Tax Break

John Fisher, international tax consultant

Archive for the tag “John Fisher”

Ain’t no Bonanza

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Let’s face it. The bar was pretty low

Jay Leno once went walkabout in New York asking innocent passers-by if they could name a country beginning with the letter ‘U’. Apart from the usual camera induced deer-in-the-headlights non-responses, a few bright sparks came up with Uganda and Uruguay. At the close of the piece, as the camera faded out, Leno was heard asking: ‘Have you ever heard of the United States of America?’

Judging by the above experience, it can safely be assumed that, had Leno carried on to ask  the name of the alphabetically last of the 50 States, at least one person – having realized there was no State starting with Z – would have thought long and hard about Y and come up with Utah. Alternatively, still on Y, they might have gone for Wyoming. And Wyoming, dear readers,  is actually the correct answer.

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Named ‘The Virginian’, filmed in California, and set in Wyoming. Only in America

Although there is a tendency to think of Wyoming as still set in the 19th century, with characters like Buffalo Bill, Wild Bill Hickock, Doc Holliday and Calamity Jane ambling around the state capital, Cheyenne, it was the birthplace – in 1977 – of one of the most important tax sanitizers in US history.

The Limited Liability Company (LLC) – a mongrel of the corporation and partnership with descriptive terminology all of its own – crawled along at cowboy pace until 1988 when the Internal Revenue Service issued a ruling that LLCs were transparent for tax purposes. At the speed of a Colt 45, American taxpayers could suddenly combine the limited liability of a corporation with the personal taxation of a partnership or sole trader. This was particularly important in America where, despite Reagan’s major tax reform two years earlier, there was no correlation between the tax paid by an individual (up to 28%), and that paid by a corporation (up to 34%) followed by 28% individual tax on a subsequent dividend (over 52% in total). Congress failed to recognize that inanimate companies – while being vehicles of tax liability – cannot pay tax. Unlike Shylock, if you prick them, they do not bleed. Human beings pay the tax – either through the higher prices suffered by the consumers, or the lower profits earned by the shareholders. There is little justification economically for wide differences in total rates.

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Companies don’t have anything to cuff, either

As it turned out, it took until 2018 for the tax rates to be aligned. In the meantime, the vast majority of American private businesses organized themselves as either sole-proprietorships (and partnerships) or – thanks to Wyoming’s pioneering spirit – the new fangled LLCs.

And, thereby, hangs a tale. It was all well and good that America – with the biggest economy in the world – knew how to treat her LLCs, but other countries struggled with defining their treatment under their own laws. They ended up one of the major ‘culprits’ in hybrid mismatch tax planning that was so fiercely attacked in the OECD’s BEPS initiative.

 

Put simply, tax transparent companies in Israel are a rare and specific phenomenon. On the principle that, if it walks like a duck and talks like a duck, it’s a duck, LLCs fit the bill as companies. Therefore, according to statute law, they are not transparent.  However, given the large exposure of Israelis to the American economy, ever since its big 2003 tax reform the Israeli Tax Authority has been finding accommodation for these hybrid beasts. As long ago as 2004 it produced a circular that reiterated the corporate nature of the LLC, but offered solutions to the availability of a foreign tax credit for US individual tax being paid (since the LLC is tax transparent in the US). If the LLC is deemed controlled and managed from Israel, despite being liable to Israeli corporate tax, a credit is given for the US individual tax on profits attributed to the US (up to the level of the corporate tax). Alternatively, the taxpayer can elect at first filing to be taxed on the profits in Israel at the member (Google translate: shareholder) level, with credit for the US taxes. Some have incorrectly interpreted that as complete transparency for the LLC. In fact the circular stresses that the LLC is a body of persons and, in practical terms, that means that losses of  one LLC cannot be offset against those of another. As LLCs are set up at the drop of a cowboy hat in the US, this represents a real problem for many Israeli investors. There are certain planning devices, but advisors have always been aware that the problem exists.

Remarkably, 15 years after the issuing of that circular, essentially an extra-statutory concession, some  jester with nothing  better to do recently inexplicably allowed – not for the first time – a no-hope case to be brought before the courts. The claimant had set off losses between LLCs – in defiance of the circular – basing his claim on (1) Israeli law determining that when a word is stated in the singular, it also means the plural, unless – inter alia – the context does not support that interpretation, and (2) an informal conversation with a senior tax officer who allegedly told him that the problem could have been solved if all the LLCs had been held under a single holding LLC.

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Why have they stopped us handing out the death penalty?

The judge swatted away the first argument – the context clearly didn’t support the multiple LLC claim. But, the second argument was even more off the wall. Whether or not the senior tax officer had been quoted correctly about forming a group of LLCs, THE CLAIMANT HAD NOT DONE SO. Robert Frost wrote a famous poem on the subject, ‘The Road Not Taken’

‘I shall be telling this with a sigh
Somewhere ages and ages hence:
Two roads diverged in a wood, and I—
I took the one less traveled by,
And that has made all the difference.’
His Honour politely demolished this argument, too. Had I been the judge, I would have been tempted to return to the cowboy country roots of the LLC and quote from Clint Eastwood’s 1976 Western, ‘The Outlaw Josey Wales’:
‘Don’t p**s down my back and tell me it’s raining.’

Prospecting for tax

Cholera vaccination at Nyaragusu refugee camp in Tanzania

True heroes…

If you hear the term: ‘sans frontieres’, it is odds on that – after ‘French’ – the first thing that will come into your mind is ‘Medicins Sans Frontieres’, that truly remarkable international humanitarian medical NGO founded in 1971 and based in Switzerland. Add to that ‘Avocats Sans Frontieres’, the human rights lawyers, and a plethora other ‘Without Borders’ organizations, and your forehead will probably furrow as your thoughts turn to the altruism of Churchill’s ‘Never in the history of human conflict was so much owed by so many to so few’, and Kennedy’s ‘Ask not what your country can do for you’.

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… and true fools

As proof of my innate cynicism, when for the first time last week I came across  ‘Inspecteurs des Impots Sans Frontieres’ (Google translate: Tax Inspectors Without Borders), my agile memory leapfrogged all those worthy international bodies dating back to the early seventies. ‘Jeux Sans Frontieres’ – known on my TV set as ‘It’s a Knockout’ – was a banal  pan-European TV competition tracing its history to 1965. Similar to a well-funded kids’ birthday party, participants were required to engage in physical contests of the utmost idiocy. Europe had been laid waste twice in the preceding half century by the two most utterly mind-boggling catastrophes in the annals of mankind, and this was the reward.

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Tax inspector in the mind’s eye

Thinking my memory was treating the world’s tax inspectors to the respect only they deserved, I plunged first into an Economist article – the headline of which had introduced me to TIWB – and then the  OECD literature on the topic.

I was wrong.

TIWB was founded by the OECD and UN in 2015 around the time the world’s governments started to take international taxation cooperation seriously. Tax administrations with well-developed international tax audit capabilities, as well as retired tax inspectors, are now targeted to assist less fortunate administrations with developing their own tax audit capabilities.

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It just got harder

It turns out there are dozens of these projects going on around the world (there is even a bi-annual newsletter), and it is estimated that, for every dollar spent, a hundred dollars of tax avoiding revenue is collected.

Along with complex changes in rules, much of the stress over the last half-decade has been on transparency and the exchange of information. But, if a cash-strapped tax administration does not know what to do with all the data it receives on international groups  who exploit the system to the full – albeit within legal limits – little will happen. Projects based in the Caribbean, Africa, Asia, Latin America and Eastern Europe are closing the gap. According to the IMF, over 20% of tax revenues were still being lost to the legal playing of the system as recently as 2016.

It looks like it is time to take tax inspectors seriously. When American humorist Dave Barry was chosen for audit in an  IRS sample, he wrote a syndicated article of comical unctuousity to the Service: ‘The truth is that I have the deepest respect for the IRS, and for the thousands of fine men and women and Doberman pinschers who work there….IRS are regular people just like you, except that they can destroy your life.’

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I do, honestly

I have decided to  turn over a new leaf and show respect to tax inspectors whether with or without borders. They are good people. Really good people. Really.

Monkey business

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Pass the monkey wrench

In its relentless efforts to clean us all up, the Israeli Tax Authority has just thrown another spanner in the works of the well-greased black market.

Meek householders faced by odd-job men  demanding cash as they flex their bulging muscles, not to mention seasoned mafiosi and disgraced politicians, will be questioning my timing. Surely,  the ‘Law for Restricting the Use of Cash’ was last year’s news, albeit that it only came into effect two months ago? The man with the leaky roof has already hardwired his brain with a little red light that goes off  when he hears – in a plethora of accents and grammatical constructs – the sum of eleven thousand shekels. Although that is not the final word (or number) on the maximum amount that can be paid in cash – it is a good trigger for the sweat glands to open. From October this year, not only those that demand cash, but those who pay it, will be liable to a fine if caught.

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Cheques are so much easier

The reason for mentioning the incursion into the colourful world of banknotes now in particular is the helpful simulator the tax authority has recently uploaded to its website. The idea – it appears – is that Joe Public can check, in the space of less than a minute, whether a cash payment he plans to receive or make is permitted and, if not, the ‘damage’ if he is nabbed by the long arm of the law.

Having carefully read the authority’s professional circular, replete with numerical examples, and then tested the simulator with the same examples, I have – at time of writing – two criticisms. Firstly,  the simulator’s results in respect of penalties are wrong – someone forgot to program the simulator’s programmer with the correct terms of the law. But, what is a little boo-boo among friends? It is the second point that, in my humble opinion, is the real issue, and on which I feel compelled to dwell.

For a deterrent to be effective, those it targets must either live in abject dread of the terrible consequences of breaking the law: death by hanging, prolonged incarceration, financial ruin; OR they must be left to fear the unknown.

The moment taxpayers can punch the numbers into their smartphones and summon up the bad news – which, starting at 15% of the illegally paid amount, is an irritant rather than a life-destroying event – for many the fine simply becomes a refinement of the black market calculation.

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Joe Public

An example will help the explanation. The abovementioned Joe Public, a typically morally unchallenged householder, hires Art Dodger to redecorate  his house. Art gives Joe a price, but tells him that – if he pays 25% in cash, he will knock off the VAT.  Until the recent change, the only thing stopping Joe was his civic responsibility which – given that he is typically morally unchallenged – is probably handsomely outpriced by the discount. Art, on the other hand, has had to make a risk assessment before making his offer. He will not be declaring VAT and income tax. He probably reckons that – even if he is found out – he will get away with a slap on the wrist and paying both taxes with interest. All in all, the income tax saving is appealing.

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Art Dodger

Enter the new law, and the soon-to-be-corrected simulator. Art retains his sunny outlook about not getting caught. Joe, on the other hand, now knows he has a risk – and, thanks to the simulator, knows exactly how much as he sits across from Art at his kitchen table. Joe might – as the law (and its simulator) hopes – tell Art to forget it. On the other hand, he might – depending on the amount at risk – ask Art to improve his offer. If that happens – depending on how Art responds – the black market  just got more sophisticated.

If I were the tax authority, I would bury the penalty part of the simulator, defects and all, in a very deep hole. The black market is a scourge that, deep down and however much our moral compass waivers , we all want to be rid of. The new law is a step in the right direction.

Oh, and they could always reassign that programmer to ‘Tax Refunds’.

Embrace the Model Treaty

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A real heavyweight of the small screen

When wheelchair bound ‘Ironside’ star Raymond Burr walked confidently down the aircraft steps at Lod Airport in 1974, the reaction of the Israeli public was something akin to the second coming. Still caught in the long shadow of the Yom Kippur War, Israelis were far closer to Tom Brokaw’s ‘Greatest Generation’ than  consumerist 1970s Western Society.  But, that didn’t stop them going bananas over an American TV personality.

Nearly half a century later, Israelis have taken their dubious place in western culture, and they can now fawn and slobber over their own lesser stars. Bar Refaeli – whose completely unearned claim to fame emanates from a combination of heaven-endowed gifts and an unearthly attachment to  silicone – has the nation goggle-eyed over her tax affairs. Based on tabloid rumors, she appears to be in a civil disagreement with the Income Tax Authority over whether she was justified in claiming not to be resident in either Israel or the United States while she shacked up with an Italian-American actor, and in a criminal disagreement over whether she – and her parents – hid critical facts from that same, august authority.

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Tax inspectors are only human after all

More worryingly, the tax authorities themselves seem to have jumped on the media bandwagon with the announcement last week that a committee has been set up to review the criteria for tax residence with a view to establishing greater certainty. Oh dear.

Starting with  the last major tax reform in 2003, Israel has moved forward steadily with the removal of ambiguity about Israel tax residency in domestic law. There was a useful addition to the law in 2007, a requirement to report the basis for an aggressive non-residence position from 2016, and several landmark court cases in recent years. Furthermore, Israel now has double taxation treaties with substantially all the countries Israelis are likely to clear off to (Australia is taking up the rear), which take precedence over domestic law where there is a dispute.

What appears to have put up the Tax Authority’s blood pressure in the Refaeli case (and, in fairness, those of a few other mega-rich individuals) is the claim not to be resident anywhere. That was ably dealt with in a court case back in 2016 concerning a poker player, when the judge made clear that such cases would be rare in the extreme (he even quoted the classic case of a person living on a yacht in the middle of the ocean).

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Sometimes it needs more than the instructions

The problem, if there is one, does not arise  from Israel’s lack of certainty in defining residence. In fact, Israel – in broadly paralleling the OECD Model Treaty guidelines – has a very healthy approach, combining qualitative tests (a person’s center of life), and secondary quantitive tests (number of days present). The problem is that the United States, going it alone as always, relies – at the first level – on a purely quantitative approach. So, in theory at least, an individual like Ms Refaeli could make sure they did not hit the quantitative test in either country, while claiming ‘center of life’ in the United States, where they don’t really care. Hey presto! Not resident anywhere. Any effort to achieve more certainty – like in the United States pure quantitive approach – is probably doomed to abject failure.

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His judgment is not to be trusted…

In cases like Ms Refaeli’s, it is surely far safer to have an Israeli judge look qualitatively at the situation in the light of the facts, and then – as Her Ladyship dons her black cap – stare the  defendant coolly in the eye while pronouncing sentence.

 

 

GILTI until proven simple

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What a joke

Appearing on Johnny Carson’s Tonight show in 1975, the ex-governor of California quipped: ‘We live in the only country in the world where it takes more brains to figure out your income tax than it does to earn the income.’ A little over a decade later, the same gentleman put his pen where his mouth was, and signed into law the Tax Reform Act of 1986, ostensibly simplifying the US Tax Code.

Well, I have to admit that I didn’t take much interest in the Code before Reagan’s reform, but – if that was simplification – I dread to think what it was like in the good old days. Fast forward thirty-odd years and Donald Trump was playing the same game. Or was he?

As US taxpayers start to consider their first  filings under the latest reform, one example should show just how complex the damned thing is.

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He also borrowed the line

As of  2018 the US corporate tax system went over to a territorial basis. That broadly meant that dividends received from abroad by US corporations would be exempt from tax. Nothing is ever that simple. America had invented, back in 1962, the concept of Controlled Foreign Corporation  (today the internationally ubiquitous CFC) which essentially taxed passive and certain other profits parked in tax-advantaged jurisdictions on a current basis, irrespective of whether the income was repatriated. But, if they were to transition to a territorial basis, that wasn’t enough. To paraphrase Mr Carson: ‘Wheeeeeere’s Google/Amazon/Apple?’ What about active income being cleverly sheltered in the Islands and Irelands of the world? And so was born Global Intangible Low Taxed Income (GILTI). After certain adjustments, foreign income (‘intangible’ was evidently thrown in to make a good acronym) would be taxed at half the federal tax rate (10.5% in the New World Order) with a foreign tax credit for 80% of the foreign tax paid on the income. That meant that a foreign tax rate of over 13.125% cancelled out the US tax (which is the same effective rate on Foreign Derived Intangible Income – the export incentive offered to US corporations under the reform – meaning there is ostensibly no tax advantage to going through loops to carry on the business offshore).

So far – if a little complicated –  bearable. The fun starts, however, when considering the effect of GILTI on individual or transparent entities (LLCs, S Corps, Partnerships) investing directly in foreign companies. Once caught within the CFC rules, their position becomes untenable. As it seems right now, they get no 50% deduction for GILTI and no foreign tax credit. That means they have to pay up to 37% tax on the gross income abroad, in addition to the local tax paid.  Given that the foreign jurisdiction may impose withholding tax on distribution of an actual dividend (albeit that such tax may be credited – if there is other income – in a general basket separate from GILTI), and given the exposure to State taxes and Obamacare, it is time to consider buying a one-way ticket  up the Empire State Building.

Now, straight-thinking people  might have thought this was a mistake, calling for suitable regulations to correct the situation. Evidently not. In this (once again) newly simplified world of US tax the solution being screamed from the rooftops is for the individuals to make a S962 election for their income to be treated as corporate  for tax purposes. That way they (probably) become eligible for the foreign tax credit – although the 50% deduction still looks doubtful. Because they have elected to be treated as a corporation, there is tax to pay on the ‘dividend’ when received. This ‘might’ be eligible as a qualified dividend (23.8% tax) and there ‘may’ be a credit to be had on the foreign withholding tax. But, nobody seems very sure.

This is simplification?

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Don’t try this at home, kids. It’s just for movie stars

I recall an interview with the conservative intellectual guru William F Buckley Jr. on the night of Reagan’s 1980 victory. Asked why he wholeheartedly supported the former actor, he told a story (much as the newly elected president might). He had been one of a group, including Reagan,  attending a meeting in a room on a high floor of a luxury hotel. The door became jammed, and they couldn’t get out. Reagan proceeded to climb out of the window, feel his way  along the perilous ledge to the next room, where the window happened to be open, climb in and come around to open the door from the outside. To the genuinely brilliant Buckley, that showed decisiveness, and made Reagan eligible to rule the world. When I heard this, my immediate reaction was: ‘Wouldn’t it have been simpler to just call reception?’

Perhaps the Americans just have a different concept of  ‘simple’? After all, as George Bernard Shaw is reputed to have said: ‘The English and Americans are two peoples divided by a common language’.

Watch this space

The Fast Show Special

The Rolls Royce (alright, Bentley) of tax havens

The proud boast of the John Lewis Partnership Department Store chain, ‘Never knowingly undersold since 1925’, is less than impressive when compared with Switzerland’s record on international tax. It has never been knowlingly undersold since at least 1872 when one of its cantons signed the world’s first every double taxation treaty. I thought of Switzerland when enquiring about a new car last week. As the model that interests me is sold in two local showrooms, I tried both. One was highly professional and even told me the ‘real’ statistics for fuel consumption, as well as which model would best suit my needs. The other went through the usual car salesman’s pitch and, before signing off, blatantly declared they would undercut anything the other guys were offering. The search goes on.

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Anything you need..

Throughout my career, Switzerland has been enormously useful. Holding companies, domicile companies, principal companies, mixed companies and finance branches have provided solutions for international groups looking to park some of their profits offshore without the need for sailing out to some God-forsaken island in the Atlantic of Pacific where, once upon a time, the local representative might have been cooked for lunch. However, as international competition for corporate tax tourism picked up in recent decades, the Swiss had to up their game. There were even international visits from  respectable firms of Swiss tax advisors offering private rulings involving somersaults of tax logic. Nothing particularly strange about that. It was the fact that they were accompanied by  representatives of their local cantons’ tax authorities, smiling benignly.

And then came the world’s Damascene Conversion to fairness and transparency in the international tax sphere. For Switzerland it was more a case of the Spanish Inquisition. With nowhere to turn, where would they would they go from here?

Well, the response has been sometime in coming, and thanks to 50,000 troublemakers forcing a referendum on the issue a couple of weeks back, it will still be coming until at least May. But, the proposal approved by the legislature late last year does away with all those different types of special company and says goodbye to private tax rulings. In their place come ‘reduced’ combined federal and cantonal tax rates centred around 13% to 14% and a string of other provisions.

It is the string of other provisions that has left me checking the internet for booby-trapped timing devices.  Switzerland just has to stay ahead of the pack. Call it Swiss DNA. In the modern world 13% to 14% just ain’t going to swing it. (They couldn’t go any lower – as a nation that doesn’t sport beaches and not much else, they do have to worry about funding their welfare schemes. As it is, employee/employer taxes have had to be upped to cover the loss of corporate revenue). There is provision for step-up of assets for companies migrating to Switzerland (some nice planning available there) and the write-off of hidden reserves for companies coming out of the old regimes. But, the latter only lasts five years and Switzerland presumably hopes to live a bit longer than that. Notional Interest Deductions on capital are thought to only apply to one canton. Beyond that, patent box and R&D treatment are pretty standard.

quote-in-italy-for-thirty-years-under-the-borgias-they-had-warfare-terror-murder-and-bloodshed-they-orson-welles-277430So what are they going to do long-term? Switzerland, of course, is not just a pretty rock-face. Three of the largest fifty companies in the world are headquartered there (and I don’t just mean tax headquartered). The tourist industry  is massive. And there is, of course, its impressive watch industry. However, 75% of the economy comes from services. Banking secrecy has been permanently compromised, and tax tourism seems to be following suit.

The Gnomes of Zürich must have something under their hats, surely? If there is one thing the Swiss are not, it is cuckoo.

 

Keep Calm and Carry On

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About as intellectual as it got

The British have always been a supremely pragmatic people. It was thanks to a fickle king that they knocked religious hegemony on the head early on, and thanks to another misguided monarch that they got their revolution out of the way before the Rousseaus, Marxes and Engels of the world could fill the vacuum with an ideology. Indeed, it was the utterly pragmatic empiricist John Locke who tidied up the mess in the latter half of the seventeenth century.

It is, therefore, no surprise that – despite the cataclysmic events in Parliament surrounding Brexit – the British Government has been beavering away, preparing for the morning after (which, because Brexit is planned for the night of Friday March 29th, will be effectively Monday April Fools Day).

The big news from Davos last week was that Britain and Israel have confirmed ‘in principle’ a Free Trade Agreement similar to that enjoyed between the EU and Israel. With £10 billion of trade, that is eminently sensible for both parties. What received less coverage was the signing  a few days earlier of a protocol to the double taxation agreement between the two countries that dates back to 1962.

Protocols amend treaties. Hearing the words ‘protocol’, ‘tax’, ‘treaty’, ‘Israel’, ‘UK ” (not strictly a word) in the same sentence came as no surprise to my tax-attuned ear. What with all the OECD changes in respect of Base Earnings and Profit Shifting (BEPS) and the automatic exchange of information, protocols are the name of the day. The media reports (that all appeared to stem from the same press release) gave a few details of new provisions and mentioned the obvious. It was only when I downloaded and read the document (who, for heaven’s sake, ruins the party by reading primary sources these days?), that I realized the enormity of what had happened. Perfidious Albion, God bless her!

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What an interesting job

Israel and the UK initialed a new treaty to replace the 1962 one way back in 2009. I remember it well, because I was informally consulted just before initialling, and found a couple of boo-boos. In order for a treaty to take effect, each country needs to take it through whatever processes its domestic law requires – but the stages are identical: initialling, signing, ratifying. In the UK, following the signing,  an Order in Council is issued. That is a process where a Government representative rattles off the wording of a load of boring regulations while the Queen listens (yeh, sure!) and, in the case of a tax treaty or protocol, it goes to a delegated  legislation committee, where it is considered and then brought before Parliament. It can then be ratified.

The 2009 treaty hit a total snafu after initialling. The original 1962 treaty bore the wording: ‘the term “Israel” means the territory in which the Government of Israel
levy (sic) taxation’, and  ‘the terms “resident of the United Kingdom” and “resident of Israel” mean respectively any person who is resident in the United Kingdom for the
purposes of United Kingdom tax and any person who is resident in Israel for
the purposes of Israel tax’. It was widely understood that somebody in London (I hazard a guess, from the Foreign Office) decided that Israeli residents of Judea and Samaria aka the West Bank aka the Occupied Territories should not be included. That was never going to pass muster with  the Israeli Government, and both sides got back in their trenches for the next decade.

But, times change, and these days it might be cheekily argued that go-it-alone Britain needs Israel more than Israel needs Britain (although Britain is still a very-nice-to-have). And that treaty is seriously prehistoric. Meanwhile, as Professor Emeritus of Empire Building, Britain had to watch its step.

Then came the Eureka! moment. It was time to sign protocols with treaty partners. A month after  the UK’s High Commissioner in Cyprus signed with the Cypriots, a British government representative signed with the Israelis. But, there was a subtle difference. The Cypriot protocol ran to a familiar 3 pages; the Israeli protocol ran to an eye-boggling 19. The British and Israelis had effectively shoehorned the long-dormant new treaty into the Protocol, simply passing over the naughty bits.

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I wonder if Mel is one of George’s

The signatory for the British Government was one Mel Stride, Paymaster-General – a name and title which, together with the plot, could have come straight out of a John Le Carre novel.

All that now remains is for the Queen to cock a deaf’un, and for Parliament to be pre-occupied with Brexit. (Israel also needs to ratify).

As regards the new provisions, they can be easily found popping up all over the internet in the same form as they were initially announced.  What seems to have escaped the journalists’ attention is the long-awaited exemption on UK pensions received by Israeli residents (as opposed to the highly-specific exemption from withholding tax on interest and dividends to Israeli pension funds, which was included). New and potential expats, benefiting from a ten year tax exemption on foreign sourced income in Israel,  should be talking to their advisors.

It could have been 1984

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1960s subliminal brainwashing led a generation to careers in numbers

A career in tax really does necessitate a command of numbers. You never know when they are going to unexpectedly turn up and try to bend your mind.

Many years ago, I was asked if I could assist an independent contractor with a spot of number bother with the Israeli tax authorities. I couldn’t.

An Israeli company contracted with a US individual for – what can best be described as – seasonal work. For a number of years, he had arrived on January 1st  and left religiously on July 1st. In those days there were no low-cost airlines encouraging bookings decades in advance, so why was he so particular about the dates? To be back home in time for the July 4th jamboree? No. You guessed it. According to the Israel-US double taxation treaty, independent services by a US resident  are only liable to tax in Israel if the individual is present for 183 days or more. As Israel has always contended that part of a day is to be considered as a day, he had to leave on July 1st – day 182. Since the paying company was required to apply for a withholding tax exemption certificate each year, the matter irritated the tax official charged with issuing the certificates to distraction.

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Not that seasonal

There was nothing the frustrated official could do, so he waited patiently. And his patience paid off. Sometime towards the end of 1999 the individual booked his tickets as usual for January 1st to July 1st 2000. He may even have brilliantly thought he knew what he was doing, but – like over-clever crooks who are  eventually hoisted with their own petard –  he screwed it up. Even though it divides by 4, the turn of a century does not normally sport February 29th UNLESS the number of turns of the century since that event in Bethlehem two millennia ago also divides by 4. 2000 was a leap year, July 1st was day 183, and he was sunk.

This story came to mind now, because January is the month for getting caught napping by the Israeli tax system.

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One way to remember January 30th

Individuals with taxable income from a rental apartment can pay 10% tax on the gross income, rather than much higher marginal rates on the net,  until 30 days after year end. That adds up to January 30th. According to the rhyme I learnt as a child, that is not the day January hangs up its boots  – so paying on the last day of the month, although intuitively the thing to do, is too late. A miss is as good as a mile (although many experts might disagree in this particular case).

Companies that are eligible to maintain their books according to the Dollar Regulations, effectively reporting in foreign currency, are required to elect to do so by that same, busy, day – January 30th. Remember on January 31st – and you will be twisting through the year with the shekel.

Does somebody get their kicks out of tripping innocent taxpayers up with this sort of insidious nitpicking? Or, do the authorities just have a difficult time with numbers?

The Celtic Tiger changes its stripes

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I can’t wait for 2046

The biggest debunker of conspiracy theories has to be what the British call ‘the thirty year rule’  for the declassification of secret documents. It is not that the released documents reveal the truth (the really juicy ones are locked up for far longer); it is, rather, the realization that the behind-the-scenes machinations of government way back then were far more chaotic than anything we imagined at the time. Conspiracies need thought.

So, my conspiracy theory about Ireland’s mammoth tax bill  to pharmaceutical giant Perrigo towards the end of last year will probably be utterly disproven sometime in 2048. But, by then I will be either dead or too old to care. So, here goes.

The (undisputed) story:

In 2013 the (undisputed) Irish Elan Corp sold its interest in Tysabri, a multiple sclerosis drug, to Biogen Idec Inc for a lot of money. A few months later (undisputed) US corporation Perrigo Inc entered into an inversion transaction with Elan. The transaction involved the smaller Elan achieving ownership of Perrigo, with the Perrigo shareholders receiving a majority of the shares of Elan. The principal  (undisputed) advantage to Perrigo was a reduction in future tax. This would be achieved by (calculated conjecture) including future non-US acquisitions under the Irish parent, thus bypassing the then draconian US tax system, and engineering debt from the US to the Irish parent. The latter  would reduce US taxable income at 35%, and increase Irish taxable income at rates of between 0% and 25%, with the Irish foot secretly holding the scale at the lower end thanks to leprecaunish Irish wheezes such as the Double Irish and Single Malt schemes ( the Irish clearly chose names they were convinced could never be traced back to them).

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Ireland is quite a distance

In December 2018 it became known that the Perrigo group (Elan had very cleverly changed its name to that of its new subsidiary) had been issued a bill by the Irish tax authorities for  €1.64 billion. The justification was the reclassification of  the profit on sale of the intellectual property to Biogen from trading income (somewhere between 0% and 12.5% tax) to capital gains (33%). Perrigo promptly announced  that  it was suddenly hard to run a US customer-service organization from the other side of the pond. It is now rumoured that the group is threatening shelving plans for expansion in Dublin unless, presumably, their appeal against the tax assessment is successful.

And now, the conspiracy theory:

As opposed to the $13 billion tax claim from Apple forced upon Ireland by the EU (poor Ireland), the issue  here is what one commentator called Tax 101 – the party trick of tax advisers worldwide walking the tax classification tightrope between capital gains  and trading income, ready at all times to pull the tax-saving bunny out of their moneybags. The sale of the IP was several months before Perrigo merged into Elan. It is to be presumed that Perrigo ordered a tax due diligence, and even if some bits and pieces were obscured by the Guinness, had some inkling of a potential €1.64 billion tax bill. Either they received an utterly obese indemnity from Elan’s shareholders, or there was a clear understanding from somewhere that lreland’s long-standing open-sewer policy of encouraging American investment at all moral cost meant that the authorities could be expected to stay out to a liquid lunch.

Fast forward to the beginning of 2018, and the US had a new tax law . The complementary regimes of Foreign-Derived Intangible Income on certain income of US companies from abroad, and Global Intangible Low Taxed Income of non-US subsidiaries, established a planning benchmark US effective tax rate  in either case of  around 13% . Add to that new inversion rules and restrictions on interest deductibility, and the question that comes to the befuddled mind is: ‘Why Ireland?’

So, what does a country do when its economic raison d’etre is disappearing down the  sewer? It takes a leaf out of Donald Trump’s book – and thinks protectionism. But, in the case of Ireland – other than its beer and whiskey industries – there was precious little of its domestic economy to protect. Other  than its tax advantage, that is.

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And where do you think you’re going?

In October 2018 the Irish budget included, as expected, Controlled Foreign Corporation provisions as required by the EU (see Tax Break 1/1/19). What wasn’t expected was the early imposition of an Exit Tax (which was not due until 2020). Companies wanting to expatriate from Ireland will now face a 12.5% ‘capital gains tax’ – or, in other words, they are pretty well stuck.

All this opened the door for the Irish Treasury to take off its kid gloves, and treat captive foreign companies just like any other. The Irish seem to be saying to Perrigo: ‘You can check out any time you like. But you can never leave.’ I wonder how many Irish-Americans there are in California.

 

Telling it like it isn’t

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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’.

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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.

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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.

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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…

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