Tax Break

John Fisher, international tax consultant

Archive for the tag “Luxembourg”

Telling it like it is (?)

The person who drew the map ran out of ink

The person who drew the map ran out of ink

Alan Coren, the late editor of Punch, once wrote that, while touring Europe he climbed to the top of a hill to get a panoramic view of Luxembourg  – only to find there was a tree in the way.  The first time I flew into Luxembourg airport  a few years ago, was also the first time I had flown in a propeller plane since 1966. Luxembourg is size-challenged.

But when it comes to tax,  Luxembourg is a country that punches way above its weight. For years, it has been proud of its friendly tax environment (it has been in the game so long that, when I started out, the rage was 1929 Holding Companies which, I believe, had something to do with 1929).

Despite Luxembourg’s disproportionate influence, I was still a little surprised when, a few months ago,  that bastion of bankrupt democracy, the European Parliament, forced Jean Claude Juncker on the European Commission as its president. As much as the EU likes to claim it is about politics, it is clear that it remains attached to its birth mother, the EEC (European Economic Community). As such, the work being done in its various forms by the G20, OECD and EU concerning illegal state aid, suggests that anybody from Luxembourg would be an unlikely candidate for any economic portfolio, let alone the big job. Not only did the top job go to a Luxembourgian, it went to one who had been Finance Minister since 1989 and Prime Minister from 1995 until 2013. So, when the sparks started to fly following the (absolutely superfluous) revelation last week that hundreds of multinationals obtained ‘sweet’ tax arrangements in Luxembourg, it wasn’t as if Juncker could even blame ‘the other lot’ when they were in power, because he personally (let alone his party) had been in power for a quarter century.

Ideal tax rate for Luxembourg

Ideal tax rate for Luxembourg

Instead, he bunkered for a while, before making an unanticipated appearance at a press conference today. It was Monty Python time. Informing the assembled rabble that tax administration in the Grand Duchy ‘operates autonomously’, he responded to a journalist who queried why – given that his period of office had coincided with a bonanza time for corporate tax schemes – anyone should believe him, with the churlish: ‘Because I said so’. Asked whether his credibility as a European leader had been shredded, he replied to an Italian inquisitor: ‘I am as suitable as you are’. Heady, diplomatic stuff.

In any event, Juncker plans to march on, leading the onslaught on illegal state aid and  other State sponsored tax avoidance. While admitting that he is politically responsible for everything, he has reportedly claimed that he had nothing to do with the tax arrangements. Juncker is an honorable man, so he deserves to be taken at his word.

Today’s press conference led me to thinking about writing an entirely fictitious sketch about the prime minister of a small western tax haven. Any likeness to any person, living or dead, is entirely coincidental.

Scene: The Prime Minister’s Office in the Principality of Taxembourg. Prime Minister, Jean Paul Messerschmitts, is sitting at his desk. Enter the Tax Commissioner.

TC: Prime Minister, I have come to talk about  projected  Tax Revenues for the year ahead.

PM: Why are you talking to me about it? Collect whatever tax you like and then I and my Cabinet will see how much there is to spend on welfare, education and things

TC: But, sir, I need to talk to you about the incentives we are giving foreign investors.

PM: I do not have time.

TC: When will you have time, Prime Minister?

PM: Can’t you see that I am always busy? Today, I must screw in three new light bulbs in my office, followed by my unveiling of a new ATM cash dispenser on the High Road. Then, this evening, I am hosting a dinner for a retiring Traffic Warden. Tomorrow promises to be another hectic day. Being Prime Minister AND Finance Minister is tough, you know. Set up an appointment with my successor for 15 years time.

TC: Prime Minister, I am sorry to have troubled you with such a trifling matter. Why should you have to be bothered with my nonsense when you must deal with important matters of state? I promise not to trouble you again.

PM: Schtum! Schtum!

Exeunt

pinocchioNow that all the fuss is behind him, Mr Juncker will be able to get on with the task he was, sort of, elected to undertake. With his immense experience, I am sure he will do an excellent job.

The Lord giveth and the Government taketh away

Luxembourg has won the Eurovision Song Contest an incredible 5 times - only twice less than regional superpower Ireland

In recent months, both the Obama Administration and Republican Congressional leaders have suggested that tax deductions for charitable donations should, in certain circumstances, be curbed in the future – although, in keeping with all things Campaign 2012,  the facts are  a bit thin on the ground.

Frankly, I did not give this particular tax break much thought until a wake up call last Tuesday morning.  Not literally – although I was in one of those ubiquitous hotel rooms that could be absolutely anywhere in the world if not for the single distinguishing feature of the shape of its  electrical sockets.  Having arrived late the previous night in Luxembourg – western Europe’s broom cupboard  that could probably be conquered by a posse of Belgian traffic wardens en route to a jolly in the French Alps – the only bright moment so far had been stumbling upon Mary Nightingale, the 21st century thinking man’s crumpet, anchoring ITV1’s News at Ten among a Babel of more than seventy  channels.

Who invited him?

Rising early – as is my custom – and with nothing else to do because this was Luxembourg, I decided to take a look out of the window at the city (for all I know, the horizon beyond the end of the car park was already Germany). As I opened the  curtain I was struck by the beauty of the sunrise and, indeed, stood rooted to the spot for some time. Then I got to thinking about the last time I had watched a sunrise and the result was rather depressing.

Here I was in a foreign country (well, not literally a country – but it was foreign), and my reality was that  I had just  rolled off an airplane (albeit propeller driven) into a taxi into a hotel lobby into a hotel bedroom into and out of a hotel bed; and what now awaited me was rolling into another taxi into an ubiquitous meeting room (the electrical sockets tend to be hidden so you are really lost) into yet another taxi into another aircraft seat.  I had done the same thing ten days earlier – for Luxembourg read Netherlands. You get the picture.

Meanwhile, back home, the sun rises, the sun sets, it rains, there is a heatwave and I don’t even notice – driving early to the office, sitting with the sun-blinds down because I seldom get round to rolling them up. In short, standing there, staring out of the window, I realized I was living in a bubble and had lost touch with the world.

But it is not only me who has a problem. Western society may have  lost touch with itself.

Keeping it personal

At the start of the financial crisis, in 2008, the soon-to-retire Archbishop of Canterbury Dr Rowan Williams wrote a remarkable article in the Spectator in which he pointed to the idolatrous qualities of the financial markets and bemoaned the loss of the face-to-face element of trust in a credit transaction. The financial world had become so complex with so many derivative elements between the lending and borrowing of funds that the markets were deemed to have a life of their own and individuals were isolated lacking control over their own social destiny. The corollary of this may be summarized in a quote of Michael Jordan  “There is no “I” in team but there is in win” – the individual is isolated and the collective is lost.

Which brings me to tax deductions on charitable donations.

Income taxes finance the collective requirements of the nation as a whole and governments cannot possibly personalize the destination of taxes paid. Although no right minded person in the twenty first century would suggest that we should go back to a welfare system based entirely on the generosity of individuals and tithes – governments are much better at collecting the amounts needed for collective social action- there is most definitely a place in modern society for charitable institutions. Governments the world over have proved inept at running most things (other than their chauffer driven cars). In recent years evermore public services in the western world  have been privatised or, while funded by the government, operated by private bodies. There is massive room for charitable institutions to play a part particularly in the area of social welfare and while they may be eligible for government funding, there is a twofold advantage in encouraging individual “investment” : the donors vote with their feet if they perceive a breach of trust; and the system encourages genuine empathy.

He preferred giving charity to paying taxes

Despite the rants of some American fundamentalists that taxes crowd out charity, the marginal propensity to donate is a function of many things and the argument is totally spurious. I believe that the tax deductibility of donations to “‘legitimate” causes – and all would agree that   President Obama or a President Romney should curb abuses – has more to do with the effect on society than economics. It reminds people, albeit inversely, that there is a connection between taxes and the social collective  –  by showing that the government is prepared to pass up on its legitimate right to revenue in favour of private funding.

At the end of this week the two great faiths that underpin western civilization celebrate (not coincidentally) major festivals. Each, in its own way, provides the chance to reconnect with the community. In increasingly sceptical societies participation in these festivals is just as much an opportunity to affirm Belief in Mankind as Belief in God.

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