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Was the Battle of Europe lost on the playing fields of Eton?

holy-grail-knight

What was that about Freedom of Movement in the EU?

‘History doesn’t repeat itself, but it often rhymes.’ That aphorism, attributed to Mark Twain, has been much on my mind  lately.

Anybody wanting to get inside the minds of the wrong-headed majority that tragically voted the UK out of the EU (and probably lit a fuse to both those abbreviations) could do worse than read one of Dickens’s less known novels, ‘Barnaby Rudge’, about the Gordon riots against Catholic legislation.

Although the situation in 1780 became violent while last week’s referendum ensured peaceful mob rule,  the cynical manipulation and ignorance that led to the riots should have been a cautionary tale taught to every schoolboy and schoolgirl  in the last century and a half.

In the weeks, months and years ahead experts will assess the carnage to be irrevocably wrought on the UK and Europe, .

From a tax viewpoint, the immediate damage would appear to be to the UK Holding Company regime, as well as Finance Companies and IP ownership. This arises from the future removal of the parent/subsidiary directive, and interest and royalties directive. These two directives guarantee exemption from dividend withholding tax and withholding tax on interest and royalties, respectively,  when paid by the other 27 EU countries to the UK. Following the UK’s withdrawal from the EU, withholding tax will be applied according to treaty. This will mean that Holding Companies, exempt from tax on their dividends, and Finance Companies and Patent Box companies paying low tax, will be at a disadvantage compared with EU jurisdictions. As the UK does not withhold tax on dividends according to domestic law, the UK is currently very popular as a holding jurisdiction – a popularity that is likely to disappear very quickly (like, tomorrow morning).

Thanks to the OECD’s BEPS project, most other disadvantages of the Brexit will already have been swept up in wider international agreements, while there may be some small advantage in not being penalized by the EU for offering State Aid to companies.

It is well known that Boris Johnson and David Cameron studied at the same elite school. While the Duke of Wellington may have declared that the Battle of Waterloo was won on the playing fields of Eton, it would appear that  the Peace of Europe may have been lost on that same dot of England’s green and pleasant land.

It’s simply not cricket.

Pupils huddle during the Eton Wall Game at Eton college in Eton, near London

Meeting of a future Tory Cabinet

 

 

 

 

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”?

Olympic spirit lost

It didn’t say “Wet”

My trip to New York cancelled last week courtesy of Superstorm Sandy, I decided to take advantage of the hour before anyone realized my  calendar was empty to clear my desk. Forgetting the utterly ignored disposable cup of coffee nestling under a sheet of foolscap, I watched in helpless horror as it tipped drunkenly on its side and lazily cast forth its contents over my diary and neighbouring assorted papers. My barely legible handwriting disappeared as the ink, dissolving into the coffee, was dispersed across the open page. Taking a leaf out of the book of the intrepid New Yorkers, by midday I had a spanking new diary and only the merest hint of brown on numerous documents newly piled at the edge of the desk.

The experience took me back 40 years to the summer of 1972 when we were just finishing 8th Grade (in England it was called the 3rd Form which was a bit confusing since we had already had one of those several years earlier). Our Form Master was Severus Snape minus the charm with whom one messed at one’s peril. Of course, as healthily idiotic teenage grunts we messed at our peril – but we all knew our limits. All of us, that is, excluding one. There is one in every class. A totally incorrigible youth with no academic aspirations who is programmed to kick back at all cost against authority. Civilly disobedient – Mahatma Gandhi without a cause. Anarchic without knowing the meaning of the word. Angry young man who wasn’t even angry. If we were told to write the address on our report envelopes in the centre, he wrote it in the top left-hand corner. If we were told to sit down, he stood up. Told to write in pencil, he wrote in ink. You get the picture.

We “knew” our limits

In those days part of the daily ritual was the redundant task of calling the register to corroborate the evident  fact that, while  so-and-so’s desk was clearly empty, he (we were all He’s) was not hiding somewhere else in the room. Each morning the dreaded Commandant would labour through the 31 names and mark squares on that term’s page with an alternating diagonal pencil-mark producing, over time, a herring-bone effect that was quite aesthetic. Trusting in his absolute power over us, the register was left in his unlocked desk – a Holy Ark that we assumed, if touched, meant  instant death.

Then came that fateful morning when our revered leader marched to his desk, removed the register, opened it, fell totally silent, shook with rage and then sat down with his head buried in his hands. Carnage. Somebody (guess who) had poured an entire bottle of Parker Quink over the sacred tome. I don’t remember precisely what happened next but, despite the temptation to embellish the story, I am pretty sure there was no blood and there was definitely no ambulance.

Why am I writing all this? Because the European Union appears these days increasingly like a class of juveniles. And no prizes for guessing the incorrigible country. They were at it again last week.

Last Sunday, the editor of an investigative magazine published a list of over 2000 names of account holders in the Geneva branch of HSBC bank and was promptly arrested for breaching privacy laws. What is more, in a show of absolute legal efficiency, he was brought to trial on Thursday and, equally promptly, acquitted of the charges against him.

This all sounds quite impressive, if a waste of taxpayers money, other than for one thing – all the actors in this little play were Greek. The list, transferred to the Greek Government two years ago by the then French Finance Minister and now Head of the IMF, ostensibly pointed to wealthy Greeks who may be running a sideline in tax evasion. Somebody (the hot potato is now passing between former government ministers) stuck it in a drawer and “forgot” about it. Meanwhile, as I noted on this blog back in February there are (or, at least, were) over 165,000 (one hundred and sixty-five thousand)  cases awaiting trial in the Greek court system. But they still managed to get this guy up in front of the Beak within 4 days.

What privacy?

I am not a lawyer and I do not know how heinous it is to breach someone’s privacy when it is in the public interest (if I am not mistaken Woodward and Bernstein did something similar 40 years ago that rather inconveniently brought down the President of the United States – and nobody tried to put them in the Electric Chair). However, even I know that there is something absolutely heinous with the government of a country that is struggling on the ropes with its budget deficit, not pursuing tax evaders. The fact that this case was taken to trial so fast is not heinous – it is just a sign of how morally bankrupt and obviously beyond the pale Greece is. I had goose pimples when the current Greek Front Man, Antonis Samaras was praised by Angela Merkel in Berlin. I know  that a Greek exit from the Euro would not be simple for the creditor nations and that fact is heavily influencing Germany’s approach. But sometimes  the school principal has to realise that it is not enough to make the errant youth write a thousand times “I must not tell lies in class” or “I must keep my promises”. If he proves himself totally incorrigible he needs to be expelled.

The Greeks like to keep telling us that they are the cradle of modern civilization and also the inspiration for the world’s greatest sporting event – the Olympics. Agreed. And what is the greatest problem facing competitive sport in the 21st century? Doping. Greek governments have been “enhancing” their statistics and breaking their promises, rather than records,  for years.

It is clearly time to expel Greece from the Eurozone and disqualify it, for a period of several years, from the benefits of EU membership.

Pole position

Brilliant Belgian

Several years ago we went on a family trip to Holland. Sitting in the front passenger seat of the taxi taking us south from Schiphol, I tried to keep the driver’s attention while the kids re-enacted the Second World War in the rear of the van. Observing that signs on the motorway to Uit appeared over a distance of several kilometres  I suggested that Uit must be a very big town. The cabbie promptly asked me if I was sure I was not Belgian. I learned two things on that trip: firstly, that Belgians are to the Dutch what the Irish are to the English, and the Polish are to the Americans; and secondly, that “Uit” (pronounced “oot”)  is Dutch for “Exit”.

The Polish are always on my mind as hot lazy August melts  into cool vigorous September; the invasion of Poland on the first of the month in 1939 prompted the British and French – who couldn’t give a fig about the Poles but had to respect their pacts –  to declare war on Germany.

Stupid Irishman

Much as I have never shared the prejudiced view of the Irish concocted by  the English (I believe the last century produced more Irish literary geniuses per capita), I never bought the American take on the Polish. That was, at least, until I encountered their kamikaze tax laws. Fortunately – for them – the knock-on effects of the Euro crisis (lucky Poland is not in the Eurozone) lead the Polish government earlier this month to re-embrace life and announce proposed amendments to the tax law which should serve to bring their law safely back to earth and increase tax revenue.

The most prominent proposal is, at first sight, the least bellicose. Until now, limited joint-stock partnerships (SKAs) have been transparent for tax purposes which should not cause the average reader of this blog to blink. It is now proposed that SKAs should be corporate taxpayers which, while being  a far less common phenomenon, is by no means unheard of.  However, this change is mushroom cloud-sized.

French Polish

For several years, much foreign investment in Poland, especially in real estate, has been effectively tax free. Put in simple terms, investment funds that enjoy tax free status when they invest in securities, invest in SKAs. Despite being partnerships, the holdings in the SKAs are considered to be holdings in securities  while the SKAs do not pay tax because they are transparent. As such, foreign investors in such structures can walk away tax-free in Poland which is, frankly, a bit stupid. With the change in status of the SKA, this planning device will be completely annihilated. Poland will still be attractive as its corporate tax rate is a mere 19% (and unlike its eurozone colleagues it does not need to beg for bailouts). As long as investors are coming from countries with electricity, running water and a worldwide tax system, if they plan themselves properly, other than timing differences they should be no worse  off (or not much worse off) than now.

Talking of stupidity, today is the 70th anniversary of one of the major foul-ups-at-sea of the Second World War. On September 12, 1942 the British merchant vessel Laconia was torpedoed and sunk by a German U-Boat. At that point sea warfare was still “civilised” (it changed as a result of this incident) and, when the U-Boat commander realized he had hit a ship carrying civilians and Italian prisoners of war – as well as British and Polish servicemen – he brought the submarine to the surface. Many of the passengers were in life boats (the Laconia was an ocean liner launched a decade after the Titanic and the shipbuilders weren’t going to make that mistake again) and those in the water – many of whom were servicemen – were brought onto the deck or, in the case of civilians,  into the interior. The commander even called for other ships to come to their aid promising not to attack unless they were attacked and two more U-Boats and an Italian submarine  joined them. They then proceeded to start  towing the lifeboats towards the shore of Africa to meet up with Vichy French ships.  To ensure no mistakes, they draped Red Cross flags over the gun turrets of the submarines.

With Joseph Heller’s classic Catch 22 satire about the US Air Force still nearly 20 years away, on the morning of September 16 the flotilla was spotted by a US bomber pilot who could have been the prototype for Hungry Joe or Havermeyer. Radioing back to his base for orders he proceeded to use the Red Crosses for target practice as he attacked the U-Boats. The German commanders immediately cut the lifeboats adrift and submerged leaving all those on deck to drown. I pass no further comment on this incident other than to mention that among the dead servicemen was my father’s  brother, Joe. He was 29 years old.

And finally, on a more cheerful note, Happy New Year to all those who choose to celebrate it in the middle of September.

Of mice and men

It is lucky the President didn’t ask himself what Dean Martin would have done

When challenged by an aide as to why he had changed his mind about invading the tiny island nation of Grenada, Ronald Reagan is reported to have replied “I sat back and thought: What would John Wayne have done?”

That was nearly 30 years ago and the protracted  7 week campaign was a huge military success for the world’s No. 1 military power dwarfing Britain’s earlier victorious 10 week recapture of a bunch of rock formations from the Argentinians.

The way irritating  little  tax haven islands have been  behaving lately it might be time for a refresher course in “Who’s Sheriff  round these parts?”

The Cayman Islands, as most people reading this blog will know, does not have much of a history of Direct Tax. In fact, it does not have ANY history of Direct Tax. As such it is among the OECD’s ultimate nightmare nations because, whatever is done to tackle Harmful Tax Competition, it is difficult to hammer a country that says it will not tax anyone.

Foreign workers arriving in Cayman Islands

Therefore, it was something of a surprise when Caymanian premier McKeeva Bush announced last month that his government would be imposing a tax on salaries known as a community enhancement fee. Surprise turned to fury when it turned out that only foreign workers would be required to pay the tax. What made matters worse was that the tax was cynically devised to encourage employers to replace a current compulsory pension contribution with a contribution towards the tax which would enable the Cayman Islands to compete with the Bermudian employment tax system while netting more tax. The lame excuse given was that they were under pressure from the UK (Cayman Islands is a UK whatchamacallit) to balance the budget – and this avoided the need for “painful” budget cuts. To cut a short story even shorter, last week the proposal was cancelled . What amazes me is the absolute cheek of it all. Here is a nation, whose main industry is the denial of tax to others – with a population of  55,000 there are 9,000 mutual funds, 260 banks and 80,000 companies forcing other countries to either borrow or cut public spending – that thought it could tax with impunity and still only inflict the pain on foreigners.

What happened the last time the British left

However, Caymanian chutzpah pales when compared to the Channel Islands. Famous for inventing the offshore industry as well as two breeds of dairy cow, Jersey and Guernsey government representatives have  been bleating rather than lowing  in recent months. In an interview with the Guardian newspaper, the Assistant Chief Minister and former Bailiff of Jersey even went as far as to threaten independence from the UK (how will the UK survive?) although he was quick to stress, in good old-time conservative banking fashion, that this would be “quite a long way down the road”. Given that the islands are the last remnant of the Duchy of Normandy, the rest having been lost to the French by King John (great name, lousy monarch)  800 years ago, “quite a long way down the road” could be any time not in the next 500 years. .

 Idle threats apart, what was the gripe? At the end of last year the British closed down an expensive VAT avoidance scheme that was causing extreme distortions in the distribution of goods. The EU  exempts low value products from VAT on import from non-EU countries. Although the Channel Islands are  UK Crown Dependencies they have their own governments and are not part of the EU. As a result British and other mail order companies were exporting their low value goods to Channel Islands subsidiaries who then sold them to UK and other customers without VAT. This gave a clear pricing advantage over local suppliers (the customers are invariably private individuals who cannot reclaim the VAT). Worse, they were also splitting much larger deliveries into small components to circumvent the VAT requirement.

More recently the Times newspaper uncovered a widespread direct tax avoidance scheme. UK resident wealthy individuals would be employed by a Jersey entity called a K2 which would charge for their services. Rather than paying them a large salary or dividend, the Jersey company would pay a small salary to be assessed to tax in the UK and give them a tax-free loan resulting in tax paid of around 1%. For some reason, British protests at this clear act of unfair play together with closing the VAT loophole got the government so riled that, despite being a camembert cheese’s throw from the Normandy Coast and the hands of any potential Continental European aggressor, they would like to consider going it alone (one day).

Guernsey was marginally less annoying when told that, while their zero-10 corporate tax system (everybody pays zero tax except financial institutions and local real estate businesses) was not considered Harmful Tax Competition, they would have to cease charging Guernsey resident shareholders tax on deemed dividends and await the real thing. This proved a minor blow for the Bailiwick’s budget balancing but the Treasury Minister accepted it; on the other hand he lamented that  external forces had forced their hand. What did he really expect?

“Mr Gorbachev, pour me another drink!”

The Channel Islands have Bailiffs rather than Sheriffs. Who cares? If they sent in John Wayne he would, as always, just play himself and sort them out good and proper. After all, it was thanks to his philosophy that Grenada became the law-abiding paradise it is today and that the Soviet Union fell apart.

Risks of the import/export/import business

The crooks used to die laughing

Back in the sixties when my all-time superhero,  Batman,  used to dress like he was going to a neighbourhood Halloween party, actors Adam West and Burt Ward would issue warnings to stupid children not to try any of their stunts at home. That was sound advice.

While they had the full attention of the little weirdos they might also have told them that, when they grow up, they shouldn’t try crime. Because, while stupid people might get a real kick (and “pow” and “splatt”) out of crime, when they get caught (and stupid people who think they can swing across skyscrapers with capes catching between their legs DO get caught) it really messes up their social life.

I reckon it is precisely these sorts of wackos who  go in for VAT fraud. VAT fraud is very tempting. As will be seen from my “VAT Fraud for Dummies” below, it carries the very real advantages over regular aggravated burglary of not involving physical violence and offering theoretically unlimited gains.

It’s a dog’s life sentence

The problem is that when you get caught, as happened to a gang in England recently, the judge tends to get enthusiastic when it comes to sentencing. One genius  copped a 17 year sentence last month. For any Americans reading this, British custodial sentences compare with American ones like dog lives compare with human ones – so for 17 years read 119 years (and for VAT read an indirect regressive tax designed to fall on final consumers and hated by every Yank who hates Barack Obama).

The most popular form of VAT fraud operates best in the European Union. This is mainly because the Europeans, as a matter of policy, trust each other. They trust the Greeks, the Italians and the Spanish just as much as they trust the Germans and the French – and that is official.

In describing “Carousel” fraud I will actively omit a few essential steps so that, just in case some fat con sunning himself next to a pool on the Costa Del Sol with a cocktail in one hand and his computer in the other is reading this, he will NOT be able to commit the crime of the century (and then get caught).

It starts in, say, France where a member of the syndicate (you need a lot of goons for this game which increases the risk of someone singing) exports mobile phones to Britain. It is almost always mobile phones or similar devices although carbon credits have recently joined the list. The French exporter does not charge VAT because, as an export sale, it is subject to zero rate VAT. In Britain – where VAT is not charged at the port because the British and French are in bed together in the EU lovefest – the VAT registered purchasing company  on-sells the goods with a profit to another British VAT registered company charging whatever rate of VAT Britain’s coalition government is charging that month (for VAT fraudsters – the higher the better – so bring it on, Dave). The first British company then conveniently forgets to pass over the VAT to the UK authorities and ultimately “disappears” with the VAT it has received from the next company which is its accomplice. So far, apart from breaking the law, nobody is better off. From here on, depending on the level of “sophistication’ of the perpetrators the goods may now pass through a number of “legitimate” companies in the UK charging and reclaiming VAT until they reach the final UK company that makes it all worthwhile (until they get caught). That company exports the goods to France issuing a zero rate VAT invoice (“There’s a hole in m’ bucket, dear Liza, dear Liza..”). Under VAT law, the exporter can now reclaim the VAT it paid to the company it purchased the goods from. The final upshot is that the first UK company has disappeared with cash supplied by the syndicate but ultimately “refunded” by the British government. Best of all, the whole process can start again with the French company exporting to the UK – so the same stock of goods can be sold several times and multiples of the VAT amounts “lifted”.

In the early days the tricksters used to, at least, play the game. There was a stock of mobile phones that moved around the market. Then somebody woke up to the fact that, unless you were really unlucky and got hit with an audit, nobody ever needed to see the goods – but to be on the safe side they packed up boxes in warehouses with bricks and a layer of phones at the top. Later, it appears that even the cost of the bricks and their transport between companies bothered them so many did away with the goods altogether.

You can’t put a round peg in a square hole

This is nicely reflected in how two such frauds were blown in recent years. A while back HMRC did an audit on a stock of mobile phones in England and discovered that their chargers did not have British square-pinned plugs and were hence unsellable in England. More recently, a case was uncovered because the invoices were for models of mobile phones that, due to a manufacturer’s delay, had not yet reached world markets. As I said above, these are the same stupid morons Batman and Robin were talking to.

You will be pleased to know, however, that the great bureaucracy, the EU, has not stayed silent. Several years into this mess (it is estimated that VAT fraud runs into the billions) the EU Commission  finally proposed two weeks ago that, for a limited period only, certain very specific categories of goods (including mobile phones) should be accounted for using the “reverse charge mechanism. This is a method whereby, broadly, VAT is not charged by the seller but is instead accounted for by the purchaser until the final sale to the consumer.

Could somebody tell her that she is supposed to be DOING the frisking?

This reminds me of  US airport security since 9/11. Every time I take my shoes off in a US airport so that they can check for explosives similar to those once concealed by a British citizen boarding a flight, I think of two things. Firstly, the only deadly thing about my shoes is the odour. Secondly, that there is a terrorist who has just walked through security with a cleverly hidden device chuckling to himself about the stupidity of Homeland Security in thinking  he would try the same schtick twice.

But VAT fraudsters are not terrorists with an ideology and a mission. They are greedy fools most of whom are lucky to be less stupid than the European bureaucrats sent to stop them.

Rocket tax

Where is the Higgs Boson when you need it?

At the dawn of my career when I would flit from audit client to audit client, red and green pens at the ready, every accounting department would resonate at least once each day to the gravelly voice of Bonnie Tyler singing  “Every now and then I fall apart”.

Well, last week scientists finally proved (almost) that she was talking rubbish and people and things and the universe don’t fall apart. This is  because of something called the Higgs Boson. What really got up my nose were  all those goofy scientists, whose parents were too tight to pay for orthodontic treatment, coming down off Mount Olympus to explain to us mere mortals the significance of the discovery of the “God Particle” in a multitude of idiots guides, guides for dummies, table-tennis balls on trays of sugar and impossible cartoons.

Who, in heaven’s name, do these physicists think they are? It occurred to me that I should return the compliment, so if any scientists read this blog – this post is meant for you.

The cost to the American taxpayer was $170 billion.

Everybody knows that taxation is rocket science. It is full of equations and graphs that mean nothing to the scientist in the street but make people with doctorates in taxation feel that they have not wasted their lives.

The European Union is currently facing a major crisis among the countries that make up the Eurozone. As I have pointed out  in previous posts, the only way the Euro has a future is if the countries achieve fiscal unity, a significant level of political unity and there is cultural convergence. Following negotiations last week, the first two are looking increasingly likely in the medium term – but nobody is talking about the last. This is complex stuff and invites a plethora of  courses in Euro for Dummies. To try and make it simple, I will use the analogy of the Higgs Boson to explain.

It is no coincidence that the countries causing Euro problems are predominantly in Southern Europe (Greece, Spain, Italy, Portugal, Cyprus – Ireland is a special case). It is a fact of life that the weather around the Mediterranean is a lot more clement than in the North. There is incontrovertible empirical evidence to show that when the weather is good and you have a Mediterranean coast down the road, there is a desire to spend less hours in the office. The incontrovertible empirical evidence stems from my experience of having spent half of my life so far (hopefully only a half-life) in the smog of London and the other half with a view of the Mediterranean from my office window.

No escape – 24/7

As mentioned in my last post there is a widespread belief among tax professionals in “Tax Neutrality” – that tax should not affect the allocation of economic resources. One of the many divergences from this rule is the tax treatment of leisure. When people’s work income is taxed their desire to work diminishes and their desire for leisure increases. Ever since Corlett and Hague (1953) it has been recognized that, to rectify this disequilibrium, leisure should be taxed. However, since governments cannot tax something intangible, they should tax leisure “complements” while, possibly, offering tax relief for tax substitutes.

Getting difficult? Let’s shoot over to the Higgs Boson. Scientists have known for eons that atoms are made up of electrons and a nucleus. The nucleus is made up of protons and neutrons which, themselves are made up of quarks and lots of other bits and pieces. But it was not clear what gave all these particles mass – in other words what kept everything together. Peter Higgs (and others) developed a theory in 1964 that the missing ingredient was an invisible particle of force which came to be called the Higgs Boson. As particles went flying madly around they collided with the Higgs Field (made up of Higgs Bosons) which permeates the whole universe. Depending on the nature of the particles these were slowed down at various rates and success by the Higgs Bosons. Some particles, such as photons, are so aerodynamic, that they shoot through the Higgs field at the speed of light. The existence of the Higgs Boson was (almost) proven this week by crashing protons head-on in the 27km Large Hadron Collider spanning the Swiss-French border near Geneva.

Southern European compromise?

Now let’s imagine that the citizens of the Eurozone are particles and that tax is the Higgs Field. The workers of Northern Europe are slowed down by taxation, making them more interested in leisure but it takes such effort and money to create meaningful leisure in most of the miserable months of the year that they are not slowed down significantly. The workers of  the Mediterranean Basin, on the other hand, are slowed down totally by the tax because their leisure in outdoor activities such as the beach and  barbeques at the back of the house, is cheap. 

It follows, therefore, that for the Eurozone to survive – through, among other things, increased productivity in Southern Europe – leisure needs to be taxed. The way to achieve that is by increasing consumption taxes (VAT) and other charges on the products that complement cheap leisure. Examples would be charging for using beaches, banning outdoor cooking on weekdays, increased VAT on swimsuits (wouldn’t help much in parts of Greece) as well as deodorant (which would encourage people to stay in air-conditioned offices).

Sounds pretty horrible. Agreed. The alternative would be for the Southern European populations to behave responsibly. The prognosis is not good. It would require a quantum leap in behavioural patterns. In the meantime the Eurozone crisis is a case of an irresistible force (Germany) meeting an immovable object (Southern Europe).

Did you hear the one about…..?

Once upon a time timing was everything

Comedians  fear the moment in their careers when they lose their timing. Evidently not the Cypriots.

This week Cyprus proudly assumes the six month rotating presidency of the EU. Last week, after knocking on the doors of friends and distant neighbours to see if they could spare a dime, they finally asked the EU for a bail-out to prop up the banking system that has, understandably, been heavily exposed to that accident of comic timing, Greece. So far, embarrassing but containable.

However, at the end of May – fully aware that the EU presidency was just around the corner and that the bailiffs were approaching fast across the Mediterranean, the Finance Minister announced a new tax regime for Intellectual Property. Put in brutally simple terms, find an excuse for painting income routed through Cyprus as deriving from intellectual property – in the broadest sense – and they will tax you at the exorbitant rate of …2%. Never mind that they have one of the lowest tax rates in Europe. Never mind that they are begging for money from their colleagues. They are clearly grabbing some more of the zero sum international economic cake and biting off the hands that feed them.

Of course, just as Churchill explained the use of diplomatic language when declaring war on Japan: ” When you have to kill a man, it costs nothing to be polite”, they put up a smokescreen. Rather than offering 2% tax it was announced that an 80% deduction would be granted for investments of this nature, the headline tax rate being an already  rock-bottom 10%. Brilliant. Like the rest of us are really stupid.

“From each nation according to its ability to each nation according to its needs” – Marxist-Cypriot philosophy?

Now being the product of a daft and naive western liberal education, I would have said that the immorality of this scam was pretty slam dunk. Not so. If their past pronouncements are anything to go by, members of right-wing economic, and totally loony right-wing libertarian economic, fish (sorry, think) tanks would have jumped on the first carbon guzzling plane to kiss cheeks with the Cypriot president (who happens to be a communist which makes the mind really boggle) in gratitude for saving the world economy.

Why? I will explain.

In the good old days of the twentieth century, when there were barriers to trade, when international travel took so long you had to check luggage, when there were great recessions and depressions, when one world war followed another – newly socially concerned governments would fret over their sovereign tax systems. The received wisdom on all sides of the economic divide was that “tax neutrality”  – trying to make sure that taxation did not cause distortions in economic decisions – was a desirable goal. On the other hand, as with everything else in the real world, this policy was more honoured  in the breach than in the observance. Individuals were exposed to progressive taxation – a form of redistribution of income. Consumption taxes such as VAT were regressive in that poorer people spent a higher proportion of their income. There were Pigouvian taxes such as those on alcohol and cigarettes (and more recently carbon emissions) designed to compensate for social costs. And then, there was tax relief  to encourage savings. 

Another option

Overall, the attitude to tax neutrality for most nations was the temporal equivalent of the British approach to the Church of England – a good lamppost when you are looking for something to lean on. However, what was important was that electorates could vote into office  parties that promoted “Big Government” (like in Britain, France and Germany) “Small Government” (like the Americans like to  think they were doing) or “No Government” (like the Greeks didn’t realise they were doing). Thus, tax rates were free to be high, low or, if you happened to be living it up in the Cayman Islands , non-existent (go on – how many people reading this could pinpoint Georgetown on a map at the first attempt?).

And just as the Americans, Japanese and Europeans were starting to understand the Laffer Curve (the relationship between government revenue and tax rates) and were reducing tax rates in order to actually increase revenue, globalization kicked in.

Have a Tax Break. Have a Fair Trade Kit Kat

Of course for most people who don’t walk around with straggly hair, beards and open leather sandals (or happen to be the Commie president of Cyprus) ,  the liberalization of the world economy has been generally viewed as a good thing. Competition encourages efficiency and, as long as there are certain bells and whistles included such as the amazing Fair Trade movement aimed to help producers in developing nations, more power to the global elbow. Lower tax rates have also proved a boost – average corporate rates came down drastically across the world from the 1980’s onwards as noted above without destroying the ability of sovereign governments to determine fiscal policy.

Now an unaffordable luxury. Like the 12.5% tax rate

But then things started to get out of hand. Not satisfied with economic competition, countries started to go for tax competition. The star player in this game was Ireland with its 12.5% corporate tax rate that made them so successful in attracting American investment. Other countries followed and the race  to the bottom commenced. Meanwhile, both the OECD and the EU introduced various measures against harmful tax competition to try and contain the epidemic – but these inevitably led to ever cleverer schemes and enhanced competition. The result (leaving aside the Euro Crisis) is less ability of governments to choose between social welfare and survival of the fittest which, judging  by the nature of opposing major parties in many national parliaments, should be a major part of the democratic process.

However, reading the literature of such right wing organizations as the Cato Institute and the Adam Smith Institute you would think the turbo competition of nations like Cyprus and common-or-garden tax havens is an economic ideal. The theory, as is so often the case with right wing thinking as far back as Adam Smith himself , is simple (dare I say, simplistic). Governments will be forced to lower their tax rates which will increase Tax Neutrality, ensure that economic flows are not distorted and leave individuals in charge of their fates.

This is every bit as cynical as Cyprus’s latest game. What they are actually saying is that harmful tax competition, such as the utterly contrived Cypriot IP regime,  is good because it does away with “Big Government”. That is wrong. The question of size of government should be decided, as far as still possible,  at the ballot box and not by the underhand tactics of small nations.

So, the members of those illustrious think tanks should  indeed be flocking to the Cypriot president whose nation is, not for the first time, contributing to the hammering of Big Government. As a Communist, while he would presumably wail at the thought of the decimation of government , he should at least recognize  the concept of the ends justifying the means. What a joke.

Raising the energy bar

Ancient artefact circa 1968

In my salad days, apart from holding down a regular job as an elementary school student, I had some house jobs. Returning home in the freezing dark each winter’s eve, my chafed thighs burning from the cold, I would make straight for the soot encrusted scuttle standing guard outside the kitchen door. Carrying it across the yard to the squat  bunker opposite I would scoop coal into the scuttle and then return it to its post ready for an older pair of hands to commit the contents to the boiler that spread warmth around the house.

…and another

In the mornings, after breakfast, when the teapot was empty, it was my task to take it into the garden and spread the tea leaves around the roots of the rose bushes to help them grow.

Every day, before the empty milk bottles were washed and returned to the doorstep for collection by the milkman, I used to gather the silver and gold metal tops. When I had a sufficient quantity, I would post them to the BBC Television Centre and await the following Monday’s Blue Peter programme when they, along with millions of others,  were transformed by the wonders of alchemy into a Guide Dog for the Blind. The dustmen (oldspeak for “city cleansing department”) only had to come once a week.

All innocent stuff you might think. But judged by modern standards it is not clear to me whether, on balance, I was an ecological saint or a child soldier pressed into service  by the Lord’s Resistance Army as an Earth Murderer. Fossil fuels do not get a good press these days.

I would love to meet the joker who invented the word

In the last few months alone we have had Australian legislation against carbon emissions, EU legislation over airline polluters, Canadian protests against shale gas fracking and British centralization of future power policy.

Dealing with the greenhouse gases that lead to global warming is, of course, not a new concept. The main “incentives” to reduce the release of carbon dioxide (the main culprit) into the atmosphere have been carbon taxes and cap-and-trade schemes.

Crime against humanity?

Carbon taxes are quite simple in that the social cost of a specific measure of carbon emissions is estimated and emitters are taxed accordingly. There are two main problems with this system . Firstly, while university professors may have had a field day devising the concept, nobody has the foggiest idea how to objectively calculate the social cost – so prices vary madly. Secondly, it is impossible to predict how much effect the tax will have on reducing emissions. In addition, there is the philosophical (and, if you happen to be poor, highly practical) problem that the tax is regressive. That means that if affects the poor more than the rich because, on the assumption that the cost is passed on to consumers, they  are hit comparatively higher. On the other hand, as long as a government applying the tax (as Australia this year) undertakes to ensure that the tax is dished out to lower income households as subsidy or tax break as well as supporting industry’s efforts to reduce emissions, this last problem is mitigated.

Cap and trade schemes, in contrast, control the reduction of carbon emissions by setting limits and the government issuing permits for those emissions. That is where the fun starts. Schemes have tended to start with “grandfathering” the permits free of charge to emitters on the basis of past emissions. They are then free to trade these permits. The concept is that a market price will be reached where those emitters who can most cheaply reduce emissions will do so.  This has produced windfall profits for some of the biggest culprits while there is little government revenue to aid the lower income sufferers of price hikes.  A more morally acceptable  (but less politically practical ) scheme is to auction the permits and use the revenue in a similar manner to the carbon taxes.

And now to the real world. Both types of scheme do not appear to be working too well. Carbon taxes have been set too low and permits have been distributed too freely.

While both systems, especially the cap and trade, appear quite clever on paper, both lack bite. When you take into account the countries that do not play ball, the potential leakage as companies move operations elsewhere is positively frightening.

Perhaps it is time to take a look back at the world before the Industrial Revolution when  the only greenhouse gases emitted came from the extremities of grazing cattle.

Hanging maybe. But drawn and quartered?

In those days there was a lot of lawlessness. As today, many only respected the law to the extent it was enforced but then society was not sufficiently organized to ensure its enforcement. So, what did the authorities do? They terrified the population. If you stole a sheep you were hanged. If you deflowered the wife of the heir to the throne you were hanged until you were half dead, dragged through the streets and then forced to watch yourself being disemboweled, castrated and quartered before being sent off to meet your Maker at a number of addresses around the country.

Where greenhouse gases are concerned, we are back in the good old days. Nobody (hmm..) would suggest executing factory owners for spewing out a bit too much smoke but, instead of making all those nice academic calculations to establish the fair cost of these heinous crimes, carbon taxes should be set at punitive rates (lets call it what it should be – a fine) and cap-and-trade permits made more scarce with a minimum price in the primary market. The revenue raised should principally be returned to the pockets of those in lower income brackets as well as being employed to assist companies to reduce carbon emissions.

Do you think he separates his wet and dry rubbish?

Coming downstairs one morning about a month ago without my glasses I noticed, stationed outside every house in my street, an absolutely motionless heavily tanned sentry. After turning on the radio with the expectation of being greeted by martial music but instead having my ears harassed by yet another castrato Bee Gees song in tribute to the late Robin Gibb, I found my specs and realized that the sentries were in fact brand new standard issue chocolate coloured slop buckets. The green revolution had finally come to my home town and we were to split the dry rubbish (green coloured bin) and the wet, rotting, stinking  rubbish (poo coloured bin).

After drinking my early morning mug of tea I decided to christen our new acquisition and went out to deposit my teabag. We might not have any rose bushes but we do now have a bloody ugly brown bin littering our doorstep.

Teaching Mrs Merkel German

How many times in one reign does a monarch have to listen to Tom Jones singing Delilah?

Nostalgia ruled for most of last week. While the British indulged in a House of Windsor love fest, the world delighted in snippets of the Queen over her sixty year reign. It was Prince Charles, the King-in-Waiting, who stated the obvious at the Buckingham Palace Doorstep Concert noting that for many people this was the third jubilee they were enjoying along with the Queen (who, frankly, did not by that stage look like she was enjoying anything very much).

My memory leapfrogged over the Golden Jubilee and sprinted straight for the 1977 Silver Jubilee. That was a very different occasion – the generation which, back then, we called middle-aged had lived through the Second World War and brought an old camaraderie to the festivities, as opposed to today’s middle-aged who brought Stevie Wonder, Tom Jones and Paul McCartney.

Maybe it was just the glasses, Jim. Or maybe not

But, Silver Jubilees aside, I was reminded that 1977 was an annus horribilis (as, indeed, was much of the decade but my Latin does not stretch that far). Britain was governed by a minority Labour Government which, in turn, was governed by the Trade Unions who kept bringing the country to its knees.  James Callaghan, the hapless Prime Minister being fattened  for the slaughter by Mrs Thatcher, had swept into No 10 a year earlier with the slogan “Jim Won’t Fix It”. This was a play on the title of a popular TV show and branded him immediately as totally incompetent.

 Meanwhile, across the pond the Americans put a Georgian peanut farmer into the White House who, apart from claiming to have been attacked by killer rabbits, let his team spread compost over US diplomacy. At one diplomatic function Chief of Staff Hamilton Jordan (another Georgian) was reported to have told the Egyptian Ambassador’s wife that he had always wanted to see the pyramids, while fixing his gaze somewhere well south of her eyes.

Jack and Bobby Kennedy. Or maybe not

From the economic viewpoint  the world was down the tubes. The collapse of the Bretton Woods exchange rate system  early in the decade followed by the Arab Oil Crisis had led to rampant inflation – or to be more specific – stagflation. This state of affairs was the nightmare of every adherent of the  school of economic thought that had ruled since the 1930s – it broke the rules of Keynesianism. Inflation together with slow growth and steadily high unemployment was not to be found in Lord Keynes’s song book.

It was no wonder, therefore, that a radically different breed of economist managed to insinuate itself into the frontal lobes of the world’s politicians and the world was presented with Monetarism in the UK and Reaganomics in the US while the French elected the rabid socialist Francois Mitterand just to prove a point. That should have been the end of history, but it wasn’t. Things started going visibly pear-shaped towards the end of the century and neo-keynesianism ( a potpourri of everything that had come before) has been on the ascendant among economists, if not politicians, ever since.

Sadly, since the financial crisis hit in 2008 all we have heard from European leaders (until the French played their usual “driving the wrong way down a one way street card’  in electing a socialist president) is austerity, austerity, austerity. The Eurozone has to collectively tighten its financial belt, balance its budget (well, almost) and keep within very low inflation targets.  Bung up taxation, slash public spending, pay off your loans. And, meanwhile, let the continent  burn.

Strange. I always thought Paul was born around the same time as Beethoven

Leading this bloody crusade is none other than Europe’s Supreme Leader – Angela Merkel. Locked into a  mindset of classical economics and simple housekeeping Frau Merkel, along with all the other European big chiefs  other than M Hollande who has yet to prove that he is not a left wing nutjob,  is missing something fundamental. And that something was observed by a German – Georg Wilhelm Friedrich Hegel.

Frau Merkel should ask the Queen about Hegel’s “Zeitgeist” . She should ask her about her 60 years of regular meetings with her prime ministers from Winston Churchill to the current young boy. The Queen would doubtless tell her that the spirit of the times  has changed.  Beethoven could not have written the Ode to Joy in 1967 London and Paul McCartney would have had trouble with Yesterday in 1827 Vienna. So why is there an assumption among political leaders that, because something did not work in 1977 it will not work in 2012 OR that something that did work  in 1982 will work in 2012?

Did I say at any cost? Maybe not

Back in the 1970’s inflation had got out of control  and – let’s make no mistake – reasonably stable prices are a sine qua non (Latin again) for a stable economy. Stagflation was a reality. Unions were at their most powerful. People’s expectations were at the bottom of the pit. It was critical to bring order to the money markets and bring the unions in line, at whatever the short-term cost, to facilitate a basis for nations to move on. It was left to  Thatcher to tame the Coalminers and Reagan the air traffic controllers.

The European crisis of the last few years is against a very different historical backdrop. Inflation and the unions are not a major threat. The financial crisis is precisely that and not a crisis of economic fundamentals (with the exception of Greece which will soon be sent on its way to Hades). It is the handling of the crisis that threatens to upset the applecart.

Any fool can see that, by everyone getting their house in order at the same time demand just deflates (Paul Krugman has pointed out that  you cannot use the analogy of a spendthrift household that needs to tighten its belt when referring to an entire country because the spendthrift household can rely on demand being created by responsible households as opposed to the entire country where demand just disappears).

Should I buy ingredients for another cake or pay off the mortgage?

Krugman, like Keynes, has no problem with  balancing budgets when the economy is booming. However, when the economy is in recession it is time for increased government spending. It is clear that, whilst in the long-run governments may be highly inefficient participants in the economy, in the short run they will spend much more freely than private households concerned about the future. This supports the contention that taxes should not  be reduced in a recession if that means less government spending. Alongside all this there should be quantitative easing (basically, central banks injecting cash into the economy) and increased targets for inflation.  Balanced Budgets would  still be sought but over a much longer period. Within the Eurozone they will need more banking unity and some form of joint eurobonds to protect weaker economies that cannot devalue their currency to increase competition.

Angela, go with the flow!

It is not an exaggeration to state that the next few months are going to be  critical for the future of the European Union. If Mrs Merkel prefers not to battle with the stark prose of her fellow German, Mr Hegel, she might prefer that nice Mr Shakespeare’s Julius Caesar (not in Latin):

There is a tide in the affairs of men.
Which, taken at the flood, leads on to fortune;
Omitted, all the voyage of their life
Is bound in shallows and in miseries.
On such a full sea are we now afloat,
And we must take the current when it serves,
Or lose our ventures.

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