ‘if remitted to, or received in’ that country. This covered quirks in both the UK and Israeli tax systems at the time, the UK charging certain types of resident to tax on a ‘remittance’ basis (still the case – British tradition dies hard), and the Israelis charging passive income to tax on a ‘received’ basis (abolished in 2003). The second was a peppering of the treaty with the term ‘subject to tax’. Dividends, interest, royalties and capital gains were only treaty relieved if they were ‘subject to tax’ in the other country. There was much debate as to what ‘subject to tax’ meant, but whatever it meant, the tax authorities tended to think it meant something else. As a result, when Israel introduced its 10 year exemption period on income from foreign sources for new and veteran returning residents, HMRC gave it a Churchillian salute – the treaty didn’t apply.

Well, in the new protocol, the remitted/received clause disappeared from the beginning of the treaty, only to reappear in substantially identical format at the end. But, like with Mr Corbyn, ‘subject’ appears to have been a dirty word to drafters – those ‘subject to tax’ clauses have been swept away.

Had the British drafters cottoned on that Israel had overhauled its system of taxation in 2003, they might have replaced the word ‘received’ with something more apt to catch the 10 year exemption which does not tax on receipt or remittance– but they didn’t. And there are no ‘subject to tax’ restrictions on passive income. That would seem to imply that new residents should, for example, be eligible for reduced 10% taxation on interest even though they are exempt from tax in Israel, and owners of copyrights or patents could be totally exempt on their royalties, not to mention recipients of pensions.

These are just musings. HMRC could, I daresay, look for loopholes and, in any event, anyone thinking of trying to take advantage of the situation must take advice from a UK tax expert before contemplating diving in.

What right-minded voters wish for Corbyn on Friday morning

As for the British General Election – I hope Mr Corbyn remembers to turn on his TV for the results. They are due in the early morning, rather than the afternoon.

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03 Dec 2019
1 Comment

Service and tax included

You get the idea

Around the turn of the century, British left-wing tabloid, The Daily Mirror, had a very short-lived flirtation with serious journalism, signified by the change of its banner from red to black, and the use of words like ‘proletariat’ instead of ‘sex’.  One of the serious broadsheets ran an editorial a few days into the experiment stating that the Mirror had ‘gone from talking bollocks about trivial things, to talking bollocks about serious things’. As is being proven once again in the contest for the Democrat to challenge President Trump next year, a socialist message is much harder to formulate and get across than a conservative one.

When it comes to taxation, income taxation – in its modern guise – has socialist leanings (even in conservative societies). It is a progressive tax that seeks fairness with redistribution of income between the wealthiest and the poorest. As such, it is also a complex tax that is the Play-Doh of tax advisors who juggle, shape and interpret it. VAT, on the other hand, is a regressive tax that broadly comes in one-size-for-all, take it or leave it (and if you leave it –risk going to jail).

We were reminded of the primitivism of the specific Israeli incarnation of Value Added Tax last week, in a court decision in which the judge made very clear that, despite her desire for fairness, her hands were tied by a law that – though she would never have used the term – is an ass. And an expensive ass, at that.

Israel, like most countries operating a VAT system, does not insist on VAT being charged on exports or services to foreign residents. The reasoning is simple – to improve competitiveness with foreigners. Way back, the Israeli legislature saw fit to include an exception regarding services, ‘if the subject of the agreement is the provision of a service in practice to an Israeli resident in Israel’.  Fair dinkum. There was no justification for unfairly improving competitiveness with other Israelis.

Tax planning doesn’t always go right

But, not satisfied with their status as children of a lesser god,  VAT practitioners thought they could juggle and shape the Play Doh. What if the service was partially for a foreign resident and partially for an Israeli? If the amount were charged abroad, VAT would be an emphatic – and hardly fair – zero.

So, following a court decision around the time the Daily Mirror was making a fool of itself, the legislature tightened the wording to, ‘if the subject of the agreement is the provision of a service in practice, in addition to a foreign resident, to an Israeli resident in Israel’.

And that is why laws are far too important to be left in the hands of lawmakers.

The result was a car crash. The exporter was to be sacrificed on the altar of obsession – the car chase between the tax authorities and smart-arse tax avoiders, where collateral deaths were just an unfortunate statistic. As soon as there was any trace of an Israeli recipient of a service, the whole charge – lock, stock and barrel – was to attract VAT.

The latest case last week, in which the only good news for the appellant was that the judge limited costs, did allow for the possibility of negligible or subordinate services sneaking through. But, the rest of the news was grim.

Being nicked for VAT is not a joke

What it all means is that, until such time as the legislature (which has been in suspended animation throughout 2019) hopefully listens to the judge and gets its act together, the reinvigorated VAT authorities are likely to be on the prowl for those charging  zero rate VAT without legal justification. Conservatives are, after all,  all about law and order.

Posted in Israel and tagged , , ,
25 Nov 2019

Leaving (eventually) on a jetplane

It’s got a better chance

With a month to go until Christmas, this is around the time post offices are bombarded with envelopes addressed to ‘Santa Claus, Roof of the World, c/o Lapland’. Not a postal code in sight. And each year, there are heartwarming stories in the press of whip-rounds among local staff to fulfill the dreams of the least fortunate of the young correspondents.

A High Court decision a fortnight ago, and an article in the financial press last week, reminded me of my own Neverland  letter several years ago. Had the indignant tax authority junior clerk who called me when it was dumped on her desk been Father Christmas, I would have stopped believing in him there and then.

Trying to make sense of the system

The trigger was a foreign multinational corporate client that reorganized its holding structure which included an Israeli subsidiary. According to both treaty and domestic law, the transaction was not taxable in Israel. However, there is a section in the law that requires the sale of an asset to be reported to the relevant local tax assessing officer within 30 days. Non-reporting carries the horrendous penalty of……nothing. However, always a stickler for telling clients to do the right thing, I informed the parent company that we would be filing the form on time. The only problem was that the foreign client didn’t have a tax number, let alone an assessing officer.

So, I wrote a very nice narrative of the transaction, stuck it in an envelope addressed to ‘Assessing Officer, The Income Tax Authority’ together with the required form, and dropped it off at the authority’s Tel Aviv reception desk, making sure to have the desk clerk stamp my copy ‘received’.

About a month later, I received the above-mentioned irate call from the poor lady on whom, having toppled down the entire hierarchy, the letter had landed.

‘What am I supposed to do with it?’

‘I don’t know.’

‘You are wasting my time. Come and collect it.’

‘No’

‘OK – I am going to send it back to you.’

‘As you wish. But please don’t trouble yourself.’

‘So, I will chuck it in the bin.’

‘As you wish.’

Phone slammed down.

I didn’t care. I had my precious ‘received’ stamp, and that was all that was important to me – I had reported. And, if I hadn’t reported nothing would have happened either.

Some people will do anything to get away

The law’s lack of teeth is also a characteristic of Israel’s Exit Tax. A resident ditching his or her tax residence is liable to capital gains tax on, broadly, assets held outside Israel (most assets held in Israel will be caught when sold). The law has been in force since early in the century but reporting such gains is rare. Why? Because, there is a choice to pay the tax on leaving the country, or to defer the tax until the asset is actually sold, then paying tax on a proportion of the gain according to a linear calculation pre and post emigration. But, by that time, the assessee could be sunning himself on Miami Beach, not too worried about being chased on the matter. November 11th saw the culmination of 4 years of court proceedings regarding exit tax charged to someone who was inexplicably caught (or, alternatively, suffering from some kind of death wish or pang of conscience, walked into the tax authority and gave himself up). The upshot was that, there having been two court cases at the district court level, the High Court judges issued a judgment about as short as the writing on the back of an average movie ticket. Surprise, surprise – Income Tax Authority 1 Man-In-The-Street 0.

A few days later the country’s main financial newspaper ran an ‘exclusive’ article (mercifully, without compromising pictures of the Tax Commissioner) that the tax authority was working with its dentists to apply teeth to the law. The only thing for sure is that none of the theories put forward by the learned professionals interviewed will be the ultimate solution. That would be too simple. One thing is for sure, the going is going to get a lot tougher for those leaving the country permanently or semi-permanently.

And despite that ultimate court decision being given on the eleventh day of the eleventh month, it won’t be over by Christmas.

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18 Nov 2019
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No time to die

In his latest movie, Quentin Tarantino – parodying Hollywood’s parody of itself – has a baddie refusing to die despite multiple wounds to her body. Finally, Leonardo DiCaprio (SPOILER ALERT) incinerates her with a flame thrower he happens to have next to his Beverly Hills swimming pool, and what’s left of her reluctantly succumbs.

Tax advisors also have a habit of never lying down. It is in their DNA to spy out loopholes in tax legislation whatever the good lawmakers throw at them. Indeed, that was never more clear to me than the first time I volunteered (for entirely client-centric reasons) to help the tax authority rewrite a terribly written professional circular. Every altered phrase brought another potential dodge.

After over four years of being knifed and shot at by the 15 Actions of the OECD’s Base Erosion and Profit Shifting (BEPS) project, earlier this month the tax profession was presented with the public consultation document on the Global Anti-Base Erosion Proposal – Pillar Two, conveniently, but outrageously, granted the acronym GloBE. Classified under Action 1 on the digitalization of the economy, it is really designed to catch anything that was missed – the victors bayonetting the wounded.

There are four parts to the proposal. The income inclusion rule means that, if a multinational group shifts income to low tax jurisdictions (or, these days, high-tax jurisdictions with low-tax loss leaders), the parent country will be forced to pick up the discarded tax. The undertaxed payments rule would either not allow a deductible expense or impose withholding tax on payments to scantily taxed related parties. The switch-over rule which, despite its debauched Hollywood-friendly name, would simply allow the ignoring of tax treaties operating the exemption rule on foreign tax (for example, not taxing the profits of a foreign branch) in favor of the credit rule, where the income is taxed and a credit given for foreign tax paid. The subject to tax rule is slated to be instituted as a back-up to thwart the plans of any smart-ass who thought he could get round the undertaxed payments rule through the wonders of a tax treaty.

Down but not out

 The six-million-dollar-fee question is: ‘Are international tax planners about to bite the dust, go west, push up the daisies?’

What do YOU think?

The proposal, which despite my one-paragraph precis runs to 36 pages, gets lost in its own complexities. It has two significant problems: how to define profit; and how to define low-tax. The system has to be simple, so the temptation is to rely on that child of a lesser god – accounting profit. But, what is accounting profit? Those distant cousins – auditors or whatever accounting people call themselves these days – have so far not been able to settle on a single international set of financial accounting standards or generally accepted accounting principles (GAAP). So what do you do when, for example, the parent company does not consolidate under its own jurisdiction’s rules and the group is a Wild West of different systems? And what about those, oh so important, permanent and temporary differences to tax accounting that occupy our tax-crazed minds? And, when push comes to shove, what is low-tax? As the OECD and its friend the G20 have chased tax havens into a corner, the world has become more sophisticated than when Ireland drunkenly adopted a – then unheard of – 12.5% tax rate decades ago. It’s not always the statutory tax rate, stupid.

So, along with transfer pricing, it looks like international tax planning will live to fight another day – it is just going to have to reconstitute itself like in some Hollywood B-horror movie…

Posted in International Tax and tagged , , , ,
05 Nov 2019
1 Comment

No laughing matter

Gallows humor

The masters of smalltalk have to be taxi drivers, barbers and publicans (Google translate: barkeepers). I have wondered for decades what humorous stories publican Albert Pierrepoint shared with his appreciative clientele, as they handed over their shillings encouraging him with the words, “And one for yourself”.

For Pierrepoint had an interesting sideline – he was Britain’s public executioner of choice. Some of the most notorious villains of the 20th century passed through his rope until he hung up his boots in 1956. If the stories are to be believed, he never treated that work as a laughing matter, and – indeed – even once had to hang one of his own customers with whom he had regularly sung duets across the bar.

A short, disagreeable piece on the Israel Tax Authority’s website made me think of Pierrepoint the other day. In an attempt at humour, a report of the results of a spot audit at two of Tel Aviv’s open air food markets was laced with quotes from the caught-red-handed miscreants: ‘ I am careful to register sales but I am after an accident and take pills.’ ‘The paper roll on the till ran out and, just as you arrived, I put in a new one.’ ‘My accountant told me I don’t need to register credit card transactions, only cash ones.’

Now, apart from none of these lines being side-splittingly funny (it IS a tax authority website, after all), there is an element of gratuitous cruelty or, at minimum, a lack of sensitivity. This was not an edition of Candid Camera. As American humorist Dave Barry once wrote after being selected for random audit by the IRS: ‘Remember that, even though income taxes can be a “pain in the neck,” the folks at the IRS are regular people just like you, except that they can destroy your life.’ What did the inspectors expect the panicked market stallholders to say?

I cannot help but believe this is all about the modern world’s obsession with self-promotion. Gone are the days when people with naturally anonymous occupations (like tax inspectors and accountants) beavered away anonymously – their reputation earned for their true professionalism rather than their vacuous razzmatazz.

Years ago, I happened to be at one of Tel Aviv’s main tax offices when a middle-aged man – having evidently been told that he was to be hung out to dry due to chronic non-payment of taxes – went crazy. The inspector was about to call security, when the soon-to-retire Chief Collection Officer came out of his private office, put his arm around the individual, said some soothing words and led him into his office where he offered him a coffee. However much the individual was in the wrong, the tax official understood his distress.

The tax authority’s money is hung out to dry

So, if you want to make fun of somebody, how about the Globes newspaper report the other day that the Israeli Tax Authority is unable to collect as much as a billion shekels from foreign assessees because neither the Bank of Israel nor the commercial banks are willing to facilitate payment of, what might be, laundered funds? A case of ‘hoisted with their own petard’? What a joke.

Posted in Israel and tagged , , , ,
30 Oct 2019

Lost before translation

Balfour was Prime Minister, Foreign Secretary AND looked like John Cleese

At a conference in Lisbon a few years back, I listened to a delightfully amusing talk by a former British Foreign Secretary (who is NOT now Prime Minister). He mentioned a near diplomatic incident some years earlier when he was speaking at a dinner in Japan. His quote from Matthew: ‘The spirit is willing, but the flesh is weak’ was translated as: ‘The whisky is good, but the meat is terrible’.

We have all smirked at some time or other over images of South East Asian signs ostensibly in English. The funny side is, however, sometimes lost when it comes to assembly instructions for cheap goods ordered over the internet from faraway lands, when we toil into the night trying to assemble them. The frustration is only exacerbated when we realize that some of the parts are missing or don’t fit, and there is nowhere to turn this side of Suez. (I would point out that last comment is not strictly true in my personal case). The High Street store has life in it yet.

Israel – the Start-Up Nation – prides itself on very expensive exports with excellent instructions (often an expert team sent abroad to install the very latest technology). On the other hand, we are still East of Suez, so something has to give in our relations with foreigners, the people who happen to make up most of the world.

An excellent example is Israeli trusts and their reporting requirements. The only thing the forms are missing is a label on the back stating: ‘Mad in Bangladesh’.

In case you’ve never seen it

By now, everybody knows that Israel’s fairly new trust tax law doesn’t fit reality. Gallant efforts by the tax authorities (and I mean that most sincerely, folks) to try and produce sensible practice out of it, most clearly resembles attempting to  sew Mama Cass into Marilyn Monroe’s ‘Happy Birthday, Mr President’ slinky dress.

In the last week alone, I was faced with two reporting howlers.

A trustee needed to report the formation of an Israeli resident trust. This would – according to the forms – inexplicably normally be done by the settlor. But, in accordance with the law, a trust that has been decanted from an existing trust looks to the settlor of the parent trust as the settlor. As is often the case in these circumstances, the settlor was in no position to file the forms because he was already dead. Choosing between a number of irrelevant options, the reporting accountant took a bash and ticked a vaguely relevant box. I was amazed when the trust’s  foreign advisor told me they were wrong, and pointed me to the ‘right’ box. And – in the world of wonky instructions for third world products – he was right. The English translation fitted the trust precisely. The only problem was – it was not a faithful translation of the official Hebrew which unfitted the trust precisely.

And then, I had to break the news to someone else that there is no form (I also thought there was, until I read them all in detail) for beneficiaries receiving cash distributions from a relatives’ trust on the 30% tax on distribution route. It isn’t really surprising – logic and intelligent interpretation of the law require tax on such distributions to be paid by the trustee, but the tax authority’s explanatory circular, as well as forms to be completed by the trustee, places the payment obligation on the beneficiary. On that basis, the reporting by the trustee is purely informative and no active tax file is opened. In the absence of access to the financial data of the trust (which is in the hands of the trustees), the beneficiaries cannot challenge the full 30% taxation on their distribution (the tax authorities talk loosely of the trustee convincing them – but, in their official eyes, what has he go to do with the price of cheese?), so there is already a mess. This is exacerbated by the fact that the line on the actual tax return for distributions from trusts is for both ‘liable’ and ‘exempt’ trusts. These terms have no meaning in Israeli trust tax law – but whatever they do mean (and I have my suspicions), without an accompanying form the tax authority cannot know who should be paying the tax (the trustee or the beneficiary). AND THERE IS NO FORM!

Tax returns in Israel are filed electronically. The days of the nice letter from Mrs Trellis of North Tel Aviv  to the nice tax clerk explaining the situation are over.

At a dinner in Tel Aviv a couple of years back, I listened to a delightfully amusing talk by a former British Foreign Secretary (who IS now Prime Minister). He referred to the residents of Bromley being a credit to their favourite son (or words to that effect). I turned to the British expatriate next to me and pointed out that Bromley’s favourite son was Charles Darwin. Reminds me of something, but I can’t (or should I say won’t?) put my finger on it.

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24 Oct 2019

…for the people?

And a system of government…

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

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

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

Another example of one nation one vote

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

O ye of little faith!

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

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

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

2020 should be an interesting year.

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06 Oct 2019

Red Scotch Tape

And then came the 1970s

When Queen Victoria opened the Great Exhibition in 1851, Britain was the world’s leading industrial power, producing more than half its iron, coal and cotton cloth.

 Well, I don’t think Her Late Majesty would be very amused to hear from her great-great granddaughter how the country she bequeathed to her descendants in perpetuity is currently faring in that field (mind you, her grandson Kaiser Bill did a far bigger hatchet job on Germany).

Nothing highlights the shifting sands more starkly than the announcement the other day that, following World Trade Organization approval, the US is to apply ‘the biggest ever’ new tariffs to imports from the EU – and specifically the UK, France, Germany and Spain.

The British air industry knew when to be competitive

The issue has been brewing for 15 years, ever since the US first complained to the WTO that the EU was subsidizing Airbus and others to assist in their competition with Boeing and others. The EU was indeed found to have overshot the General Agreement on Tariffs and Trade and given until late 2011 to comply. The EU did take measures, but in 2012 the US requested the review of a compliance panel, and in 2018 the WTO determined there had been further violations. The WTO finally ruled last week in the US’s favor and the US Trade Representative was quick to issue a list of products to have their wings clipped through new import tariffs.

The list of products to be punished, represented by their Harmonized Tariff Schedule Codes, is long. The first item is, unsurprisingly, aircraft – the prices of which are to be hiked by 10% from later this month.

It is the next item – designed to hit Britain – that is gobsmackingly strange. You would have thought that it would be heavy turbines, trains or ships. No. It is single malt (and only single malt) scotch whisky – together with single malt Irish whiskey distilled in Northern Ireland, if there is such a thing. And no friendly 10% for them. 25% slapped drunkenly on the price.

It turns out that the most effective way to get at what was once ‘the workshop of the world’ is through premium brand whisky. But, it is all so unfair. Check on Wikipedia for ‘Aircraft Manufacturers of Scotland’, and you will be greeted by ‘Defunct Aircraft Manufacturers of Scotland’. In fact, tragically, Scotland’s biggest claim ever to aviation fame was probably the 1988 Lockerbie Disaster, for which they suffered more than enough.

So, sadly, the good people of Scotland (in the interests of full disclosure, I should point out that I am half Scot) are being made to pay for the shenanigans of their southern partners (who themselves are probably far less guilty than the Germans and French , both of whose record on air wars is abysmal).

Who are the Americans trying to kid?

I don’t know what hurts more – Britain’s descent from the industrial world to the spirit world, or the gross unfairness of trade wars. Not much can be done about the former, but the latter should be exorcised before the new mercantilism takes an unbreakable hold.

We are not amused.

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