Tax Break

John Fisher, international tax consultant

Archive for the tag “exit tax”

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.

Vive L’ Hollande

The quiet ones are the worst

The swashbuckling  Alexandre Dumas  coined the phrase “cherchez la femme” (literally: look for the woman) that has haunted French culture ever since. In the run up to the French Presidential election it is generally agreed that, had Dominique Strauss-Kahn not fumbled in the wrong pocket of his bathrobe  for the gratuity for the chamber maid of his New York hotel room, he would now be  a shoo-in to the Elysee Palace and the rest of Europe would be nodding approval at the  election of a former head of the IMF. Instead, Europe is aghast at the prospect of an old-style left-wing candidate (more of that nonsense below) who is about as exciting as a stale baguette and, whilst by all accounts of high intellectual ability, brings  recollections of Lyndon Johnson’s comment about that other President-by-mistake,  Gerald R Ford – “He cannot fart and chew gum at the same time”.

HE left HER!

But, however daft and outdated many of Francois Hollande’s policies are, and however unlike Maurice Chevalier and Alain Delon this slightly owlish chap is – judging by the two women in his life, there has to be some magnetism somewhere. Although he seems to have never got round to paying for a wedding licence, the mother of his four children is none other than the delectable Segolene Royale who is best remembered for losing the presidency the last time to little Sarkozy. Not satisfied with his lot, he started up with a drop-dead-gorgeous Paris Match journalist two years before he finally split up from Royale and it is Valerie Trierweiler  who is expected to become First Lady (or First Mistress, or whatever they call girlfriends in the Elysee Palace).

And SHE took HIM!

Among Hollande’s policies are: the renegotiation of the latest Eurozone treaty which is what has led European leaders from Merkel to Cameron to refuse photo-ops with him; the batty idea to return the retirement age to 60 from 62; and, battiest yet, a proposal to tax people making over € 1 million at a new 75% rate earning him the nickname “Monsieur 75%”.

The background to the 75% top rate is not economics. In 2012 everybody knows that punitive rates (and that does not even take into account wealth tax and social taxes that get dumped on top) do not bring in significant revenue. No. Mr Hollande is out to take revenge on the rich, especially the demonic financial sector- as he speaks you can hear the cart rattling into the Place de la Concorde, the hapless aristocratic occupant being pelted by the rabble as he approaches his doom at the hands of Madame La Guillotine.

Apart from the effect on the incentive to work, mad tax rates on the highly paid simply cannot work in the European Union. Shortly after making his madcap announcement Hollande traveled to London to canvass the 300,000 plus French living there ( London is the 6th largest French city). The French no longer buy left wing panic mongering about life beyond France’s borders, normally accompanied by Gitanes smoke and the fruity aroma of  un bon vin rouge; instead they master English and go abroad.

The one policy that might have prevented a wholesale decamping from Gaul is the imposition of an Exit Tax – the crystallization of  a capital gains tax liability on assets on the day of departure irrespective of  if, and when, the asset is disposed of and the capital gain realized. The European Union has been playing with this concept for years – most recently in the November 2011 European Court of Justice decision in the National Grid Indus case. The problem with exit taxes is that they tamper with a basic freedom of the EU – The Freedom of Establishment . On the other hand, the EU is concerned not to deny members the right to a balanced allocation of taxing rights (territoriality). As such, the Court considered the imposition of an immediate Exit Tax as not “proportionate” – instructing that, if an exit tax is to be imposed, the assessee should have the option to pay the tax at a later date when the asset is realized.

The French government, in fact, prophesied this situation when advancing new exit tax legislation in 2011. The legislation applies to shareholdings in companies, does not require immediate payment if breaking residence for another EU country and – in the event that the asset is not sold within 8 years – eliminates the liability. As one commentator noted, the new exit tax does not appear to have had any effect on slowing emigration.

Thank heaven for little girls

Of course, the peculiarities of the French election system could see Mr Hollande crowned but unable to enact his manifesto. If the elections to the National Assembly, a month after the second round of the presidential election, return a right wing majority (the current composition is heavily tilted to the right) , the Fifth Republic will enter into its fourth period of Cohabitation – a President and Prime Minister from opposing parties sharing government.  Mr Hollande has already proven himself a master of Cohabitation – cohabiting successfully with Ms Royale and Ms Trierweiler – so he is well placed to make a go of things at the national level.

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