Tax Break

John Fisher, international tax consultant

Archive for the tag “humour”

Votes for taxpayers!

20161108130213001_hd

Some suffering is not pointless

I was sorry to hear that former US president and Nobel Peace  laureate Jimmy Carterhad  broken his hip last month.  I was not sorry to hear that the incident had ruined his planned turkey hunt in his home state of Georgia. I – like the lion’s share of the western world – have a visceral dislike of the pointless suffering of wildlife.

The Americans continue to do things their way, while the rest of us are becoming more and more constrained by multinational consensus. The latest example came last month when a Swiss referendum ensured the application of a new corporate tax regime, as well as restrictive gun laws. On the face of it, this was an example of absolutely raw democracy in action. In Switzerland, all it takes is 50,000 signatures on a petition to guarantee a national referendum on parliamentary laws. And that was the case here.

now-da60eba3-50be-4016-82ea-9bc8698d4ffc-1210-680

What choice do sovereign states have anymore?

But, beneath the surface, the reality was different. Both proposals had, broadly, been up for national vote previously, and both had failed. This time, the people knew that Switzerland’s much-loved-by-foreigners tax friendly principal companies, finance branches and private tax rulings were dead in the water, thanks to BEPS and related international agreements  pushing for a level playing field for domestic and foreign businesses alike. Meanwhile, persistence with the country’s liberal gun laws would mean exclusion from the EU’s much-prized border control free Schengen Area.

Companies of all stripes will now be subject to the same rate of tax, deductions being given for EU friendly R&Dcosts, patent box and the write-off of hidden reserves. To help cover the expected shortfall in tax revenue, and  pacify the lefter leaning elements of society,  there is to be an increase in social security related taxes. At the same time, residents of Switzerland will have to get used to less freedom to bear arms.

The message to the Swiss from the international community was loud and clear – you can vote any way you like, as long as it’s ‘yes’. Two thirds of voters duly obliged in both referenda; the rest are helping police with their enquiries (that bit isn’t true).

Careful thought about the Swiss situation  raises the long-standing question of the importance of nations and, with it, the importance of citizenship. Before the ascendancy of the nation state, the 17th century poet John Donne meditated that, ‘No man is an island, entire of itself; every man is a piece of the Continent, a part of the Main’. Napoleon, Bolshevism, two World Wars, Apple and Amazon later, and nations have limited control of their own destinies, while hundreds of millions of their citizens live beyond their borders. Despite the passing centuries, we are evidently not done with Donne. And, despite a declaration of the League of Nations scarcely 90 years ago that: ‘Every person should have a nationality and should have one nationality only’, growing numbers of people collect citizenships like their grandparents once collected cigarette cards. 

25B40AA100000578-0-image-m-16_1423998377710

This bloke was a US citizen until recently. What was that quote of Baldwin?

The time has surely come to reassess the State/Individual connection. In  a world where -with a few prominent exceptions – compulsory conscription to defend the nation is no longer necessary, too many people fit Stanley Baldwin’s assessment of: ‘Power without responsibility – the prerogative of the harlot throughout the ages’.  An excellent candidate for consideration to, at least partly, replace citizenship in assessing an individual’s rights and responsibilities vis a vis the State, would be long-term tax residency.

Who knows? Monaco might one day be a permanent member of the United Nations Security Council.

Tales from the Crypt…

Notre_Dame_de_Bayeux_couloirs

Cryptowhat?

In a landmark Israeli court case last week, it was decided that Bitcoins are assets, the profit on sale of which attracts capital gains tax. The case revolved largely, but not exclusively, around the question of whether such cryptocurrencies meet the description of – well – currencies, exchange differences arising from which are exempt from tax.

The judge waxed  lyrical on the technical definition of ‘currency’ in Israeli law, bringing back memories of the 1980s when Milton Friedmann’s Monetarists ruled the macro-economic world; if there is no – what you and I call – cash, there is no currency. Given the movement towards a cashless society since Friedmann’s death, some might argue that the  approach was a little primitive (although, in fairness, the judge did recognize the prospect for change). But, let’s face it, why be just primitive when you can be positively Neanderthal?

punk_rockers_4_by_fuatyildiz

We really have come a long way since the Stone Age

We all know that money came about as a way of avoiding the gross inefficiencies of barter. Instead of a hunter having to schlep home the two sheepskin jumpsuits he got for his wild boar and then swap one of them for a wife, some bright spark realized (possibly while taking a break from inventing the spark), that the supply chain could be streamlined. All it needed was something the supply of which couldn’t be tampered with by the caveman next door, that would maintain the relative values of the items being traded.  Somewhere down the line people left the caves, gold came gradually  to the fore, and it wasn’t until 1931 – with one world war behind it, and the human race less than a decade away from indisputedly proving that it hadn’t really got anywhere since the stone age – that the Gold Standard was ditched.

So,  all that was really needed in this case was to establish whether Bitcoins, or cryptocurrencies generally, can be described as replacements for barter. With that in mind, it is time for a fairy story that will prove that every decently educated five-year old could have judged this case, and saved the State a small fortune.

Once upon a time, there was a poor widow whose old cow stopped giving milk. She sent her son to market to sell the beast. On the way, the boy – who was always looking for the chance of a quick buck – met a man in a pinstripe suit who offered him a handful of, what his prospectus claimed were, magic beans. When the boy arrived home, proud of his financial prowess, his sensible mother summarily chucked the beans out of the window. The next morning the boy found a beanstalk where the new Maserati should have been. To cut a long story (and a long beanstalk) short, as every one of you knows, Jack ended up – through a morally questionable transaction – with a pile of gold (gold!), a goose that laid golden (made of gold!) eggs, and an annoying harp that was presumably ditched in the nearest lake.

Jack’s deal for the magic beans was purely speculative. Jack didn’t know what he was getting, and his mother’s reaction was absolutely logical. And, look how the story ended. No beans in sight. To give the tale a happy ending, the storyteller had Jack and his mum back in hard currency (gold) quicker than you could say ‘Jack and the Beanstalk’.

a1bfa0_572c60930c6a44c5b353a19659e6d1c2_mv2

How I learnt Economics

Bitcoins are magic beans (the analogy can be extended to marijuana shares by substituting magic mushrooms for magic beans). There is no way any self-respecting caveman, five year old, or fairy tale character would accept them in a barter transaction as long as their price continues to move all over the place.

There have been too many unnecessary court cases over the last couple of years in what are, to any self-respecting tax specialist with no patience for worthless sophistry, open and shut matters. (Take for example, Snow White and the 1.83 Meter Actor). On the other hand, there are lots of disputes involving genuinely controversial issues that are settled by compromise with the tax authorities when a judicial clarification would be to the advantage of society.

There must be a better way to ensure that honest taxpayers can live happily ever after.

 

 

 

 

Hand it over and nobody will get hurt

xl9zrbcxhn2sypx1olck

Automatic exchange of information between governments has been suspected for years

The ink on the page of my last post about the new softer, gentler approach to tax collection was not yet dry when Israel’s main financial daily ran a banner headline concerning the upcoming automatic exchange of information between tax authorities. The wording was a rather unimaginative: ‘ A flood of requests from foreign banks on the way: Demand  reporting of Israeli residency.’ Personally, I would have gone for the more catchy: ‘We will find you, and we will kill you.’ Game on.

The Common Reporting Standard, that – based on domestic legislation –  will require most  of the world’s tax authorities to collect data on foreign resident accounts from financial institutions in their jurisdictions and ship it out to the salivating jaws of the tax authorities of the account holders’ countries of residence, is at the door (see Tax Break January 7, 2019).

Daily_Mirror_800_FP

Not a word about tax evasion

What bothered me about the headline, and the accompanying two page article, was not the accuracy – in my younger days, I would periodically pull my hair out at the distorted product of an interview I had given to that particular journal on a hot topic. This piece, however, appeared researched and reasoned. My problem was that any reader of the newspaper, other than someone with a financial death wish, has already done what they had to do (compliance, voluntary disclosure, or expensive – and possibly regrettable – planning). Meanwhile, a colossal number of people who do not read the financial press, and may not be financially savvy, remain – incredibly – blissfully ignorant as their canoe careers inexorably towards the falls.

As the death knell for international tax evasion has grown louder in recent years, the Israeli tax authorities (in line with many of their international counterparts) have shown remarkable restraint in enabling errant residents with unreported income from abroad to come clean with minimum fuss (paying some tax and remaining friends). Voluntary disclosure programs have been renewed, extended (there is currently a program in force until the end of this year – albeit without the previous advantage of anonymity),  and-where relatively small amounts are involved – even made simple.

The trouble is that, in a country like Israel that does not require a tax return from most salaried employees, many people  don’t ‘think’ tax of their own volition. So, when Belgian Aunt Sophie left Yossi  the contents of a bank account in Switzerland which sensible Yossi didn’t touch – treating it as rainy day money – he also didn’t think to report the interest to the Israeli tax authorities. And, unprompted, he still doesn’t. He will presumably start thinking about it when he gets a summons to appear in court in his mail box. The tax authorities will have achieved exactly what they actively set out not to do – waste valuable resources crucifying people they are not interested in. As Jesus  is reputed to have said a mile and a half  from where I am now sitting: ‘Forgive them, for they know not what they do.’

The solution is so simple, it hurts.

maxresdefault (3)

I don’t care WHAT you were doing in the bank…

In the absence of a universal tax return, every resident over the age of 18 should be required to complete and submit a simple annual questionnaire (either online or offline) including such questions as: ‘Do you, or any of your children under the age of 18, have any access to the contents of a  foreign bank account?’ The answer ‘Yes’ to such questions should result in a compulsory tax return coming through the door. Failure to complete the form should result in a compulsory tax return coming through the door together with an appropriate fine designed to concentrate the  mind of even the most financially illiterate.

And, if that doesn’t work – the tax authorities need feel no guilt in unleashing the Spanish Inquisition.

 

 

 

‘Your money or your life, please!’

1f64b9cd8e77770da8ba484c2de03c90--story-inspiration-writing-inspiration

How some people view the taxman

Stopped in the street by a young person with a clipboard, and asked: ‘What do you think motivates people to pay tax?’, I would have to answer honestly: ‘Five to ten, with time off for good behaviour’. Were my inquisitor brandishing a microphone and staring into a camera, however, the same question might elicit all sorts of ego-enhancing responses such as: ‘A positive view of democracy’, ‘Trust in government’, or, teeth gleaming beneath the arc lights, ‘A belief in the redistribution of income’.

When it comes to tax, who we are, and who we want others to think we are, are entirely unrelated.

Last month, the OECD invited public comment on the update to its 2013 report, ‘What drives tax morale?’ (Google translate: ‘What motivates people to pay tax?’) The original report made some good points: Ghana (which, if one was going to single out one country out of over 190, was evidently as representative as any) sounds like it has residents queuing up to pay tax because of its policy of earmarking revenue for specific purposes (eg VAT for health care). Eminently sensible, if you can do it, although Western treasuries have traditionally had insurmountable difficulties even keeping their hands off earmarked National Insurance/Social Security contributions.

But, what aroused my suspicion about the whole enterprise were the high scoring answers (questions elicit a 5 down to 1, or 10 down to 1 sliding scale response) to some highly moral questions:

  • People in Africa who agree that the tax department always has the right to make people pay taxes – substantially no country scored less than 3.5 out of 5.
  • People in Latin America who think that tax evasion is never justified – only outliers scored less than 7.5 out of 10.
  • People in Asia who would like to see more government spending even if it requires tax increases – 3.5 out of 5.
saint-halo

Not as holy as he looked

Of course, some of this partially depends on who they were asking. I am sure a lot of people in Asia would like to see increased government spending as long as others (the rich) are paying the increased tax. But the whole thing smells of acute bias, whatever the reason.

wpid-20140608_194740-e1402590016150

Even kids recognized the brown envelope

My most relevant  takeaway  from the recent update was a behavioural economics ‘experiment’ in  Britain that has already had wide exposure in the press. Her Majesty’s Revenue and Customs sent letters to taxpayers who had not paid their taxes on time. There was nothing new in that – generations of Britons (me included) remember the brown window envelope that ruined their day even before they had picked it up off the floor behind the front door. The innovation was in the language. Instead of British understatement asking them to ‘please pay their debt promptly’ (or words to that effect), taxpayers were greeted by exhortations such as:

“Nine out of ten people with a debt like yours, in your area, pay their tax on time”, “The great majority of people in your local area pay their tax on time” and “Most people with a debt like yours have paid it by now”.

We are told that the percentage of people paying their bill as a result of these letters went up from 34% to…wait for it…39%! I wonder what the numbers would have been had the letter arrived by registered mail, been printed in red, and promised prosecution two weeks before the letter actually arrived if the amount was not paid IMMEDIATELY.

I rest my case.

What a laugh!


maxresdefault (2)

Don’t mention the war!

The irony of Ukraine’s recent election of a Jewish president would not have been lost on my grandparents who fled the Odessa pogrom of 1905, but they would have been utterly bamboozled – along with millions of members of their grandson’s generation – by the news that he is a satirical comedian.

On the other hand, many would think the contrary – that a honed satirical mind provides the keenest insight into the human condition, the sine qua non for an elected leader.

For someone who has made his living out of speech, President-elect Volodymyr Zelensky was remarkably mute on the issues during the campaign. He was either saving it all up for the ‘opening night’, or – more worryingly – he didn’t have anything to say.

As ‘news’ seeps out about his intentions, it does appear that the new president intends to push ahead with Ukrainian corporate tax reform. As the reform is somewhat revolutionary, it is either a sign of great political courage, or a complete absence of new material in his act.

Volodymyr Zelensky candidate for the post of President of

The polls just kept smiling on him

Despite Zelensky’s media people improbably waving it around as one of his team’s great ideas, the Ukrainian government and parliament have been toying for some time with replacing corporate profits tax (the plain vanilla thing we recognize around the world) with a ‘tax on withdrawn capital’. In a nutshell – companies would not pay corporate tax annually on their ongoing profits, but would incur tax on the withdrawal of any funds. So, for example, dividends  paid to a foreign resident would first attract tax at the company level, that foreign resident picking up  the net dividend as taxable income in  their home country with no credit for the Ukrainian tax paid. This contrasts with the traditional situation, where withholding tax would normally ‘belong’ to the recipient and be creditable in the foreign country either according to domestic law or treaty.

The rationale of the proposal, bantered about by the outgoing administration,  is that the non-taxation of reinvested funds will make Ukrainian industry more competitive. The reality is more likely that it is because tax collection is currently fiendishly difficult, and it will be much easier to collect on a transactional basis when the money is heading out the door anyway. For a courageous newcomer with a proven sense of humor and satirical prowess,  a far superior rationale might bring the house down –  the proposed tax makes more sense than the system employed by the other 190-odd countries in the world.

Although the tax on withdrawn capital is to be imposed on the company, in economic reality it is a tax on the recipient collected through the company – as if an uncreditable withholding tax were imposed on, say, the dividend. The company effectively pays no tax, period.

As I wrote on these pages back in July 2015, it is by no means clear that companies should pay tax.  While Shylock could ask, ‘If you prick us, do we not bleed?’, joint-stock companies – like Pinocchio – do not have the same luxury. Companies are a legal fiction – the Walt Disney of the business world. As they do not have feelings (an accusation often aimed at me), they cannot suffer taxation. Taxation is paid by flesh and blood people – it is the customers who pay higher prices , the shareholders who make lower profits, and the employees who receive lower income. The company just sails on regardless – and, if it dies, does not even warrant a marked grave. There has always, therefore, been a strong movement to abolish company taxes in favour of taxes on individuals – income tax, withholding tax, value added tax. Company taxes, it is argued, distort economic performance.

1384-trtworld-106659-136652

Putting Ukraine on the map

There is, of course, one colossal problem with the whole idea – it is nigh impossible to predict annual tax revenues when so much is dependent on the decisions of companies  to distribute, or not. The system has evidently worked in Estonia – a small country – but failed in others. Ukraine is a big country with a complex  economy and a population of over 42 million. It has even won the Eurovision Song Contest twice.

It will be interesting to see if this idea continues its long run, or closes soon after the new leading man takes over.

 

Fishy business

9781534777651-uk-300

The good old days…

Among the moral influences on my childhood, and that of my fellow English countrykids, was Hilaire Belloc’s ‘Cautionary Tales for Children’. Entering the Land of Nod at night to the story of Jim who ran away from his nurse and was eaten by a lion, or Matilda who said lies and was burnt to death, none of us was likely to deliver on any 6-year-old’s lurking urge to commit mass murder or rob a bank. Our parents knew how to keep us on the straight and narrow – pure, unadulterated fear.

In a long(ish) career, I have always tried to avoid instilling fear in clients. Clear explanations, and the earning of trust, are usually enough to encourage action. However, there is one area of taxation  in Israel that sometimes demands a little more persuasion when it comes to foreigners, both corporate and individual, setting up businesses here –  professional bookkeeping. And from this month we have a Cautionary Tale all of our own, thanks to a judge in the Tel Aviv District Court.

The judgement reads like a funny children’s book:

הורדה (2)

‘101, 102…’

One fine day (that is approximately how the judgement starts) a woman walked into the local fishmonger operated by a Mr Katzav (Google translate: Mr Butcher). It seems they had an argument about the price (he wanted 108 shekels and she was only willing to pay 103 shekels). She ultimately insisted on paying him in notes and coins of small denominations, and stormed out of the shop. Waiting in the street were two comically ill-prepared tax inspectors who were there on a tip-off. They converged on the woman, in sight  – through the window – of a clueless Mr Butcher, and managed with difficulty to extract from her the details of her purchase. Thanks to nobody keeping proper track of what happened next (maybe no fewer than 3 inspectors are needed for that), there was some dispute as to whether the inspectors entered the shop 2 minutes or 10 minutes after the customer left. There was also some confusion as to whether Mr Butcher was on the telephone when they came in, and whether Mr Butcher decided to ring up the purchase (the cash was already in the till) just before or just after the inspectors identified themselves.

BN-VW488_RAMA64_8RH_20171030172148

Excellent powers of deduction

The bottom line was that none of the details really mattered (and the tax inspectors must have thanked their lucky stars for that). Once the judge had cleverly concluded that there was no way the officials could have been in the shop confronting Mr Butcher within anything close to 2 minutes – the mere fact that he was late in ringing up the purchase was enough to sink him.

Israeli bookkeeping regulations, based on statute and relying on case law, require any amount received to be registered ‘close to undertaking the transaction’. Motive is not relevant – the regulation is not designed just for tax evaders; it is also designed to prevent people honestly forgetting. So, ‘close to undertaking the transaction’ broadly means ‘immediately’ ie ‘right now’. (On the other hand, had Mr Butcher been able to show that it was a genuine mistake – wink, wink –  he would have probably been given a second chance, on condition nothing went wrong within the next 12 months.)

In the event, Mr Butcher’s accounting records were declared unfit for that year and, presumably,  the previous one. To be clear, that is a smelly state of affairs – the tax authorities can assume higher income than reported, and fines may be imposed.

While the non-registering of income is the most critical offense, there are a myriad bookkeeping rules for differing areas of business, right down to the specific layout of tax invoices. If practice is materially out of sync with the regulations, the same result can occur as with Mr Butcher. (Even the ‘second chance’ is scary as a sneaky follow-up audit could be expected during the probation period).

The takeaway should be that, anybody running even a one-man business needs to be sure that all details of the complex bookkeeping regulations are adhered to. That will, more often than not,  mean using the services of a professional bookkeeper.

hull

Hull – the UK’s current City of Culture

The first corporate liquidation in which I was involved, some 35 years ago, was of a Hull (a coastal town in Northern England) based fishery. They sent the records down to London. When we opened the boxes, the books stank in more ways than one.

Que?

הורדה

The British University of Glue

The English language often lags scientific progress. We still ‘turn on the radio’, even if none of us have seen a dial in years. When my kids were growing up, I always reminded them to ‘pull the chain’ even though toilet flush mechanisms had long been more user-friendly. And today, our computers offer us the opportunity to ‘cut and paste’ when there isn’t a pair of scissors or tube of glue in sight.

Early in my career, cutting and pasting was the standard way a kidnapper combined letters taken from a newspaper into a ransom demand, and a tax adviser pulled the disjointed components of a document together into a work of art that could demand a ransom. As we went (the ‘we’ being tax advisers rather than kidnappers), we deleted and replaced inconsistencies of language with red biro, and sent the resultant scrolls down to the soon-to-be-cursing typists.

Well, thanks to Word, those days are long numbered – but something close is going to hit the tax world like a tsunami next year (in fact it has already hit – but in very limited circumstances).

The Multilateral Instrument (MLI) – that won wide praise for the fact that it happened at all – is going  to make a lot of people’s lives (including mine) a misery, and no amount of Microsoft wizardry is going to lift  spirits; the Gettysburg Address was a magnificent eulogy – but it didn’t help the poor fellows buried there.

1_hAZU7r0-5D5S1wIVu4HOUQ

Lost. Full-stop (Google translate: Period)

For the uninitiated, the MLI is a 49 page document of semi-comprehensible English and French that modifies bilateral tax treaties without the need for excruciating bilateral negotiations. Over a hundred countries signed up to the basic wording (the latest entries into force, in the last fortnight, are Malta and Singapore), with multiple choice opportunities for certain clauses, the right to exclude other clauses or sub-clauses that are satisfactorily covered in a specific bilateral treaty, and the right to ignore yet other clauses. There is also a right not to include another country (Israel has, for example, so far excluded the UK, and only the UK). The document deals – as part of the BEPS project – with hybrid situations, treaty abuse, avoidance of permanent establishment status, dispute resolution and arbitration. If you want a feel of how complicated it is – the section entitled ‘Simplified Limitation of Benefits’ runs to four and a half pages.

But that is not the difficult bit. If, for example, an Israeli adviser is going to consider a transaction with one of Israel’s 54 treaty partners that are not the UK, after establishing whether and when  that partner has signed up to the MLI, it is necessary to shoe-horn the relevant sections into the bilateral treaty, update specific sub-clauses, and then try and make sense of the different language styles and terminology without the benefit of a red pen – each change depending on the options the other side has chosen along the way. Cutting and pasting gone mad.

311fe468b42dace6de2e60adefc53918The OECD is making efforts to make it all easier with an MLI Matching Database (Beta) which,  at least, should obviate the need to view both country’s details with a split screen. Mind you, the OECD’s I-know-nothing disclaimer means it will also all need to be checked manually anyway. And, in any event, the cutting and pasting as well as different language are still there.

38DCD7F300000578-3812229-image-m-36_1475084813019

Poor chap

The only long-term answer will be for some enterprising professional (probably a legal and tax publisher) in each country to produce updated treaties that read in one go from beginning to end.

I suppose we should be grateful that, with the United States not on board and the UK leaving Europe, they didn’t just do the whole damn thing in French.

Bog standard (almost)

4872b6edeccecee3df2209a342bba5bc

These days a bloke would do anything for a free ticket to Australia

Charles Dickens’s fecund imagination allowed Pip’s benefactor Magwitch to return to England  from transportation to an Australian penal colony, albeit at risk of judicial execution. By all accounts, thanks to the triple-knot of location, location, location, escape for  real-life transportees wasn’t all that simple. What the desperate convicts of the nineteenth century needed was the solution of the  twentieth – air travel. And, in a twist of fate, the first person to pilot a controlled flight in Australia (back in 1910) was none other than history’s greatest master of escape, Harry Houdini.

Well, by now, the world’s tax advisors are becoming used to the locks, double locks and padlocks being used to prevent international tax planners from thinking out of the box. But, the tax treaty signed (though not yet ratified) last month between Israel and Australia plonked a kangaroo, with a 10 ton weight in its pouch, on the box’s lid.

הורד (3)

Truth be told, the Wright Flyer never did move very much.

The treaty itself is not very exciting. It contains much of the usual – just about comprehensible – gobbledygook, together with a fair share of the totally ludicrous. An  example of the latter: SHIPS AND AIRCRAFT SHALL NOT BE REGARDED AS IMMOVEABLE PROPERTY. Thanks for that.

There is also an unhealthy obsession with the amount of time that needs to elapse before work on a  construction site or installation project by a resident of one country  becomes taxable in the other – too many numbers and too many conditions (and given the nature of trade between the two countries – not too many instances).

marmite_v_vegemite_0

Spreading the love (and hate)

At the end of the day – as with all treaties – it is withholding taxes that are the real bread, butter and Vegemite of the agreement. These fit within the ‘new normal’ of international double taxation treaties: 5% – 15% for dividends, 5% – 10% for interest, and 5% for royalties. It is the Australians who benefit from this much more than the Israelis. While, in the absence of a treaty, dividends from Israel can rack up upwards of 30% tax, as long as Australian corporate income is franked (ie the company paid tax in Australia), there is no Australian withholding tax. Similarly, Australia’s withholding tax on interest is 10% as opposed to Israel’s mainly 25%. Only when it comes to royalties are the tables  turned.

Among the sparse points of genuine interest is the question of whether the exemption on pensions from Australia to Israel applies to immigrants to Israel in their first 10 years of residence.That one will have the experts opining vigorously.

What makes this treaty ‘different’ is the (what I believe to be unique) ‘Article 28, Protocol’. Now, many treaties have protocols which are agreed explanations and adjustments to those carefully negotiated agreements.  The recent protocol (not yet in force) to Israel’s treaty with the UK (Tax Break  27/1/19) is effectively a new treaty. But, to have a section in the treaty that simply refers to an attached protocol as part of the treaty is – at first sight – circular and balmy.

https___blogs-images.forbes.com_theopriestley_files_2015_07_1984_3016Pyxurz-e1438359584320

No!! Not Hybrid Instruments!

However, closer inspection reveals all. Article 28 is to tax advisors what Room 101 was to Winston Smith in Orwell’s 1984 – the fulfillment of their greatest fear. Among all the normal explanations and clarifications, just in case anyone had any ideas about favourable interpretation of the treaty,  is a section that lists most of the goodies of the BEPS project, stating that nothing in the treaty can stop a country clobbering anybody who tries it on, whatever the wording. Game, set and match.

The Great Houdini’s most famous escape was from a water-filled tank in which he was inserted upside down, heavily manacled. Antipodean tax planners will  soon be standing upside down working out what to do next, together with their right-way-up Israeli counterparts.

Dead Wrong

images (2)

April fool!

It’s bad enough that, thanks to the controversy surrounding Brexit, the average Briton no longer lives with peace of mind. From April 1 they will no longer die with peace of mind.

A headline-grabbing exaggeration perhaps, but probate fees for opening a file to deal with a deceased person’s estate are due to jump from £155 to, in some cases, £6000 from next week. While the government insists it is a fee – in order to avoid a legal requirement to include it in the annual Finance Act – the Office for Budget Responsibility announced on March 15 that it would be included, alongside Inheritance Tax, as a tax for statistical purposes.

Her Majesty’s Revenue and Customs  has been administering the controversial – and widely hated – Inheritance Tax since its inception in 1986.

8113305659_9bfcfd8f38_o

The Twilight Zone?

As in other countries imposing an Estate Tax or Inheritance Tax (there are many that have either cancelled or never adopted either) UK Inheritance Tax is  controversial for the wrong reasons. It is argued that it represents a double tax on already-taxed income, while at the same time not bringing in much revenue (other than from the good dead people of Guildford, the recently crowned inheritance tax capital of Britain). The first argument cries out for a different spin, and the second (it represents around 1% of tax-take) may anyway cease to be valid in the years ahead.

As taxes go, an Inheritance Tax makes a lot more sense than an Estate Tax.

An Estate Tax imposes tax on the estate of a dead person – beneficiaries receive what is due to them out of the post-tax value of the estate. There is, unquestionably, an element of double tax (although the likes of Thomas Jefferson and liberal philosopher John Stuart Mill gave the finger to that), and the fact that estate tax planning is entirely within the bailiwick of the donor (subsequently the ‘dead person’) such tax can often be minimized.

An Inheritance Tax imposes tax on the beneficiaries. In that case, the double tax argument is weakened – the dead person passes on their estate free of tax (but without a tax deduction for the transfer as they, rather than society, decide who is to receive it) and the beneficiaries – similar to the winner of a lottery – pay taxes on their windfall. As regards the level of collections, imposing tax on the beneficiaries also puts something of a spanner in the works of aggressive tax planning during the donor’s lifetime.

There are two types of inheritance tax  – accessions and inclusion. An accessions tax system provides the beneficiary with their lifetime tax-free inheritance threshold, and hits them with the prescribed rate of inheritance tax on  the balance of what they receive from any number of donors, while an inclusion tax  charges beneficiaries according to their marginal income tax rates  (plus an inheritance surcharge). While inheritance tax is always fairer than estate tax, the inclusion tax system is the fairest of them all – as it clearly works in favour of beneficiaries of smaller amounts and/or lower income.

Furthermore, in all cases (Estate Tax and both types of Inheritance Tax), the increased exchange of information between tax authorities mean it is increasingly difficult to hide assets ‘abroad’ – which should also substantially serve to increase the revenue collection.

83956121-616c-4044-b38c-de00c3f0b9b6-2060x1236

‘More tea, guv?’

Britain claims to have an Inheritance Tax. The problem is that – to all intents and purposes – no, it doesn’t. It has an Estate Tax. The government website (Gov.UK sounds like an initiative of the Kray Twins) talks to the donor. Other than in specific circumstances the tax is claimed from the estate. The tax-free threshold is given to the estate – and even in the case where specific gifts are given outside the will in the 7 years prior to death, they get first benefit of the tax-free amount. And the tax rate is fixed.

So, why is it called an Inheritance Tax?  We shouldn’t complain. At least it is called a ‘tax’ as opposed to the Probate Fee, which is a tax but the government can’t afford to call it that. And what about Her Majesty’s Revenue and Customs?  Isn’t it a tax authority?

41BSCWFdzqL._SX331_BO1,204,203,200_

At least they still call it a ‘tax’ return

Perhaps we shouldn’t ask too many difficult questions of a country with a tax year-end of April 5th.

Telling it like it isn’t

jet-set-tarmac_1

Very last call …

A rabbi, a priest and the secretary-general of the OECD walk into a bar… Not heard that one before? Read on.

Last Wednesday, January 2nd, as the 20th Knesset breathed its last before flatlining in the run-up to a General Election, the Finance Committee approved regulations paving the way for the introduction of the international ‘Standard for Automatic Exchange of Financial Account Information in Tax Matters’.

61um7xkkwvl._sx258_bo1,204,203,200_

Game over

The New World Order, where there is nowhere for the less-than-honest to hide their ill-gotten gains, has been heading this way to much fanfare for some time. Too long, in fact. Israel signed on to the G20/OECD 2014 initiative early on, and was committed to having the necessary legislation in place by January 1st 2017. This was to be followed by necessary bi- or multilateral agreements (it committed to two multilateral ones), necessary bilateral commitments to ensure  the other side would respect confidentiality – as well as being both legislatively and operationally sound – and technical guidance to Israel’s banks on how to provide data on accounts of foreign resident in standard international format (so they could be easily deciphered at the other end). Information exchange was to start in September 2018. In fairness, Israel didn’t score too badly other than on one rather critical point – although legislation was in place in mid-2016, well in time for the 2017 deadline, it could not come into force until accompanying regulations took effect.

Well, as the naysayers would have it, a miss is as good as a mile and the road to hell is paved with good intentions. By December 2018, there were only seven countries that were non-compliant: Antigua & Barbados, Brunei Darusallam, Dominica, Niue (is that a country or a spelling mistake?), Qatar, Sint Maarten and … Israel. This prompted a desperate letter from the secretary-general of the OECD to Israel’s prime minister, and the eleventh hour passing of the regulations last week, exactly two years and one day late. If you are going to be late, you might as well do it in style.

What went wrong?

The required regulations, as the American FATCA information exchange regulations before them, hacked at one of the mainstays of ultra-Orthodox society (and a much valued traditional Jewish institution)  – the ‘Gemach’. The concept is a simple one. Groups of largely anonymous donors provide money to an intermediary who generally disburses the funds as interest free loans to those in need. In the event the borrower is unable to repay, the donors (who have generally kissed goodbye to the money) have no recourse. Until now, these arrangements have had no legal or regulatory basis – essentially private arrangements that could run into incredibly large sums. When FATCA came along, Israel’s banks started closing Gemach accounts as they were unable to verify to the US authorities that there were no US ‘depositors’. On the other hand, as the chairman of the Finance Committee repeatedly protested, requiring a donor who gets nothing other than a place in Heaven out of the whole process to fill in forms for the tax authority is a kiss of death for the institutions.

A solution was found, with the evident acquiescence of the US authorities, for small Gemachim, and in August 2016 Gemachim generally were given two years grace, in which time they would – against their will – be brought under regulation, and they could organize their affairs to be compliant for the banks. To cut a long story short, after a lot of weeping and gnashing of teeth, including the flat refusal of the Bank of Israel and Capital Markets Authority to supervise them (The Capital Markets Authority lost, and ‘won’ the job), the very last piece of legislation to pass its third reading in the 20th Knesset was the attrition-much-reduced Gemachim Law, which paved the way for the Chairman of the Finance Committee to agree to approve the information exchange regulations.

rowan-williams-009

The only thing crooked about him

Had the script of this farce been written by the 2008 financial crash’s moral voice, then Archbishop of Canterbury Rowan Williams, the Finance Committee and Israel might have walked away with their heads held high. Williams had maintained that the ‘markets’ that bankers claimed dictated the path of the financial system, were – in Judeo-Christian – terms a form of idolatry, something man-made being attributed independent powers. He argued that modern financial transactions lacked the face-to-face component of yesteryear – it is much easier to default when lenders are obscured behind a curtain of intermediate transactions than when recognized at an individual or community level. Here were self-regulating funds that should not be collateral damage in the post-2008 meltdown regulatory war against the unfettered avarice of the players in the financial markets.

mattress

There are always the traditional methods

However, Anglicanism hasn’t had much of a look-in around these parts since 1948, and  the ‘guilty’ Knesset Finance Committee was chaired until last week by an ultra-Orthodox rabbi-politician not given to philosophical musings, but rather to horse-trading in the name of his flock. The reason there was a need for a law regulating the Gemachim was that a number of them, predominantly in the United States and Israel,  had been the facilitators of big-time money laundering and tax evasion. A war of attrition in the long process of arriving at the final wording,  holding the inevitable (and, hence, unforgiveably late) information exchange regulations hostage,  is considered  to have severely compromised the regulatory effect of the law. Any collateral damage ultimately suffered by the moral majority of Gemachim is thanks, therefore, to the unsavoury dealings of some of their number, rather than the excesses of the financial system.

The last weak joke of the 20th Knesset…

Post Navigation