Tax Break

John Fisher, international tax consultant

Archive for the tag “humour”

When tax legislation bombs

Why did the RAF bother?

In his bestelling book, ‘Churchill’s Ministry of Ungentlemanly Warfare’, Giles Milton tells the story of the destruction of Peugeot’s factory in Occupied France. The facility had been commandeered for German military production. One night, Bomber Command ordered the dropping of a massive amount of ordnance on the plant, only to discover the following day that they had missed their target completely and, instead, razed a number of French villages with several hundred innocent civilians providing a tragic statistic of ‘collateral damage’. The next attempt, which was as successful as the bombing raid had been a disaster, involved a handful of saboteurs placing plastic explosive at key points in the building.

Israel’s trust tax provisions, that largely took effect in 2006, could have been orchestrated by Sir Arthur ‘Bomber’ Harris himself. They are so far from perfect that they look like   the Knesset Finance Committee opened its bomb hatches and peppered them over the taxpaying public. It is well known that the authorities were so concerned about the capacity to use trusts to evade taxes, that they legislated to nab the heinous few, while causing collateral damage across the local and international economy.

Sifting through the debris, an example of legislation that appears to have been totally lacking in precision is the instruction that ‘the provisions of the third chapter of Section III’ will not apply to trusts. References like that are what Churchill might have called, ‘ A riddle wrapped in a mystery inside an enigma’ – obscure enough to be missed by anyone but the most obsessive tax wallah. Well, lo and behold, the chapter’s sections deal with the very human provisions of deductions and credits, such as those applying to pensions and the personal status of the individual – the stuff that amorphous trusts should be rightly excluded from. Indeed, the tax authority’s explanatory circular gives such items as the examples.

Bah humbug

However, somebody at the drafting stage obviously became bored, and didn’t notice the tax credit for charitable donations tucked away in the chapter. An individual is entitled to a 35% tax credit for donations to Israeli recognized institutions up to the lower of 30% of taxable income and around 9.2 million shekels. That is quite an incentive to donate. The trouble is that, according to the law, a trust (technically, the trustee) – that pays tax in Israel like an individual – cannot avail itself of that credit.

There is collateral damage, and there is collateral damage. Trusts , by character if not by definition, make charitable donations. In countries where tax efficient, those donations might be by way of making the charitable body a beneficiary. But, in Israel there is generally no tax on distributions anyway – the tax is on the annually earned income. So, by denying benefits at the trust’s taxable income level, they are being denied absolutely.

The bottom line is that it is not tax efficient for trusts to make charitable donations. That smacks less of collateral damage, and more of insane carpet bombing. It is almost as crazy as the Germans deciding to make their vehicles in France, and putting a man by the name of Porsche in charge of  the Peugeot factory.

Succinct summary

As WWII proved, it’s a mad, mad, mad, mad world.

Hoisted with their own petard

The good old days

In Tudor times it was traditional for condemned gentlemen to pay their own executioner. The equivalent in my world is the statutory requirement to report any of a series of positions taken in a tax return that the tax authorities do not agree with. The tax inspector no longer needs the deductive powers of a gumshoe – he or she can just sit in the comfort of their torture chamber picking their victims off one by one. The good news is that you need to be making quite a packet from your planning to be forced to the block – 5 million shekels in the current year or 10 million shekels over 4 years. The bad news is that there are 57 varieties (or positions) to choose from.

Although the list came out in December last year, the form for reporting – which is just really an index of the December headings, and could have been put together in half one of the many hours saved investigating – finally hit the presses earlier this month, just in time for some to miss the filing date of their  tax returns. What is most interesting is that most of the ‘positions’ could better be described as the ‘law’. The tax authorities seem to have taken a leaf out of US Immigration and Customs Enforcement‘s book: ‘Do you seek to engage in or have you ever engaged in terrorist activities, espionage, sabotage, or genocide?’ Like someone is going to announce they have been evading tax.

Some parents live in obscure faraway lands

However, one that caught my eye concerned the profit to be reported on the sale of trust assets. The pronouncement by the authorities (already back in 2017) was not controversial – the sale of an asset that had started life outside the Israeli tax net was subject to capital gains tax on the full gain – painful, but common international practice (and the clear law). The explanatory notes, however, included an exception relating to ‘Relatives Trusts’.  When the legislature took its last swing of the axe at trust tax planning in 2013 making everything taxable, there was one small sweetener. While distributions to Israeli beneficiaries would face a tax bill, Ma and Pa who had set up trusts in the obscure faraway lands where they still lived, would – together with their trustees – be largely let off the hook from reporting in years when distributions were not made (unless they chose otherwise). The explanatory notes spread the bonhomie further by making clear that relatives trusts set up before 2003 would get a step-up in value for capital gains tax purposes to January 1 of that year. The explantory notes were cross-referenced to the tax authority’s notes on the trust law. The only problem was, they didn’t fit. Where did 2003 come from? In fact, what the blazes did 2003 have to do with trusts at all – It was the one area actively ignored in the great tax reform of that year. The explanatory notes were silent.

They could always try and take it with them

But, if we are already talking about relatives trusts, there is sadly no happy ending. The authorities were nice to Ma and Pa. They even decided not to mess things up until not one, but both, of them were safely tucked up in their faraway graves. Then the fun would start. A relatives trust would become an Israeli resident trust – facing full taxation even of the bits heading to foreign siblings. While there were regulations offering solutions (potentially painful) for trusts to carve out foreign beneficiaries’ income from the Israeli tax system, the wording didn’t comfortably include relatives trusts which started life as something statutorily amorphous.

So, as with so much in Israeli tax law, assessees grieving their parents now find themselves at the mercy of the tax authority. In fairness, the authorities do their best to produce a sharp result from blunt legislation. But it can take a lot longer than a Tudor treason trial.

Relatives trusts need tender loving care if their beneficiaries are to avoid the ignominy of the scaffold.

English as a very foreign language

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One word would have been a start.

Several years ago, I returned from a quick trip to Paris on El Al Business Class. As everybody knows, El Al’s security measures are peerless, but just before the gate at Orly airport, the French insisted on putting us all through a second metal detector. I buzzed. Now, I am a big believer that there can’t be too much security, and would normally have been happily compliant as they played hide and seek with my belt and shoe heels (this was before shoe heels were a real security item). But this was France. And this was a security officer pulling on white gloves. And he was French. He barked at me in his Gallic tongue, and – despite five wasted years at school doing my bit for the Entente Cordiale – I just looked at him like a gentleman would look at a barking puppy. He barked again – and that was it; I flipped:

‘Speak to me in English! There is only one international language today, and you will speak to me in it!’

He barked again, this time signaling I should turn around. Not likely with those damned white gloves, Pierre!

I then did something rather disingenuous for the first and only time in my life:

‘I am an Israeli. I speak English. Why don’t you?’

At this point, the El Al security officer who had interviewed me earlier, and had suffered my heavily accented Hebrew, together with her two colleagues who were standing nearby, actually burst out laughing.  Suffice to say, not wishing to spend the weekend in the Bastille, I did ultimately comply. I have no idea why he wore the white gloves – he went nowhere near my Maginot Line.

What made me raise this now in a tax blog? A few weeks ago, the OECD uploaded the latest version of Israel’s Transfer Pricing Country Profile. The document involves, in the main, ‘yes’ or ‘no’ answers with a space for the reference in statute law. So far, so good. But, here and there, a few short sentences are necessary. Aye, and there’s the rub.

lets_eat_grandmaHardly any of it was in grammatical English. I had difficulty even understanding some of the sentences.

This is a disgrace, and I don’t think it is restricted to Israel.

One of the principal reasons the OECD has been able to advance its BEPS international tax agenda so efficiently is that the world has learnt to communicate in a common language. This is not about triumph or ego. It is about efficiency.

And, of course, the advantages go far, far beyond tax. There really is no reason today why the sine qua non for any function in the international sphere should not be relative fluency in English. The only exception would be a prime minister or president who is elected by the people (mind you, the current president of France seems to have a better command of English than the current president of the United States.)

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My fecund imagination is starting to run away with itself

And, as for the written word, if I were the OECD, I would put red ink all over the Israeli (and any other unacceptable) entry and send it back marked; ‘Not good enough. Try again’. That is how we learnt English in school.  The stick also helped – but I wouldn’t put that in the hands of any organization based in Paris.

Votes for taxpayers!

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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.

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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. 

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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…

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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?

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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’.

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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

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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).

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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.

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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!’

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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.

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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.

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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!


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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.

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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

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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:

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‘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.

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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.

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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?

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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.

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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.

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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.

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