Tax Break

John Fisher, international tax consultant

Archive for the tag “John Fisher”

Double Dutch

Another way to keep the tax bill downBack in the days when there were twelve pence to a shilling and twenty shillings to a pound, there was an urban myth of a retired Maths teacher who runs into his worst student as the latter climbs out of a Rolls Royce. The younger man embraces his old nemesis, proceeds to thank him for the great Maths education that enabled him to succeed, and declares: ‘I buy ties for a pound, sell them for one pound ten shillings (Google translate: £1.50), which means a ten per cent gross profit. My after-tax earnings are amazing’.

As 2018 was drawing to a close, Holland appeared to be having a similar problem with basic Maths in meeting its commitments to the European Union, albeit that the EU had itself been guilty of gross bureaucratic circumlocution.

skool1

How will the EU manage with the English language when the UK leaves?

In 2016, the EU issued its ambiguously entitled, ‘Anti Tax Avoidance Directive’, which might have been the credo of our low-taxed tie entrepreneur had it not been for the fact that the text made very clear that this was a pro-tax directive aimed at ensuring there was no avoidance. It was however a warning that members would be dealing with poor-language damage control. The Directive directed that interest limitations, exit tax, hybrid arrangements and controlled foreign corporations (CFCs) all had to be dealt with in individual national legislation by the end of 2018. So far, so clear.

As summer gave way to autumn (and, in some cases autumn gave way to winter) member states seemed to inexplicably vie for last place in the legislating stakes, despite having no ultimate choice – even the hapless British, who were hanging off the edge of the EU, had to comply.

cubanmissilesgraph

There are other ways of solving the problem of offshore jurisdictions

As the stragglers came on board, thanks to the abovementioned Dutch, there was one curiosity deserving attention. The Controlled Foreign Corporation (CFC) has been with us since the week of the Cuban Missile Crisis (CMC) in October 1962, when John F Kennedy (JFK) signed the US version into law. In a nutshell, despite jurisdictions adopting various incarnations of CFC, the underlying nous is that certain income either parked in or diverted to a low-tax jurisdiction is to be taxed on a current basis in the hands of the parent as if a dividend has been distributed.

One of the features common to most CFC regimes is that the calculations are objective – identify the item and tax it. The EU version offers two options to choose from. Option A is the traditional method – identifying specific types of income, while Option B has CFC provisions stepping in where state-of-the-art Transfer Pricing isn’t satisfactory. Option B is clearly subjective, and seems to beg to be ignored (when was the last time a company volunteered that its transfer pricing wasn’t up to much?)

Common to both methods, however, is the ownership level triggering CFC, and the rate of tax below which the CFC legislation can apply. That last point is where the Netherlands  appear to have lost track of the numbers, and the EU to have lost track of its mind.

saw in half

I think I’ll stick with the mind reader

We all surely remember the ‘great’ mind-reading trick of our youth – telling some unwitting stooge (usually a younger brother) to ‘think of a number, double it, add X, divide by two, and take away the number you first thought of’. The answer, due to the rudiments of Mathematics, was always X/2.

Well, the Directive establishes low-tax for CFC purposes by the following calculation:

‘The actual corporate tax paid on its profits by the entity or permanent establishment is lower than the difference between the corporate tax that would have been charged on the entity or permanent establishment under the applicable corporate tax system in the Member State of the taxpayer and the actual corporate tax paid on its profits by the entity or permanent establishment.

Now, as hard as I try, I  cannot interpret this gobbledygook as anything other than a horribly complex and roundabout way of arriving at half the parent company’s corporate tax rate. Almost all the EU member countries appeared to come to the same conclusion. However, not the Dutch. Perhaps the official Dutch translator in Brussels was drunk or stoned, but after a lot of bellybutton watching in recent months over an initially proposed 7%, they finally plumped at the eleventh hour for 9%. Despite wrestling with every combination of current and proposed higher-income and lower-income Dutch corporate tax rates, I could not justify 7% or 9% when fed into the above ‘equation’.

So, what is happening? As far as I can see – nothing. The EU bureaucracy is in Christmas hibernation, with instructions only to be aroused from its slumber by occasional wake-up coughs from the tiresome British.

It will be interesting to see if, now we are in the New Year, anybody notices.

Happy New Year – especially to my Dutch friends.

Comfort and joy (for some)

New Zealand

This Prime Minister doesn’t need a babysitter

Several years ago I wrote a newspaper article about a fresh addition to the Israeli Income Tax Ordinance that included four subparagraphs. Or, at least, there should have been four subparagraphs. The fact that there were only three made the whole thing toothless. My tongue-in-cheek piece suggested a scenario where the Knesset Finance Committee was working late into the night, and the person with the most tax knowledge received a phone call that they had to relieve the babysitter – so they all went home. Joke – right? The following day I received a call from a senior tax official asking me how I knew. You couldn’t make it up.

Monkey-typing

If you pay peanuts….

The drafting of tax legislation in this country is often notoriously slapdash. But, that doesn’t explain all the problems with tax statute. For a start, there is the pain of keeping up with changing business environments – just look at the mess the international tax system is in over taxation of the digital economy. And then there is accounting. Corporate taxation is based on accounting profits.  Once upon a time, thanks to the ancient simple art of double entry bookkeeping, the profit and loss account was a fairly close reflection of the dollars and cents performance of a company give or take capital expenditure, debts, liabilities, inventory, and the odd accrual . A few additions and deductions and the taxman could take his toll. An explosion of accounting standards plus that thing they call IFRS led, in recent years, to more adjustments to the accounting profit than fairy lights on a Christmas tree – but as long as tax departments kept their heads, it could be handled. Almost.

For reasons best known to the British Mandatory Authorities that planted the seeds of our tax law, dividends – while mentioned freely throughout the Ordinance – are not defined for tax purposes. The upshot is that they go according to company law and are ultimately calculated in line with the latest whim of the accounting wonks in their ivory towers. That means that a company can distribute either more or less than its taxed profits. It’s the ‘more’ that bothers us here – or more precisely the parties to a court appeal that was heard this month.

Israel adheres broadly to the classical system of taxation – corporate profits are taxed twice, first at the company level, and then in the hands of  the individual on dividend. In order to avoid taxation mushrooming to three, four or heaven knows how many times, if there are several layers of companies passing dividends up the chain, Israel generally exempts intercompany dividends on which Israeli corporation tax has been paid. The second level of tax waits for distribution to the individuals right at the top.

General view of Buckingham Palace in central London.

Rumour has it, her great-great-great-great grandfather bought this place for a fiver.

That last paragraph probably sounds logical to anyone reading this – but it demanded a 39 page, beautifully reasoned ruling by the judge to put it to bed. The appellant company had received accounting profits from a subsidiary manufactured from the revaluation of certain real estate on which tax had, correctly, not been paid as the real estate had not been sold. The tax authorities and a judge had already told the appellant that the intercompany exemption didn’t apply. The company decided to try its luck on an appeal using a combination of sophistry (the wording  – but not the intention – of the law was, indeed, pitiful), a real concern for future double taxation (the subsidiary would be liable to tax on sale of the real estate even though tax was being paid now by its parent), and a childlike plea that, if all else failed, could the nice judge please treat the whole thing as a nightmare and pretend the dividend didn’t happen.

The judge wasn’t having any of it. He countered their sophistry with his own, and treated the request to reverse the transaction like a parent  explaining to a 6 year old that Santa doesn’t really exist. That was all reasonable and fine – but, it was the double tax issue that restored my faith in a system that so often seems broken.

The judge analyzed the concept of avoiding double taxation in Israeli law. He noted that, while the double taxation issue is an important principle underpinning the law, there are situations where double tax applies – predominantly where there is a change of ownership in-between certain transactions. Had the appellant sold the shares to a third party, its representatives would not have been in court arguing that – because the subsidiary company would have to pay tax again in the future on sale of the real estate (the value of the shares sold now would already have taken into account the increased value once), it should be relieved from the resulting double tax.

The Ten Commandments. Image shot 1956. Exact date unknown.

Thou Shalt Not Steal

So, armed with that logic, the judge rejected the appeal and insisted that tax was payable on receipt of the dividend. However, he literally ‘commanded’ the tax authorities to relieve any subsequent sale of the property from double tax, as long as there was no change of ownership in the meantime. That produced a result in parallel with normative Israeli law, as opposed to a narrow, literal interpretation that could have caused unnecessary hardship.

All too often, tax rulings rely on logic as much as  a fish relies on a bicycle. Not this time.

A Merry Christmas and Happy New Year to all those celebrating.

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