Tax Break

John Fisher, international tax consultant

Archive for the tag “OECD”

Brave New World?

Does this guy really think all day about base erosion and profit shifting?

Does this guy really think all day about base erosion and profit shifting?

When, at 3 o’clock on the morning of September 30 , I flopped, bleary-eyed, into a chair  in a Berlin hotel room, activated my laptop and started to write about John Le Carre’s Cold War Trilogy, it did not occur to me that the ensuing post was to be the beginning of my (first) trilogy.

The story so far: A frightening woman chairing a British Parliamentary Committee in November 2012 breathes fire on representatives of Starbucks, Google and Amazon for planning their UK tax bills out of existence. She accuses them of immorality which, since cross-dressing and other fun activities are rumoured to be a staple of Westminster life, is a bit ironic.

Not as cool as the  OECD

Not as cool as the OECD

In June, the G8 leaders, bored out of their minds in some windswept corner of Northern Ireland, decide to call International Rescue but, instead of Scott and Virgil Tracy touching down on the adjoining golf course, they get Pascal Saint-Amans (pictured above), the sexy no-strings-attached   French Head of Tax Policy at the OECD (he replaced a not-very-sexy Welshman last year).

By the time of the G20 summit in St Petersburg in July there is a 15 point  OECD Action Plan in place, comprehensive enough to thwart the amoral designs of the most perverted of tax planners. What is more, just in case somebody manages to make it out of the killing fields alive, there is a rushed new draft on the transfer pricing treatment of intangibles as well as a plan for the automatic exchange of information, finally agreed to by the People’s Republic of China (that great champion of the right to privacy) on the eve of the subsequent September G20 summit. Meanwhile, the mob screams for the blood of multinationals and their advisors, most of whom do not look like heart-throb Saint-Amans. These days, life is good if you are a tax advisor with a death wish.

The big question is: What is going to happen next? This is a good question. Twenty years ago I would probably have ventured a straight answer; nowadays I am more reticent, which I suppose, by inference, means I am more stupid.

This was the moment to sell Imperial Bonds short. The markets failed to predict WW1

This was the moment to sell Imperial Bonds short. The markets failed to predict WW1

Some time ago a Dutch colleague sent me a copy of a fascinating book by Nassim Nicholas Taleb – The Black Swan. The basic premise of the book is that there are totally unpredictable events that have a massive impact on society and which are subsequently rationalised by that same society (why didn’t the useless US security services predict 9/11?). As a result predictions are nauseatingly inaccurate and using a broker for your investments is strikingly similar to paying the lady in the halter-neck evening dress sitting next to you to place all your chips on 21Rouge.

Predicting the future of the international tax world, therefore, comes with the disclaimer that none of what I am going to say will apply if: Rand Paul (son of Ron Paul, the serial presidential candidate who wants to turn the Fed and IRS buildings into luxury condos) is elected President in 2016; aliens build an intergalactic superhighway through the bit of Space currently occupied by Earth; the People’s Republic of China becomes the No.1 economic superpower and insists on corporate and individual privacy in line with Chairman Mao’s Little Red Book (totally upended edition); or the Messiah comes (it will only then be empirically clear whether for the first or second time).

The plans, if successfully implemented in their entirety, will lead to a fundamental realignment of the international tax area. The BEPS Action Plan, by targeting digital businesses, hybrid instruments, interest deductibility and transfer pricing at the same time as ensuring that tax planning, warts and all, is on public display at the local Tesco’s, will put paid to the magical sleight-of-hand international tax planning that attracted us all into this rural corner of the profession in the first place. The Revised Discussion Draft on Transfer Pricing Aspects of Intangibles will, by insisting on examining where value is created, substantially exclude all but serious MNE’s from shifting profits to lower taxed jurisdictions – such planning requiring the transfer of physical, living people who are actually going to carry out the functions to which they are assigned (shock, horror), as well as volume tax savings where the delta in tax rates may not be that great.

International Tax Advisors will continue to flourish – but in a much less exciting fashion. They will concentrate on tax efficiency rather than tax elimination – to the extent companies can move people, assets and risk between jurisdictions there may be genuine tax savings or deferral but, otherwise, planning will concentrate on not paying excess or double tax through inefficient structures. There will always be a need for companies to understand their tax positions in new foreign jurisdictions and all the signs are that compliance issues will continue to increase geometrically. In addition, there will always be Transfer Pricing (although, despite current protestations to the contrary, simple formulary apportionment will be used in all less material transactions).

Impossible goal? It went in

Impossible goal? It went in

The question that remains is how likely it is that the plans will be implemented in their entirety. The OECD and G20 have set ambitious deadlines for just about everything being complete by the end of 2015. While a lot of the issues have, in practice, been under consideration for some years, most of the deadlines appear ridiculous. Grown-up nations like Britain and France, while  publicly sponsoring and supporting the reforms, themselves offer tax incentives that will need to go; not all developing countries are on board; and, most significantly, unless they can substantially convince every sovereign country to agree to a Multinational Instrument that would change international tax relations without the need for the renegotiation of bilateral tax treaties, the whole thing could take decades. On the other hand, it is unlikely that public awareness of the issue will now evaporate and that governments will take it off the agenda. To get this to work some time in the next decade it needs thought (the OECD), goodwill (the G20) and brute force (the United States).

At the end of the day, as in so many difficult situations, it will be up to Uncle Sam to speak softly and carry a big stick. My money is on that. Croupier, spin the wheel.

Judge for yourself

Practicing for next term of office?

Practicing for next term of office?

Silvio Berlusconi has a mission. Having already successfully nobbled two branches of government – the executive and legislature – he is out gunning for the third.

In a speech that in any other country would have had him up in front of the Beak accused of incitement, the newly convicted (this one’s for tax evasion) former Italian Crime Minister earlier this month went as far as to say that the judiciary that had convicted him exercised “the worst power – the power to deny someone their freedom”.

Now Silvio, darling, I know you are the latest in a long line of Italians the likes of Julius Caesar, Pope Alexander (Borgia) and Benito Mussolini who, shall we say, were born without the rule of law gene, but what do you really think all those judges are for if not to deny people’s freedom?

I really do think you are missing the point when you decry such  treatment of “someone who has given 20 years of his life to the nation”. Dear boy, you are not supposed to be above the law just because you were Chief Clown. Your sentence is something of a joke – because you are 76 years old and have had some modest success in buggering up the country’s laws during your three terms in charge, you are facing one year of house arrest or community service. You probably have an estate the size of Milan and, anyway, what community service is a 76 year old fit for (don’t answer that – you are being tried separately for that nonsense) ?

Watching Berlusconi’s privately produced video following the conviction, it occurred to me just how inadequate simultaneous translations are, and how difficult is the task now facing the OECD following its new mammoth commission from the G20 to clean up the world’s tax act in time for tomorrow morning’s  breakfast.

Mr Berlusconi, sitting at a desk with a backdrop of flags fit for a Duce, looked – thanks to the AC Milan boss’s season ticket to the cosmetic surgeon – like a cross between Pinocchio and Barbie’s boyfriend, Ken. Trying to understand what he was about was not just a matter of the inevitable lipsynch problems of English words crowding out the Italian pouring from his mouth. The man’s logic and body language were totally incomprehensible to a Brit like me, despite my substantial Mediterranean connections.

Same agency that dealt with the tax evasion issue?

Same agency that dealt with the tax evasion issue?

Around the same time Messrs Dolce and Gabbana, who I assume require no introduction among the refined readership of this modest blog, reacted to their own tax evasion (yawn!) conviction with  a full-page advertisement in the world’s press protesting their innocence (or something like that) accompanied by all sorts of data. Now I, as a Brit and despite my substantial Mediterranean connections AND a career in tax accounting, did not understand a damned word.

Yet,  neither Mr Berlusconi nor the luxury goods pair are stupid. And, even if they are, their PR people surely cannot be? My conclusion is that Mr Berlusconi’s advisers knew their Italian audience who view the whole Berlusconi saga in a different light to the rest of us (let’s face it, they elected him 3 times), while Dolce and Gabbana’s Italian advisers are, sadly, stupid.

According to my Atlas he was also an Italian

According to my Atlas he was also an Italian

This all brings me to the conclusion that the OECD is on a hiding to nowhere. Thanks to sheer American bullying power, there will be some progress in such areas as Exchange of Information but much of the 15 point plan (see last Post) is going to get mired in disagreements over different value systems. As the northern hemisphere celebrates the centenary of the last summer before the old world got taken to the laundry, that is hardly surprising.

Populist leaders are ruled. OK?

G7 Summit Advanced Quiz. The chap from the EU makes it harder to spot the Italian

G7 Summit Advanced Quiz. The chap from the EU makes it harder to spot the Italian

Never one for crosswords or brain teasers, in my younger days I got my quiz kicks from lineups of leaders at  G7 Economic Summits. Always familiar were the Presidents of the US and France, the Chancellor of Germany and the Prime Minister of the UK. The Canadian premier would generally give himself away by the jutting jaw honed by evolution to fell a tree with one bite, while the Japanese PM was invariably, well, Japanese. That left the one  nobody recognized because he had never been in the job more than 3 weeks – the bloke from Italy.

It was nostalgic to view the line-up at the G8 last month – Russia has now come in from the cold – and, as in days of old, stare blankly at the Italian (I still don’t know his name).

Probably because the Summit was in one of the most God forsaken places on Earth (Northern Ireland) – the leaders turned their minds to taxation. A politician trying to deal with taxation is much like a bomb disposal expert trying to deal with unexploded ordnance – only without the expert bit. Those of us deemed by politicians (!!) to be of perverted mind and questionable morality proffer thanks therefore to the Great-Tax-Collector-in-the-Sky for ensuring the issue was kicked into the long grass of this months’s G20 Summit  in the utterly not forsaken St Petersburg (fka Leningrad fka Petrograd fka St Petersburg). Nothing, but nothing, will be achieved there other than strengthening the hand of the OECD. While the tax gurus at the OECD are impossibly slow in arriving at decisions, they do at least understand the intricacies of our ignoble craft and are the best bet the world has for getting things straight.

The communique issued at the end of the G8 Summit listed the three Ts: trade, tax and transparency. In the field of taxation the leaders plan automatic exchange of information between tax authorities as well as a central register of beneficial ownership of companies, both of which should help combat tax evasion – difficult for even the most hardened of tax hacks to argue with . Joining the populist revolt against Multinationals, the leaders declared that “On tax avoidance, we support the OECD’s work to tackle profit shifting and base erosion” – laudably reserved language given that the host of the event, David Cameron, had been quoted in the left-wing Guardian as saying: “Some forms of avoidance have become so aggressive that I think it is right to say these are ethical issues”, while urging multinationals to “wake up and smell the coffee”.

Starbucks HQ

Starbucks HQ

Other than the obviously crude reference to Starbucks who managed to turn the method for making a cup of coffee into low-taxed, high value, intellectual property, I fail to understand what was percolating through  the Prime Minister’s brain when he came up with that daft metaphor. But usage of the term “ethical” in the same sentence as “avoidance” makes my kettle boil.

Does Mr Cameron need reminding that, while he may be in a morganatic marriage with a bunch of toenail-picking lefties, his party is the standard-bearer of Capitalism? Emotive words like “ethical” and “moral”, let alone “avoidance”, do not cosy-up  with “Capitalism”. Capitalism is not an ideology, it is not weighed down with subjective value judgments. The only brakes on Capitalism should be laws passed by parliaments to curb its excesses. A good capitalist will always be looking for ways around restrictions to enhance the march of Capitalism because that is his job. He is naturally centrifugal rather than centripetal. He might throw in a bit of Social Conscience along the way out of the goodness of his throbbing heart – but it is the function of legislatures to rein him in.

While popular protest movements have every right to object to multinationals like Apple, Starbucks, Google and Amazon paying less tax worldwide than Warren Buffett’s secretary, populist leaders and legislatures would do well to take a break from their brown-nosing and reflect on who is really to blame rather than labeling companies”immoral”. If they came up long enough for air they might realize that, instead of  bellyaching with the protesters, it is their job to ensure that the right laws are in place.

If truth be told, the main problem with multinational non-taxation is what that bastion of bankrupt socialism the Guardian angrily identified as “the practice of transfer pricing”. Consistently applied rules across nations by multinationals based on the three pillars of: functions, assets and risk have indeed enhanced the mobility of profits to unlikely corners of the Globe. But who put those nutjob rules in place? Waitforit……the OECD – the darling of the G8 which is now being entrusted with the job of getting all these nasty companies back in line.

The arbiter of morality - the newspaper that supported Hitler and Mussolini in the 1930s

The arbiter of morality – the newspaper that supported Hitler and Mussolini in the 1930s

Accusing an inanimate corporate entity of immorality is beyond the realms of even my fertile imagination, but if the OECD is to get anywhere “before”, as Mr Cameron might have said, “the coffee goes cold”, all 34 member governments plus others with observer status are going to need to instruct their international tax teams to cooperate beyond their narrow interests to arrive at rules that are workable and fair in a multinational context. Experience to date does not  bode well for the future. In the meantime governments should accept that, in the interests of capitalism, the tax fraternity will continue to seek out loopholes as they seek to maximise market efficiency. Brains and pens at the ready. Let the battle begin.

The ultimate illegal alien

Thought-provoking literature

Thought-provoking literature

While Shuster, Siegel and Kane were, without doubt, the Olympians of Action Hero Comics,  the creators of Superman and Batman – each the 24 year-old  son of Jewish immigrants from Eastern Europe – were never going to be the  heirs of Socrates, Plato and Aristotle.

Man of Steel, the latest Superman blockbuster that I ran faster than a speeding bullet to see last week, is best described as schizophrenic. The first 90 minutes – the average length of a 21st century movie – is cerebral beyond anything Clark Kent’s creative young gods could have possibly imagined, while the 53 minutes of extra time are pure, unadulterated violence, which is what they very probably did imagine. Violence and one single hell of a kiss. (Spoiler Alert – if you don’t know the Superman story by now, go back to Krypton). As our Superhero and Lois Lane embrace amid the ruins of Metropolis they are  watched admiringly by a group of misty-eyed US army officers while General Zod still lurks in the shadows ready to end any chance the studio has of making Man of Steel – The Sequel. The scene is the watermark that proves the movie is genuine, infantile Hollywood.

Whatever Shuster and Siegel were thinking of when they were penning and inking the first adventure in 1938 (whoosh, pow, thwack?) they may have subconsciously been delving into their immigrant roots. They would likely have faced discrimination as kids and young men and this alienation does come out quite starkly in this latest cinematic offering – even if Clark Kent did not sail Steerage Class from Hamburg to Metropolis.

Earlier this month the OECD (the club of rich nations except the rich nations that are not members) published the latest edition of its International Migration Outlook report. 400+ pages of taxpayers money to come to the conclusion that the fiscal impact of migration is broadly neutral – that is to say, immigrants normally pay more in taxes than they claim in welfare.

With xenophobia spreading faster across the globe than  Middle-Eastern  immigrants to Europe, that money may be well spent. Enlightened politicians of developed nations, no longer able to use anti-immigrant arguments based on the lengths of noses or racial inferiority, have in recent years  opted for the economic argument  – immigrants are a drain on social services while not contributing enough to the national coffers. This latest report deflects that contention: while there are pockets where it is true such as Germany, in the main immigration neither adds not subtracts. Having said that,  young educated immigrants are deemed a definite boon.

He presumably robbed an American of his job

He presumably robbed an American of his job

Despite being the grandson of immigrants (and, indeed, an immigrant myself) I am not sure this 400+ page of apologetics quite hits the nail on the council house door. Stating that immigration is a substantially zero-sum fiscal game does not  take into account the effect on unemployment among the indigenous population crowded out of the job market (which was the ubiquitous gripe when I was a young man and should come round once more on the xenophobic carousel sometime soon).

The immigrants a country does need are those that add value to the economy – those that bring skills and diversity of thought (and hence innovation). In addition, unskilled labour is required for the functions the indigenous population are no longer prepared to undertake. Of course, the social consequences must be considered together with the fiscal ones. While cultural diversity is without question a boon to petrified- fossil  countries, any attempt at minority cultural hegemony  must be unceremoniously rebuffed.

And while we are on the subject of the advantages of diversity....

And while we are on the subject of the advantages of diversity….

Michael Chabon’s award-winnning novel The Amazing Adventures of Kavalier and Clay tells the tale of a refugee from Nazi Europe who creates a comic strip character that fights Fascism – the immigrant’s superhero. Superman was the ultimate immigrant with  strange, suspect powers  and weird clothes – but he was also the All-American boy who paid his way and devoted himself to his adopted nation. That is what immigration should be all about. Maybe, after all,  there was more to Shuster and Siegel than meets the non X-ray eye.

Holy smoke

Translation App

Translation App

On Tuesday I was asked to review a generic letter to clients that had been “professionally” translated from Hebrew to English. Wielding my red pen with the hungry anticipation of a famished vampire, I proceeded to correct just about everything on the  page except  the spaces between the paragraphs. Not being able to resist the kind of stupid one-liner that costs me so dearly in my annual employee feedback review, I passed the sheet nonchalantly across the desk with the comment, “Apart from that, it is perfect”.

The truth is that there wasn’t a single word in the document that was technically mistranslated – it’s just  that, if words could be compared to cars,  it was like a totally fatal pile-up on a fog-covered stretch of the M1.

 I had a similar, if less violent, reaction when I read the English translation of the Pope’s resignation speech. The use of the word “convoked” in the first sentence sent me diving for my Shorter Oxford English Dictionary to discover whether this was, what one of my English teachers used to call a “lovely word, doesn’t exist”. Well, it certainly does exist and, what is more, it is a faithful translation of the original Latin “convocavi” although a better oiled translator would definitely  have gone for the more comfortable “convened”. Having finally located the original Latin text (there isn’t much call for it these days outside the convocation (good word) of cardinals who heard the speech in person) I noticed that for the term “not only…but also”  His Holiness had used ” non solum…sed etiam” rather than the more common “non modo …sed etiam”. It made me wonder whether he had gone for a word that conveyed his extreme loneliness (solus=alone) in coming to his decision – a sentiment that never made it into the English version.

“Lost in Translation” could have been a good title for a movie if Sofia Coppola hadn’t got there first (and won an Oscar in the process).

Last week France, Germany and the UK issued a joint communique to their G20 partners supporting the newly released OECD report on Base Erosion and Profit Shifting (BEPS). The report came in the wake of the growing outcry among some leading nations that they are not able to tax a big enough share of the global profits of multinational groups. Although the Americans have been slightly less vocal on this since the US is the godhead of a large proportion of those groups, the IRS has been trying to hammer Amazon recently on its profit shifting to Luxembourg – so some cooperation can be expected.

What is interesting is that this report is not actually a report. It is a framework designed to pinpoint the problems that exist. Talk is of a report in July. To this must be added the keenly anticipated OECD progress report due in April on “Transparency and Exchange of Information”, not to mention the Beneficial Ownership proposed Model Treaty update from October 2012. Then, of course, there is the Daddy of them all  – Working Party No 6, which sounds like something out of Orwell’s 1984, that has been spending somebody’s (the taxpayer’s?) money for several years now, working on the tax treatment of “Intangibles”, the easy mobility of which is one of the tax world’s core evils. Although an update was only expected in late 2013, the Working Party  shocked the world (you must have felt it) when it gave a progress report last June. There might even, one day, be a final report (shock, horror).

But one thing is almost for sure – whenever all these committees, working parties and convocations report – NOTHING WILL BE ANY CLEARER. Why? Because they will be written with the usual lack of clarity that comes from culturally diverse  groups trying to crawl their way through the intricacies of unshared language. And the really sad thing is that everyone (and that includes people who don’t even know how to fill in a tax return) knows what really needs to be done to get the international tax system straight.

What governments would like to do to international tax planning

What governments would like to do to international tax planning

There is a solution to the reams of gobbledegook. It came to me a few years ago when the family was vacationing in Italy. Arriving in Firenze (Florence to beer swilling Brits), I attempted to follow the Italian English instructions from the landlords of the apartment we were renting in the old city explaining how to drive in and deposit our suitcases. If you have never been to Firenze (book a ticket NOW) you may not know that you are supposed to park outside the old city precincts in car parks that fleece you beyond anything you imagined even the Italians were capable of. Approaching the city walls I noticed one of those wordless round red signs with a horizontal white band through the middle. Suggesting sheepishly to my wife that this was, perhaps, not a great idea she insisted – on the basis of the landlords’  instructions –  that we continue. Two minutes later, having braved a couple of narrow one-way streets and unavoidably driven back out through the city wall, I found myself facing the same sign again. Try again, I was instructed. The third time I revolted, made for a car park and bundled everybody into a taxi. A few months later, true to their motto “We try harder”, Avis made sure I received two identical tickets from the local Cabinieri for €90 apiece.

The point is that we all understand symbols and we don’t understand Italian English. It is time for international bodies like the OECD to abandon all these reports and revert to hieroglyphics and numbers. Instead of reeling off thousands of pages of draft, interim draft, final draft, and really final draft reports – they should produce powerpoint presentations with diagrams based on internationally agreed symbols and icons, accompanied by multiple numerical examples of how the thing the diagram is representing is supposed to work. I actually remember the Americans putting out a Treasury Paper on withholding tax from  software payments in the 1990s which, while not adopting the powerpoint approach, used around 20 examples which made the whole thing totally clear even to someone like me who is not an American speaker.

The next President or Pope?

The next President or Pope?

There is wide belief that Pope Benedict has earned a long and happy retirement. As regards his successor, the older among you will remember the unfortunate pope whose heart gave out, or – if you are into conspiracy theories – was given out, a month after his ascension to the papacy in 1978. He decided to take the name of his two predecessors – John XXIII and Paul VI – becoming Pope John Paul I. His celebrity successor, presumably out of respect for his early demise, named himself John Paul II.  If the new guy wants to stay in the headlines he might take a leaf out of John Paul I’s  book and name himself after his five predecessors –  Pope  John Paul John Paul John Paul Benedict I. A juggernaut of a name like that  would survive any language crash.

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