Tax Break

John Fisher, international tax consultant

Archive for the tag “OECD Tax”

…for the people?

And a system of government…

‘Plutocracy’ is viewed generally as a dirty word. The idea (if not the practice) of government by the wealthy is anathema to those who treasure democracy.

At first whiff the OECD Secretariat’s proposal for a unified worldwide approach to the taxation of the digital economy, issued for consultation earlier this month, failed the plutocratic smell test. The second whiff was, perhaps, less pungent.

The OECD-led BEPS initiative has, since 2015, produced some impressive solutions to many of the problems of the international tax system – most would agree far beyond initial expectations. Predictably, however, the biggest sticking point has been the taxation of the digital economy – Action 1 on the 15 point list. And it has not been for want of trying. The OECD and G20 gradually coaxed into the BEPS decision process no less than 134 countries, in what came to be known as the Inclusive Framework, each jurisdiction entitled to an equal vote.  The Inclusive Framework has been busy during 2018 and 2019 issuing an interim report, a policy note, a public consultation document and a programme of work. The aim is to have everything in place (the remaining BEPS issues are also dealt with, but separately compartmentalized) by the end of 2020.

Another example of one nation one vote

The work of the 134 member countries sounds very impressive; there is only one fundamental problem – they are split into three factions with significantly differing views as to what needs to be done (see Taxbreak November 5, 2018). In good democratic fashion, they were instructed to achieve consensus before the ball falls on  December 31, 2020.

O ye of little faith!

The OECD Secretariat – the executive branch of that venerable club of 36 rich nations – saw chaos on the way, and has now ‘gently’ suggested its own solution, taking into account the three differing views. Although the 134 can ignore the ‘suggestion’ (or should that be the 98?), the clout of the wealthy has surely been enhanced. So, at first whiff, plutocrats rule, OK?

The proposal is, as might be expected, eminently sensible. The definition of ‘Nexus’, around since the 1920s, would – in certain circumstances – be modified to include in the tax net of a country situations where no physical presence (permanent establishment) exists. There would also be a new profit allocation rule that diverges from the traditional arms-length transfer pricing. Profits would be split into Amounts A, B and C. Amounts B and C would be fairly traditional in approach – a fixed return for marketing and distribution activities (B) with the option for a jurisdiction to claim a greater return for enhanced activities if warranted (C). Amount A is the magic ingredient, allocating a portion of the deemed residual profit of a multinational group – the non-routine profits – to the market jurisdictions after stripping out that element attributable to other factors such as trade intangibles, capital and risk. The concept is only to apply the rules to large multinationals using a suitable key – probably revenue, and to try and keep the allocation of residual profit as simple as possible.

Taking a second whiff, It is just possible that the OECD Secretariat’s motive in issuing the proposal is entirely anti-Plutocratic. The jurisdiction with the most to lose from the digital tax reform is the US which has nurtured the likes of Facebook, Apple, Amazon, Netflix and Google (the FAANGS). Realization of that fact has been reflected in that great nation’s approach to countries going it alone (eg France with its Digital Tax). The support of the No 1 international tax body is likely to give smaller nations (not to mention the not-so-smaller ones) the courage to resist pressure and ensure there is ultimately compromise rather than steamrolling. The alternative would be no agreement, and further spreading of the unilateral  taxes that have been popping up recently, undermining the underbelly of the entire system.

2020 should be an interesting year.

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.

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