Tax Break

John Fisher, international tax consultant

Archive for the tag “Internal Revenue Service”

The Greatest Show on Earth?

Can you still name this guy?

Laurence Spiegel was my first political hero. Never heard of him? Don’t worry – nor had Google the last time I checked. The one and only time I worked on the campaign team for a British General Election it was for Laurence Spiegel . That was an important election for two reasons: despite polls showing a clear advantage to the incumbent Labour Government, the Tories won an overall majority;  and the voting age was lowered from 21 to 18 on the grounds that if you were old enough to die for your country, you were old enough to choose the idiots that got you killed. None of this affected me. Laurence Spiegel was the no-hope third-party Liberal  candidate for Hendon South who I don’t think even bothered taking the day off work  (I didn’t see him at Campaign HQ)  and, in 1970, I wasn’t old enough to gain admittance to a cinema to see a war film let alone serve my Queen and country.

I have been following political campaigns ever since and the latest American circus was no exception. But it was too drawn out. There is a bridge in Scotland, the Forth, that is so long that, it is said, when they finish painting it they start again at the other end. In America, it used to be that campaigning for the Presidency started 4 years before polling day ie the day after the previous one.  Watching New Jersey Republican Governor Chris Christie cozying up to Barack Obama in the aftermath of Storm Sandy a week before the election, I could not help feeling that, in a piece of brilliantly cynical political manoeuvering, the world might well be  looking at Obama’s successor in the White House.

Election night was a major disappointment. That statement is clearly true for the 48% of  voters who picked Romney and did not, like so many of their countryment, exercise their constitutional right to stay  home welded to a sofa watching a ball game while trying to break records for calorie consumption. It was also a disappointment for me – and I, disenfranchised by accident of birth, actually wanted Obama to win (or, to be more precise, wanted the Republicans to lose). With the advantage of being 7 hours ahead of New York (some would say 7 light years), I was up with the lark to catch the phut of election night. What a yawn.

Within seconds of  Obama hitting 270 electoral college votes and hence guaranteeing a renewal of his Washington lease, what were the pundits talking about? Was it: what will Obama  do about the future of world peace ?  Was it: what will he do to make America  great again?  Was it: what is the future for social welfare ?  No, sir.  In fact, they were talking about tax. TAX! A subject normally reserved for discussion behind closed doors between consenting adults, was the first thing on the lips of the pros. And “reforming our tax code” even made it into Obama’s victory speech in Chicago (which sounded more like the candidate had beaten himself than Mitt Romney).

Fiscal Cliff? Who’s that?

If you have never heard of the Fiscal Cliff, I suggest you climb right back into that little boat in which you have been drifting without food or water for the last 9 months and enjoy the night sky. As everyone  knows, the Fiscal Cliff was Ben Bernanke’s term for the higher taxes and lower government spending that will kick in next January 1st if somebody does not kick Congress’s ass (“bottom” in the Queen’s English) first.

The Fiscal Cliff is, in fact, the unfortunate coincidence of a number of  economic legislative events coming together to cause an unmitigated disaster: the end of last year’s temporary payroll tax cuts (resulting in a 2% tax increase for workers); the end of certain tax breaks for businesses; shifts in the alternative minimum tax;, the end of the Bush tax cuts;  and the beginning of taxes related to President Obama’s health care law. At the same time,  spending cuts previously agreed upon will begin to go into effect. If nothing is done, some experts are predicting a cataclysmic effect on GDP and unemployment.

The question you HAVE to ask yourself is “How did the world’s leading nation get into this mess in the first place?” You couldn’t make it up.

The Bush tax cuts (the famous bits are the lower tax rates on dividends and capital gains) could not be pushed through the front door of Congress back in 2001 and 2003 so they used something called the reconciliation process that allowed them to be imposed temporarily until the end of 2010. By 2010 the House of Representatives was resembling the battlefield at Gettysburg, and Congress extended them for 2 years. As politics go, that is kids’ stuff.

Four more years!

In the summer of 2011 the sparks were really flying. Congress needed to raise legal debt ceilings for the federal government, otherwise the US was going to default on its Sovereign Debt. The Republican controlled House of Representatives was not playing. At the eleventh hour, a compromise was reached whereby, default was avoided and  a Bipartisan Committee was established to produce a plan to reduce the deficit over 10 years by $1.2 trillion by late November. There was a  sting in the tail that either  arose from a genuine desire to get things sorted out or  the irrational hatred between the two sides of the House . The House decided that, if the Committee could not reach a conclusion, automatic, and horrendous,  cuts would start to kick in 2013. The Committee, its members too busy scratching each other’s eyes out,  didn’t make it.

All that remains for us to do now is to sit back and enjoy the fireworks coming out of the lame-duck Congress. Presumably a solution will be reached at midnight on December 31 (or, with retroactive effect, on January 1). In American politics, after a massive buildup, most things end in a Phut rather than a Bang.

Embracing the taxman

Memories

The most idiosyncratic teacher from my schooldays died last week. Feared by the new boys, persecuted by the middle school and respected by the senior pupils, he was the quintessential British schoolmaster of the mid-to-late twentieth century. Armed with a library of twenty aphorisms (I can, to this day, repeat every one by heart  including his motto: “I may be fairly strict but I am also strictly fair”),  he terrified us until we learned to terrorize him. Eventually, we grew up  just enough to recognise  his worth. Same process, different kids, year in year out.

OK! I won’t raise the retirement age

Times have changed. Teachers are no longer allowed to discipline the permanently wired ego-machines  that pass for human sprogs today. And if schoolmasters have their hands and mouths tied, what about managers? Upset an employee and you are the one frogmarched to the CEO to surgically attach your tongue to his rump and beg forgiveness. It doesn’t stop there. Presidents and Prime Ministers – once the austere shepherds of their nations – now scrape and bow to the whims of their electors.

The individual is King, Queen and Supreme Leader. If the Liberal philosopher J S Mill thought that your right to swing your  fist ends where my nose begins – that right now ends somewhere in the next street where I cannot see you.

However, tax authorities the world over seem to have miraculously escaped modernity. They continue to confront the assessee – essentially civil society in its entirety- from behind a brick wall. Ostensibly, it is not for want of trying.

The old methods are still the best

As far back as 2007  the Forum on Tax Administration of the OECD was presented by its Tax Intermediaries Study Team with Working Paper 6, soporifically entitled “The Enhanced Relationship” (I dread to imagine what the other 5 were about). In the tax world, if you want to be friendly you need an intermediaries study team to guide you.   The Study analyzed the desirability and viability of moving away from the “Basic Relationship” – the assessee is required by law to declare all his income and the tax authorities are required by convention to scare him senseless in case he is tempted otherwise. Drawing on models tried by the Americans, Dutch and Irish for increased cooperation between Tax Authority and (Large Corporate) Taxpayer the Team came up with Revenue and Taxpayer wishlists.

The Tax Authorities’ looked for transparency and disclosure (what a surprise) while taxpayers who – let’s face it – are a bit more savvy, craved commercial awareness (amen), an impartial approach (be fair), proportionality (use common sense), disclosure and transparency  (if you want me to scratch your back, scratch mine too) as well as responsiveness (hello?).

Of course, as it turns out none of this had anything to do with touchy-feely 21st century existentialist (and post-existentialist) civil society. All that was really happening was that the Tax Authorities were looking for a more efficient way to collect taxes and large corporate taxpayers were looking for a more efficient way not to get screwed. Emotional bear hugs were not for the Tax Forum.

Indeed, speaking last November at a convention of American CPAs, Douglas Shulman, the IRS Tax Commissioner, reviewing the IRS’s Compliance Assurance Program stated:  “Any corporation that meets the program’s requirements and wants to enjoy the benefits of open, cooperative, and transparent interactions can now apply”. Thank you Mr Shulman – that speech really makes me want to embrace you and I am supremely impressed that in a country of over 300 million citizens and a monumental number of corporations an entire 140 corporations took part in the CAP in 2011!

So, given the fact that there does not appear to be any real attempt to break down the wall in the US (as well as a host of other countries) the contents of an article in last week’s International Herald Tribune about the trials and tribulations of “accidental” Americans should come as no surprise. With the IRS’s FATCA witchhunt hotting up, American passport holders who have never lived in the US but received citizenship by accident of birth, are running in droves to US Consulates to renounce their citizenship. While it is not clear to me how this solves the problem of past non-reporting, one case mentioned caught my eye. If it was not so tragic, it would be funny.

Roy, a 37 year old lifelong Canadian citizen and resident has US citizenship through his mother. Due to concerns over a savings account in his name, his mother took him to the US Consulate in Calgary to renounce his citizenship (It will be recalled that the US is substantially the last nation on Earth to tax according to citizenship rather than residency). There was one problem – Roy is developmentally disabled. The request was refused because he lacked “the legal capacity to form the specific intent necessary to lose US nationality”. In other words, he does not understand the concept of citizenship.

Her tax adviser shot himself

It strikes me that the only body lacking legal capacity in this story is the US government. Nowadays, only a resident, a regular business visitor to America or a moron  would want to maintain  US citizenship  – the tax downside is too great. A more sensible approach would be for the US government – in cahoots with the IRS – to have people “Check-the-Box” (a wonderful IRS fiction) on Organ Donor Cards or the back of Cornflakes packets  or, more likely,  one last tax return resulting in their US citizenship being viewed as transparent and, therefore, effectively annulled.

Gotcha!

In the meantime the Occupy Wall Street movement should start an offshoot and encourage everyone to “Hug a Taxman”. You never know, it might thaw them out a little.

The Yanks are coming

This post is dedicated to the memory of Orni El-Ad, my mentor and friend, who introduced me to the world of taxation and taught me how to “think tax”. Orni died suddenly this weekend at the premature age of 64. May his memory be blessed.

And then came the Zeppelins

“The Children’s Book” by A S Byatt is, without doubt, one of the most absorbing novels I have ever read. Set in the waning days of the Victorian era and first two decades of the 20th century, it is a saga of interwoven families where the adults gradually shrug off their Victorian correctness while the children gain their voice after a long period of being “seen but not heard”. 

One of the most poignant moments in the book is the attendance by the chief protagonists at the gloriously atmospheric first night of J M Barrie’s Peter Pan. Fooled momentarily into nostalgia for the Darling Family and the adventures of Wendy, Michael and John, the reader quickly regains the sad perspective that this idyllic world is sliding helplessly towards 1914 and the utter carnage of the Great War.

Years ending in 14 to 18 have always given me the creeps and that book got me marching in the direction of 2014 with much trepidation. It was, therefore, with a palpitating heart that I approached the much heralded latest proposed FATCA regulations which are full of 2014, 2015, 2016, 2017 and beyond (the way they are going they might even get to 2039 and  my heart will have a whole new reason to palpitate). In fairness, however, cause of death from FATCA is far more likely to be due to 389 pages of acute boredom than a grenade lobbed across the wire by Jerry.

The Foreign Account Tax Compliance Act (FATCA), which was enacted in 2010 and, according to the latest proposed regulations, is due to commence hostilities on January 1, 2014, is a supreme effort by the US legislature to combat offshore tax evasion by US citizens. At its core it is an ultimatum to nothing less than,the entire world’s financial institutions to act as mercenaries on behalf of the US Treasury by providing information about US account holders and deducting 30% tax at source on payments to identified and suspected US tax evaders – or themselves face 30% withholding on all taxable payments from the US.

You scratch my back James and I'll scratch yours

Due to wholesale opposition from America’s allies who saw this extraterritorial reach as an act of imperialist belligerence, there was, until recently, considerable doubt as to whether it would prove just another example of US saber rattling. However, a Joint Statement on February 8 by the United States, France, Germany, Italy, Spain and the United Kingdom abandoning all those tax evaders seeking a safe haven in exchange for reciprocal spying services by the Americans, means that it is probably time for any American with anything to hide to get his head down in the trench, pull his tin hat firmly over his ears and pray.

Foreign financial institutions (FFI’s) will need to enter into an agreement with the IRS sometime during  the first six months of 2013 in order to be in place for the first winter offensive starting January 1, 2014. In 2014 and 2015  names, addresses, taxpayer identification numbers, account numbers and account balances will need to be reported, while in 2016 any income paid to an account will be required. From 2017 gross proceeds paid to the account will be demanded.

In the meantime, with effect from 2014, participating FFIs, having performed appropriate due diligence to identify their American customers, will need to start withholding 30% tax on such payments as US source dividends, interest and royalties to recalcitrant individuals (basically anybody who is not willing to play) and recalcitrant non-financial foreign entities (NFFEs) aka companies with more than 10% US ownership. Such payments to non-participating FFIs would suffer the same fate. From 2015 proceeds from asset sales will also be subject to withholding.

Right for once

Implementation of the  most Rambo-like proposal has been postponed until  2017 at the earliest and will likely be hit by a stray, but lethal, shell sometime before that. With a view to really thrusting and turning the bayonet, the IRS want to force the participating FFIs to withhold tax on payments that do not even originate in the US using a formula based approach of applying the ratio of US to non-US assets on the FFI’s balance sheet to its payments to recalcitrant individuals and NFFEs. Well boys, you can push your luck and go “over the top” whenever you like but don’t be surprised if  the other side is just waiting to see the whites of your eyes before halting you in your tracks.

Not all entities will need to enter into an agreement with the IRS, an exemption applying to those where the risk of recalcitrant Americans hiding under a tarpaulin in the corner of the trench is not great. Considering the requirements for becoming a deemed FFI, it is not entirely clear what the advantage over entering into an agreement is and it has been suggested that it may just be a decoy.

Ultimately, it is the buy-in by foreign governments that will make this work. Local secrecy laws could have totally derailed the project whereas it is now likely that agreements will be worked out with participating governments for information to be provided to them for sharing with the US authorities. Meanwhile, banks in several jurisdictions are shouting “Yankee, go home” to their  American customers before the regulations come into force.

Looking to the future, the tax evader’s lot is not an enviable one as he is forced to retreat with his  funds into undesirable corners of the world where their risk of loss is greater. As the world goes global places to hide, like Peter Pan’s Neverland, are ever harder to locate. The IRS recently announced yet another Amnesty, offering offenders the chance to wave a white flag and pay their way out of trouble. In the meantime, advanced troops were sent in to lay Switzerland waste. Speculation is now rife as to where the crusading troops will go next .

The attitude of  the US authorities can probably best be summed up by the chorus of the most famous American song of the First World War:

Over there, over there,
Send the word, send the word over there
That the Yanks are coming, the Yanks are coming
The drums rum-tumming everywhere.
So prepare, say a prayer,
Send the word, send the word to beware –
We’ll be over, we’re coming over,
And we won’t come back till it’s over, over there.
 

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