Tax Break

John Fisher, international tax consultant

Archive for the tag “Christmas”

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

Christmas Cheer

Charles-DickensThe spirit of Christmas Present materialized in the wake of the sensational success of  ‘A Christmas Carol’. Britain which, despite French whinging, was – in 1843 – the world’s superdooperpower, had been struggling with Christmas traditions and what-not for years. Dickens’s simple short story of a tyrannical, lonely employer mirrored against his put-upon employee (the latter having a loving, but tragic, family life) caught the nation’s mood. In a tale that, to borrow  from John Lennon, is more popular than the Nativity, the eponymous Scrooge eventually sees the light, and everyone – including the sick child that Dickens threw in for extra pathos – lives happily ever after. Amen.

The gifts didn't improve much over the years

The gifts didn’t improve much over the years

For me, a non-Christian, Christmas has long been defined by an event exactly 100 years ago today. The organized football match between the Allies and the Hun is probably apocryphal (nobody can agree on the score), but what is certain is that there was an informal truce on the Western Front for a number of hours on Christmas Day 1914. The Germans seem to have started it (as every good Englishman knows, they always start everything) by singing Stille Nacht (a passable translation of Silent Night). Before long, both sides were out of the trenches exchanging gifts of tobacco, black bread and buttons – and, just maybe, starting the Hundred Years War that has seen Jerry winning four World Cups to our one. (Fortunately, the World Wars went the other way.)

The truce over, the troops climbed back into their respective trenches and spent the next four years ensuring that at least 10 million of their number would never again sit around a Christmas tree exchanging gifts in the bosom of their families. Indeed, in December 1915, the order went out that any repeat of the events of a year earlier would result in a Court Martial and the Firing Squad, not necessarily in that order.

And THAT is Christmas. Once a year, mankind is enveloped in a vague haze that colours its eyesight and addles its brain. For a few short weeks, minds turn to gift-buying and peace and goodwill to all mankind. Come January 2nd, the miserable self-seeking world is back to normal  (from what I am told by Christian friends, it can start on Christmas afternoon when out-of-town guests – like three-day-old fish – start to stink). Someone who in mid- December would volunteer to save the world would, come  New Year, not give the drippings of his nose to a person dying of thirst.

Why do people insist on comparing me to these guys?

Why do people insist on comparing me to these guys?

This is the reason why, perhaps ironically, I believe in Taxation. While there are countless wonderful individuals and organizations out there who help the less fortunate, only the enlightened, collective self-interest of a people delegating the responsibility for its poor to its elected representatives, has the chance of ridding a country of the scourge of poverty. However enticing the Christmas message of peace and goodwill to all men sounds today (December 25th), Scrooge was right when he called it ‘Humbug!’

In any event, a heartfelt Merry Christmas to everyone celebrating today.

And so this is Christmas

Exhibit A

Exhibit A

In London for a client meeting last week, I decided to take in the Oxford Street Christmas Lights on my way to the airport. While, back in the smog-filled Decembers of my childhood,  the lights adorning the length of Britain’s premier shopping street carried fairy tale themes of Hans Christian Andersen and the Brothers Grimm, this year Londoners were treated to a cosmic display of Marmite. “Merry Christmas from Marmite. You either love it or hate it”  was beamed at shoppers every few hundred yards.

At first, I thought it was a rather honest piece of marketing for a product the colour of crude oil with the consistency of vaseline and the taste of raw seaweed marinated in saltwater – a fit example of traditional English cuisine along with Pigs Trotters, Tripe and Toad in the Hole. Then, as I tossed the caption around  in my cynically-wired brain, it occurred to me that, maybe, it was not Marmite that people either loved or hated but, rather, Christmas.

Looking about me at the smiling and laughing faces of families and young couples carrying bag loads of gifts it was hard to justify that conclusion. Then I descended into the bowels of Oxford Circus Underground Station. In the concourse, a talented group of middle-aged carol singers was performing a capella version of  “Comfort and Joy” accompanied by  a pleasant Women’s Institute lady jiggling a collection box for Homeless Children. I deposited my modest sum in the slit, suspecting I heard the echo of the coins hitting the bottom, and tarried for some minutes thoroughly enjoying the informal concert. It is fair to say that at least 200 commuters passed the spot while I was standing there and NOT ONE inserted a single coin in the box. Fresh from my visit the previous day to the newly refurbished Charles Dickens Museum, not to mention a freezing walk up Shoe Lane close to where Fagin and his boys had their lair,  I thought of Ebenezer Scrooge’s exchange with the two portly gentlemen collecting for the poor. Satisfied that there were enough prisons and Union workhouses he sent them on their way suggesting that, if the poor would rather die than enter a workhouse “they had better do it, and reduce the surplus population.”

Even the National Health Service is better than this

Even the National Health Service is better than this

Of course, that is a very harsh and – in the cool, cold light of day – unfair comparison. Britain, and much of the rest of the world, is an infinitely better place to live in than in the times of Dickens. According to  blurb on the Underground advertisements, the Homeless Children are not alone in the world sweeping street crossings like poor Joe in Bleak House but they are forced to live in depressing, ever-changing temporary accommodation. Add to them the lonely elderly  who, although not condemned to the workhouse, have to get by on subsistence level state pensions, it is easy to imagine Christmas, with  its message of peace, love and goodwill to all men, as an utterly miserable time for the less fortunate.

 In the  urban, neighbourless modern world, much like Scrooge, people expect the Government to deal with the social wants of society. That is not necessarily a bad thing. The problem is that the vehicle for achieving that goal – the tax system – lacks communal ownership. That needs some explaining.

At the start of the financial crisis in 2008, the, soon-to-hang-up-his-crook, Archbishop of Canterbury wrote a brilliant newspaper article linking the crisis to the fact that credit has lost the personal relationship of  lender and borrower. Someone  borrows from a bank somebody else’s money that even the bank, having entered into a series of  complex derivative transactions against its loan book, cannot  identify. As a result, the borrower feels little guilt towards the lender for defaulting and the lender feels no compassion for the borrower’s plight.

Taxation has the same problem. Taxpayers see no connection between the taxes they are, begrudgingly, required to pay and the good they do. This is partly because they often do no good at all and partly because governments insist, for reasons best known to themselves, on behaving as if they rule the country. If governments made themselves more accountable for their taxspend, there would be a cohesive effect on society and a greater chance that taxpayers would accept tax increases where necessary.

As a responsible tax practitioner I have to stress that I am not proposing that we should all hug each other and raise the marginal income tax rate to 75% like in that Bastille of bankrupted socialism, France. The Laffer Curve would be expected to maximise government tax revenue way, way, way below that kind of rate. What is more, with all the brouhaha in America and beyond over differentiated tax rates on labour income and capital income it should be remembered that  the rate of return on human capital investment is less tax sensitive than the rate of return on non-human capital investment and there is a widespread view that if labour income tax rates are not higher than capital income tax rates there will be damaging distortions in the allocation of capital (human and otherwise) in a national economy. Furthermore, as far back as the mid-19th century John Stuart Mill recognised that tax on savings effectively represented a double tax on income already taxed once. And if you don’t believe any of this, President Wannabemitterand has discovered to his chagrin that  high tax rates drive people and capital abroad (including ,most recently, hell raiser superstar Gerard Depardieu, which proves that Christmas can still churn out its miracles).

What IS needed is, similar to the 3% budget deficit limits now imposed on Eurozone governments in Europe,  statutorily agreed percentages of government income earmarked individually for Health, Welfare of the Elderly, Child Welfare and Education. Whatever is left could continue to be spent on expensive toys that go bang-bang in faraway lands, ministers’  stretch limousines and cows suspended in formaldehyde at state sponsored excuses-for-art-galleries. Governments should also be required to provide user-friendly annual summaries breaking down to each assessee  how, based on national averages, his, her or its money was spent. If the Government foresees a shortfall of tax revenues requiring a tax increase, it should be required to announce what, precisely, the additional revenue to be raised is for.

One day

One day

Should this plan be implemented successfully there may be no more need for a lady to stand with a half-empty collection box. However, the singers must be persuaded to stay, as they are so good. One possibility would be for the whip around to be for repairs to St Martin-in-the-Fields Church in Trafalgar Square  for, if there is one thing those American Founding Fathers got right, it is that no Government cash should ever go to organized religion. I am sure Mr Scrooge would agree with me. The chiming of the neighbouring church bells on Christmas Eve drove him mad.

Post Navigation