Tax Break

John Fisher, international tax consultant

Archive for the tag “Euro”

It takes two to tango

Clothes maketh the man?

Clothes maketh the man?

Apart from the snow-white attire, it could have been, quite literally, two Old Joes getting together for Saturday lunch and a chinwag. Joseph Ratzinger and Jorge Bergoglio made history at the Castel Gandolfo outside Rome last week when, for the first time in at least 600 years, two popes met face to living face.

Watching their rather wooden performances before the cameras (neither of these gentlemen was groomed for Prime Time), it was the awkwardly staged prayer session  that caught my attention most. Here were two highly influential individuals who, despite their united front,  personified diverse spiritual and temporal states of the world.

Theologians have debated the contradiction inherent in God’s attributes of Justice and Mercy for Millennia. Here was the austere Pope Emeritus Benedict XVI, an aloof intellectual who had made his career looking for Truth through reconciling religion and science, praying with Pope Francis I who, despite his Jesuit background, has an emotiocentric approach to his calling. While Benedict XVI was more at home clinically wrestling with the scientific discovery of the God Particle than confronting the unfolding human tragedy within his own Church, Francis I (why do they insist on calling him “The First” ?) is more at home with the Sermon on the Mount. To anybody other than a dogmatic Christian, the meek inheriting the Earth might make no moral, rational or logical sense, but it does make people  feel good (especially if they are meek).

Then there is the temporal contrast. The German Pope, from the Northern Hemisphere and Northern Europe, for whom rules, discipline and tradition are sacrosanct, and the Argentinian/Italian (his father emigrated) Pope from the Southern Hemisphere and the Mediterranean basin of Europe, for whom life is too short to get caught up in the red tape so it makes more sense  just to hug and be friends.

The Euro crisis  involves both the trade-off between justice and mercy and a clash of cultures between Northern and Southern Europe. It was interesting to note how the citizens of Ireland coolly accepted their  fate (and, with a recent successful bond issue, the country is well on its way to recovery) while the Greeks and Spanish  kicked back with emotional protests.

All these guys pale into rational insignificance when compared with Cyprus. Cyprus is not in severe financial difficulties –  it is bankrupt. There is little room for useful restructuring.  Justice, mercy, logic and emotion will not help the country that has become Europe’s biggest basket case as it careers headlong towards Purgatory.

There has been a mixture of rational and emotional reporting on the Cypriot crisis over the last few weeks. It all started with negotiations for a bail-out package with the Troika – the European Central Bank, the IMF and the EU Commission.

Cyprus’s banks had invested rather too heavily in Greek banks and, when  the EU Council of Ministers decreed, as part of the Greek bail-out in 2011 that private investors would need to take a 50% haircut the then Cypriot Finance Minister  – who was present at the meeting – didn’t seem to realize that he needed to object so as to save his own country from bankruptcy. This speaks volumes about Cyprus which, quite incidentally, had a  genuine communist president at the time (even Russia and China had already given up on that nonsense).

Did someone mention haircut?

Did someone mention haircut?

With a new conservative government installed in January that was reputed to be capable of walking and chewing gum at the same time, a deal was negotiated whereby all depositors in Cypriot Banks, including the average Joe with deposit insurance up to €100,000,  would take a haircut – defined for some reason best known to the parties involved as that dreaded word “Tax”. The universal haircut is understood to have been the suggestion of the Cypriot Finance Minister. Now, at this point the Troika should have woken up and remembered from 2011 that the Cypriots do not have a very good track record on these financial things. Instead, they did not seem to realize that – by exposing insured deposits – they were risking a run on every slightly dodgy bank in the Euro-zone. This speaks volumes about the ECB, IMF and EU Commission.

In the event, when the news hit Cyprus all hell broke loose and Parliament threw out the proposal. Although the Cypriot people and much of the world’s popular press took a tear-jerk position on this (the BBC interviewed eloquently irate retired British expats living on the island with authoritative Home Counties accents) the Parliament’s decision gave the EU a second chance. The Cypriots, on the other hand, were left  needing to find €5.8 billion in order to be eligible for a €10 billion loan.

The deal that has now been reached is that small depositors (up to €100,000) will be protected while Cyprus’s second largest bank will be wound-up and its largest bank restructured. Although not yet clear, apart from shareholders and large creditors of the bankrupt bank being more-or-less wiped out, the haircut of large investors in the Bank of Cyprus is likely to be up to 60% with compensation in the form of worthless shares. In the meantime, as banks reopened a few days ago, draconian capital controls are being enforced to prevent a run on the entire system.

The result for Cyprus is that, with the restructuring of the banks, its offshore financial business – which is fundamental to the economy –  has been effectively eliminated. Much of the money invested in Cypriot banks is thought to be Russian laundered funds such that a Russian investor who sent a bed sheet to the Cypriot Laundry can now expect to get back a pillow slip (if he is lucky). He will not be a happy investor which may make the average Western European citizen smile, but this probably means an end to the Cypriot economy as we know it, which also means that the average Western European citizen will soon have the smile wiped off his face. It seems the only hope for Cyprus is reunification with the Turkish north paving the way for increased tourism and successful exploitation of the gas found off its coast. Confidence is so high in Cyprus that those English residents with clipped accents mentioned above will take comfort in the decision of the British government to divert their State pensions into UK accounts.

They never had this trouble when the Church was in charge

They never had this trouble when the Church was in charge

It is tempting to think that there could have been another solution for Cyprus involving, perhaps, a less onerous bail-out. Rationally and in the name of justice there was not. It is a country that built its future on, at best, legal offshore financing that is going out of fashion and , at worst, Russian money-laundering. But what about emotionally? Could, and should, the Troika have turned a blind eye and advanced more funds?Didn’t someone once say “Let he who is without sin cast the first stone”?

The Euro – a mental exercise

Polish ex-president demonstrates best tool for unblocking an S bend

Zbig does not understand what the fuss over austerity in Europe is all about. He fails to comprehend the fall of the Dutch government, the elevation of a socialist to the presidency of France, the  inconclusive election in Greece, bailouts and quantitative easing.  All he can say, with his utterly limited command of at least 10 European languages, is that the European Union is “good”.

Whenever he finds himself a bit short of  work Zbig chucks his monkey wrench into his volumnous bag of tricks and heads for the next member state and fortune.  An optimistic chap, his education evidently did not include Steinbeck’s masterpiece “Grapes of Wrath” about the hardships of American migration during the Great Depression or, for that matter,  AA Milne’s “The House at Pooh Corner”. Noticing that children’s classic in the bathroom of one of his clients, he casually asked the lady of the house if it was the only book they had on plumbing.

“Next stop, Berlin!”

The media is currently obsessed with the woes of the Euro.  Faced with the inability of some countries to service sovereign debt 25 of the 27 members of the EU entered into a pact, under the extremely persuasive eye of Angela Merkel of Germany, to slash  deficits. Meanwhile rescue packages were put together where required and the European Central Bank eased credit.  The  austerity resulting from the contractionary fiscal policy has been roundly condemned by much of  the economics profession and is being clearly rejected by the electorates of countries with the chance to choose.

With only an undergraduate degree in monetary economics, when the Euro was first mooted my inital reaction  to the plan was “This is mental but I am sure that better men than I know what they are doing”. IT WAS MENTAL.

Don’t tell me what to do!

Now our economic gurus are telling anyone willing to listen (which is  just about everyone except Angela Merkel who is the only person who needs to listen) that prudent northern Europe needs to expand demand and encourage inflation to compensate for the inability of countries like Greece to devalue their Euro against everybody else’s Euro. A few days ago the Germans gave the first indication that they might be prepared to budge on this.

At the same time they place faith in the ability of workers to migrate freely between states thus solving the chronic unemployment problem in distressed countries. While Zbig, working with his hands in a pretty homogenous Europe-wide market for pipes and washers,  can get by with a few necessary words in whatever language he happens to be being paid in – for most people migration is hardly an option. Language barriers, recognition of qualifications, home ownership and pension rights are just some of the factors that put paid to serious mobility.

As it appears to be silly season for macroeconomics, I thought I might throw in an idea of my own. I am aware that it is full of holes – indeed, when I briefly spoke to the editor of  a respected financial newspaper last summer, he gently advised me that, although I was clearly a young man,  economics had moved on a bit since my student days.

If they want to save the Euro, it is time to employ some highly unorthodox tax policies “for a limited period only”  that go against everything the EU and OECD believe in (which is probably as  good  a reason as any to employ them). The following idea might provide a short-term solution to the mobility problem.

Greek workers demonstrating their flexibility

Countries with official unemployment above a certain level should be allowed to ring fence job-enhancing investment from low unemployment EU countries from taxation.  Thus, for example, a German company could invest in a factory in Greece starting  2012 or 2013 employing 800 workers and would get a tax holiday in Greece for, say, 10 years. At the same time, to ensure that the tax is not simply shifted, Germany would apply tax sparing (a credit for notional tax paid in Greece). Investing companies would have to prove that their existing employment numbers in other EU countries did not drop as a result of the new investment. What the Germans should like is that it does not involve them directly dipping their hands in their pockets and, as long as the OECD can imagine the EU as one country – there is no issue of unfair tax competition.

As a result of investment and increased employment in distressed countries demand should be enhanced, leading to optimism and recovery. In the meantime economists can keep pushing for the European Central Bank to continue printing Euros (quantitative easing) and German expansion  while citizens sporadically revolt against draconian deficit reductions.

With the spread of English as the international language across the globe (even the French, Russians, Japanese and Chinese have learnt to play the game) when all is said and done mobility may one day work in the EU. But there is one country that still seems to insist it hasn’t lost the language war – and that country is quite important.

In those days there was always someone who spoke English

A few weeks ago I had to join a conference call with a foreign colleague and his client in Germany. When I called the conference number the taped instructions were entirely in German which, I confess, I did not understand. Mildly frustrated by the experience of getting nowhere and surrounded by my bemused team I started jokingly shouting at the phone. Exasperated and beyond hope, I eventually hit the hash button and, to my utter surprise, was connected to the call.  At that point, the prerecorded call identifications started – first my German colleague, then his client and then……..a bellowing “Speak English!”  I don’t think they understood.

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