Tax Break

John Fisher, international tax consultant

Archive for the tag “Spain”

Bend it for Messi

Bonzo, is that you?

Bonzo, is that you?

Having reached my majority in an era that nowadays pops up in my kids’ History exams, I am today at a stage in life where names and faces are prone to be mixed-and-matched. Every time I hear mention of Lionel Messi I invariably see Lionel Richie’s mustachioed head protruding from an FC Barcelona shirt. It was, therefore, no surprise that when the world was confronted with the shocking news last week that Mr Messi and his father (Mr Messi) are facing criminal investigation in Spain for tax evasion, my first reaction was: “Hello, is it me you’re looking for?”

Top sportsmen really do have complicated financial lives and I admit a little sympathy for the World’s Greatest Footballer if he did (and he vigorously denies it) get caught up in a bit of over-zealous tax dribbling. If convicted, we are told he faces an undisclosed fine and up to 6 years in a Spanish lock-up.

Now, unless you are one of those people with piles of cash stashed away in increasingly less remote tax havens waiting for a knock at the door, your reaction to this is probably: “Nobody is above the law and if he broke the law he should be punished and if that means depriving him of his liberty so-be-it”. I should have added, you are probably also not a Barcelona fan. Nor am I, but I am afraid I don’t think I agree with you. So there.

Only 6 years? Are they crazy?!?

Only 6 years? Are they crazy?!?

Apart from the fact that the Spanish legal system is probably too incompetent for him to be brought to trial before the end of his natural life (he is currently 25 years old) and they will need to find a rabid Real Madrid supporting judge with a fanatical death wish to convict him, the modern world thankfully operates under a system of Moral Relativism. And modern (as well as not-so-modern) governments know how to cleverly render  Absolute Immorality relative for the better good of the world and for the even better good of their poll ratings.

Earlier this month I gave my teenage son a night tour of South-East London where I spent much of my childhood. Driving up Denmark Hill (around the spot where Pip attends a wedding at the end of Great Expectations) I told him that, but for the quick reactions of an anonymous bus passenger thereabouts in 1944, neither I nor he would have ever seen the light of day. My mother was standing on the bus as a V2 rocket exploded nearby (it was probably a V1 doodlebug which told you it was coming – but that would ruin the story). The gentleman threw her to the floor just as all the windows imploded.

Well, you might have thought that, as the war came to an end and prominent Nazis and their prominent assistants came up for trial,   the genius who developed the deadly V2 would have found himself dangling at the end of a rope. What actually happened was that Werner von Braun was spirited off to America where he was the “One giant leap for mankind” to Neil Armstrong’s “One small step for man”. He developed the Saturn V rocket that powered the Apollo missions. With that, America won the space race, countless lives were enriched and the Allies saved a perfectly good piece of rope.

On the other hand, look what happened to poor Oscar Wilde. The author of some of the most important literary works to do the rounds in the 20th century, as well as one of the greatest wits in history, lay dead in a cheap Paris Hotel in 1900 only 46 years into a hyper-productive life. Already bankrupted by an ill-advised libel case that backfired, in 1895 he was sentenced to two years hard labour for being gay (for which a growing number of countries now condemn offenders to get married).  On release from prison he went steadily downhill. While, without that prison sentence, we would never have had the haunting Ballad of Reading Gaol (that is Jail in potty English) or De Profundis, we would have surely had a colossal output that was lost to the world before it was even created.

If Lionel Messi is found guilty, he may well deserve his fate – but the world does not. Here is a genius with a limited number of years to work his magic. If the world reacted with justified outrage at the destruction of World Heritage sites in Timbuktu by the Taleban – even though Timbuktu is the traditional end of the world and most of us will never go there – the destruction of the career of a temporary World Heritage site with a planet-wide following must surely be considered all the more outrageous.

Trial jury?

Trial jury?

Nevertheless, for the indignant righteous, there is a compromise.  The Spanish could hurry through the trial, find the Argentinian guilty and then offer him two alternatives – a lengthy prison sentence OR an application for Spanish nationality so that he could play for Spain in the 2014 World Cup in Brazil. However morally relative all this would be, it would be worth it just to see the faces of those Argies as they crash out in the group stage.

Mas or Messi?

Barcelona. There was a time, not so long ago, when the capital of Catalonia was not yet known for Freddy Mercury’s super-hit of the same name, when the  1992 Summer Olympics had not yet produced gold, when Carlos Ruiz Zafon had not yet got round to romanticizing La Rambla and the mysterious Cemetery of Forgotten Books, when Gaudi’s architecture and that permanently half built church just looked plain weird – and the best football team in the world had yet to stamp its trademark on the beautiful game.

Spain was a place for low-cost vacations, El Cordobes, fugitive gangland figures and cheap Muscatel wine that belonged next to the Coca Cola on the shelves of English supermarkets. But most of all, if you happened to like 1970s British humour , Barcelona was the birthplace of the semi-idiot waiter Manuel in John Cleese’s classic sitcom, Fawlty Towers. No TV character was ever more successful in hijacking the collective perception of an entire city.

Artur Mas, the President of Catalonia and a normally highly intelligent man, has been displaying elements of Manuel Syndrome lately to remarkable effect. Struggling, like everybody else, with Spain’s austerity programme and coming to the conclusion that the wealthy region of Catalonia was paying more taxes to support the rest of Spain than it was receiving from Madrid, he decided it was time to shake things up.

Calling an election only two years into his term of office, he based his manifesto on a promise of a referendum on Catalonian independence from Spain. That the promise was contrary to the Spanish constitution didn’t seem to bother him. This was his chance to give Catalonia freedom to set its own taxes (which seems to be the main gripe) and for an obscure local politician (Mr Mas) to hit the big time.

He would have “persuaded” Mas not to call a referendum

In fairness, Catalonia  does have certain characteristics of a nation. It has its own culture, its own language (which is more than can be said for Australia, Canada and the United States) and a population of 7.5 million. On the other hand, Catalonia has lacked true independence since time immemorial, while  a chunk of it has been  stuck in another country for centuries. That chunk has not expressed any similar desire to break away from the warm bosom of  its French maitre. So at best the prospect is for a Peoples’ Republic of A Big Chunk of Catalonia with an in-built reason for going to war with France to “free” its (unenthusiastic) compatriots from foreign domination. Judging by France’s dismal performance in wars over the last century, they might even win.

Apart from being a local politician who wants to get his name in the history books, Mr Mas is also an economist, which, given the economic lunacy of his independence idea and the mess Spain is currently in, makes me wonder what they teach in the Social Sciences Department of the  University of Barcelona.

Catalonia is justly proud of its export record but almost half of its trade is with other Spanish regions. If it were to gain independence it would need to apply for membership of the EU (not a foregone conclusion as has been pointed out to the Scottish secessionists) and meet its EU budget obligations, while servicing its own (bloated) debt. Although, in the modern global economy,  absolute size  is no longer a pre-requisite for  prosperity, access to trade certainly is. What is more, major economies have learnt that there is much to be gained by supporting weaker economies as they grow, producing , in turn, new middle-classes that will increase demand for their products (perhaps Mr Mas, so engrossed in other issues, hasn’t had time to learn about the European Union).  So what is the point of seceding from a country that is critical to your own economic prosperity, even if it does currently cost you a few pesetas each  year?

In the event, while pro-independence parties won the election last week, Mr Mas took a drubbing and will now, thankfully,  spend more time trying to stay in power than concentrating on independence and messing things up generally.

It also became clear during the campaign that enthusiasm for absolute independence was not that great. Should the Government in Madrid offers the regions some form of federalism with  proper taxing rights, it could be that the whole independence thing evaporates. Then Catalonia could get on with being the engine to  pull Spain back to the economic health so crucial to the Euro project.

At the end of the day, any move for independence will have to deal with a far bigger question. What will happen to FC Barcelona? Would the Spanish let them carry on playing in La Liga or punish them for deserting ship? If they were turfed out, could Spain and Catalonia survive without  the bi-annual Civil War between Barça and  Real Madrid? In the end, given the power of football, that could be the deciding factor. Anyway, isn’t all this nationalist stuff passé? After all, the opposing fans will be cheering for Messi and Ronaldo. Neither is Spanish, let alone Catalonian.

It’s peace and democracy, stupid

Bayern Munich 3 Chelsea 4

We accountants do not care much for the front section of the newspaper. If  a story cannot be reduced to prime numbers, it is not for  us. After a cursory glance at the headlines we skip to Section B to be hypnotized by the latest business and finance news followed by yesterday’s football, baseball and cricket results. Reaching the back page we take a quick look at the paper’s weather forecast and then commit its earthly remains to the nearest bin.

I am grateful, therefore,  to Nobel Laureate (Economics) Paul Krugman who shone a different – albeit obvious – light on the Euro Crisis in a recent New York Times article:

 “Failure of the euro would amount to a huge defeat for the broader European project, the attempt to bring peace, prosperity and democracy to a continent with a terrible history”.

I wonder how long they had to queue?

I am British, which explains why I have been in denial on this issue for so long. When Britain negotiated belated entry to the EEC  (the forerunner of the EU) in 1973 and promptly held a referendum two years later to decide whether to have the marriage annulled, the British Government talked lots about the importance of a Common Market. What they always avoided was the unhidden agenda of the six founding fathers – West Germany, France, Italy, Netherlands, Belgium and Luxembourg – of achieving political union: a United States of Europe. The Six had one thing in common – they had all, in recent memory, been overrun by  foreign troops. Britain, too, had been overrun  by foreign troops – Americans  – who were overpaid, oversexed and over here but, while this was hardly less traumatic (especially for the husbands dying for King and Country overseas), it did not compromise Britons’ fierce commitment to independence that has remained uninterrupted for a thousand years.

The  twenty other countries that have joined since 1973 generally fit the “We had better share some independence rather than risk our heads being kicked-in every 50 years” philosophy shared by the Six.

As has been clear from Day 1 (or, to be more precise, D Day) Britain has no place in the EU. It is a  bridge between the Old World and the New and should have  economic status not dissimilar to Switzerland – access to the Single Market is all that it ever really wanted.

With Britain out, political union could proceed and the Euro could thrive (I joke not).

Of course there will still be a few minor roadblocks along the way like: cultural diversity; getting over a history of regularly pulverizing each other; and Greece (World War 1940-45, Civil War 1946-49). But it was pleasing to recently see troubled Spain (Civil War 1936-39) taking  a leaf out of Germany’s fiscal notebook  (World War 1939-45, World Cup 1966).  The slow march towards the Common Consolidated Tax Base – a precursor to fiscal union, itself a precursor to political union – advanced another step.

It will be recalled that Spain is having a little trouble meeting its Teutonically imposed budget targets this year. It needs to raise more taxes.

So, following Germany’s lead a few years ago, the Spanish legislature invited the Interest Expense to step up to the executioner’s block  for a haircut.

While international tax advisers will be aware that Spain has been quite a paradise for the tax planning of interest expenses (double dips et al), it does look like it is time to put the castanets  back in their box and get down to serious business.

The rain in Spain falls mainly in the plain

To replace the old Thin Cap (3:1) rules which apply to shareholder finance, the Spanish have introduced a general net interest deduction limitation  of 30% of , basically, EBIDTA (a la Germany). To the uninitiated, who may find this as understandable as the programming language of their computer – I will explain it in English like wot it is spoken. Ladies and Gentlemen, hold on to your hats.

You start with the financial statements of the Spanish company (or consolidated tax group)  and open them at the Profit and Loss Statement. Using your eyes and a calculator you work out operating profit – earnings before interest, taxes, depreciation and amortization  (EBIDTA)  plus a few secret ingredients. If interest expense minus interest income arrives at more than 30% of the operating profit you start to sweat and move on to Stage 2.  In Stage 2, if it is a single company (as opposed to a consolidated group) the rules will only apply if financing expenses are derived from certain related party transactions. In addition, up to one million euro of net interest expense is always deductible. If you are wondering why Stage 2 is not performed before Stage 1, you are right – the accountant will now have to decide whether he can charge his client for the wasted hours on the EBITDA calculations. Accountants  sometimes do that sort of thing. Amounts not deductible will be carried forward for up to 18 years to be included in the same 30% limitation each year while, if the net finance expenses are less than 30% in a given year, they can be carried forward for up to 5 years.

What, sadly, the Spanish have omitted is a (brilliant) German  exception to the rule. For Germany, where an entity is in a consolidated group  even if  the 30% rule is breached, as long as the equity ratio (equity to debt) of the company is not less than 99% of the equity ratio of the consolidated group the rule will not apply. What is clever here is that they are effectively saying that if the German situation reflects a more conservative position than the international group as a whole – then it is fair to assume that the interest charge is not designed specifically to hurt Germany and should be allowed.

While, to paraphrase Neil Armstrong this may be “One small step for Spain, one smaller step for Europe” it is still a step in the right direction of unified policies.

It couldn’t happen to a nicer airline

Some years ago I flew Iberian to Spain and vowed never again (Iberian, not  Spain). Among the numerous insults I suffered on the flight (and I was flying Business – Heaven knows what happens in Coach), was when the young female flight attendant came round offering immigration cards and, smiling politely, I refused as “I am a British citizen”. “You still need an immigration card. Britain is not part of the EU” she growled. I smiled benignly and informed her that Britain had been part of Europe when her country was still a fascist dictatorship. They didn’t allow me on the Business Bus when the plane landed. I suppose old fascist dictatorships die hard.

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