Tax Break

John Fisher, international tax consultant

Archive for the tag “Supreme Court”

Tax and the C.T.

Wicked, cool and awesome!

Dan Brown’s “The Da Vinci Code” was an unlikely international bestseller. The Louvre, the Vatican and a French Church would hardly be expected to be up there amongst  the 1001 places  Joe Sixpack must visit before he dies. However, looking at what it did for interest in religion, can you imagine what a boon it would have been for tax advisors if, rather than the Da Vinci Code, Brown had woken up one morning and come up with “The US Tax Code”?

Instead, while trial lawyers have been glorified in American literature from Harper Lee’s Atticus Finch to Scott Turow’s Sandy Stern – and deified in TV series like Perry Mason and L A Law, tax attorneys have had to suffice with John Grisham’s “The Firm”. That book and spin-off movie did for the tax profession what the Taliban has done for Afghan tourism.

And that  just covers the lawyers. Tax accountants are only ever portrayed as semi-bald grunts in man-made fibre suits staring at the world through goldfish-bowl, grime encrusted spectacles.

Heeeeere’s Johnnie!

But now, thanks to the antics of  the most over-budgeted, long running reality show on Planet Earth,  that may all be about to change. “Washington D.C.” has finally gone tax.

Having watched patiently as Chief Justice Earl Warren tiptoed through the Civil Rights revolution of the sixties, Warren Burger handled both the Watergate scandal and Roe v Wade in the seventies and William Rehnquist put paid to Al Gore’s presidential hopes at the turn of the century – we have to say “Glory be” to Chief Justice John Roberts. A few short weeks ago Roberts pushed tax to centre stage. And with a newly emboldened President Obama stepping out last week to further the crusade, it must only be a matter of time before the tax profession is inundated with bright young things looking for self-actualization in their careers while Hollywood comes knocking at our doors.

I am talking of course about the Obamacare case and the Bush Tax Cuts. ” We get the Bush Tax Cuts. But Obamacare? Tax? WHAT ARE YOU ON?” I hear you politely ask . Well it turns out that the central feature of Mr Obama’s first (and possibly only) term in office – his Affordable Care Act (Obamacare)- was not about bringing a basic right of modern civilized society to the people of the United States – the right to be cared for when you are sick. No sir. The conservative Mr Roberts, in providing the swing vote in his politically divided court, surprised everyone by abandoning the standard right-wing “If they don’t know how to look after themselves, let them die” motto and confirmed the law on the grounds that the penalty that would be imposed on anybody not paying for health insurance is a tax. Fortunately, way back in 1913 – when William Howard Taft was still President and not yet Chief  Justice – Congress had the foresight to pass the 16th Amendment to the Constitution permitting a federal income tax; otherwise, to paraphrase Oscar Wilde “people would still be dying beyond their means”.

“If they would rather die,” said Scrooge, “they had better do it , and decrease the surplus population.”

I am from the old world and, while I genuinely love much about America, I fail to understand how they get caught in these idiotic outdated philosophical spiders’ webs. While individual liberty is clearly sacrosanct to the American way of life leaving little place for a Hobbesian social contract, do they not realize that Health Care is not just about the individual? What about dependents who either lose their financial support because it went on chronically expensive medical care, or lose their provider who skimped on the treatment. And it is no use waving Medicaid and Medicare as the safety net because you need to meet certain quite weird conditions to qualify.

Then last week it was the turn of the  Bush Tax Cuts. As everyone knows by now, thanks to a marvellous quirk in the US legislative system, various laws introduced during the W years include romantically named “sunset provisions” meaning that they have sell-by dates after which they have to be thrown out. Having already been extended, to cut a long story (which could be the subject of a Dan Brown book) short, if the president and Congress do not get their act together quick, come New Year’s Eve as the ball drops in Times Square, taxes will shoot up and fiscal spending will shoot down. America will then walk off what journalists are calling a “Fiscal Cliff”. Recently it has started to look like the Democrats and Republicans are so busy bashing each other that, similar to a Hannah Barbera cartoon, they will take their fight over the cliff edge and, only when they look down, take the country (and the rest of us) with them into deep recession. 

Are you on less than $250,000?

Barack Obama has called for an extension of the cuts but, in a clear electioneering move, only wants them extended for people earning less than $250,000 (which, for most people who are not American, is quite a lot of money). Everybody else would be sunsetted. The Republicans of course will have none of this – all or nothing – and even the democratic former Speaker of the House of Representatives Nancy Pelosi wants $1 million (I wonder how much congressmen earn?). As mentioned in a previous post, I am getting used to the concept that in America presidents do not have any real say over fiscal policy and just act as a vociferous lobby. However, I do wish that the gentleman in the White House would explain how he suggests implementing this quarter of a million bucks cut-off. The Bush Tax Cuts, contrary to popular belief, are not just about shoving up long-term capital gains tax rates and making dividends ordinary income. In addition to tweaking of personal tax bands and the top rate (which are irrelevant in this context) there are loads more provisions. What, for example, does Mr Obama intend to do about Alaska Native Settlement Trusts that allow tax to be paid at the lowest marginal individual rate? And what about Marriage Penalty Relief?

Meanwhile, as the world struggles with recession and America itself struggles in Iraq and Afghanistan, the United States House of Representatives last week spent 5 hours of taxpayers’ money (spread over 2 days) debating and voting to repeal the Health Care Act.  Nobody, but NOBODY, expects the act to be repealed in this Congress but we are already hearing Mitch McConnell, the pugilistic minority leader in the Senate warming up for a fight with Harry Reid, the Senate Majority Leader.

While they are at it, they could set in process the repeal of the 16th Amendment (I don’t think they can do that by themselves) and, as Ron Paul the Libertarian candidate for president would like, get rid of income tax as well.

At least HE knew he was a B-movie actor

Perhaps, on reflection, rather than seeking stardom for our profession, we should encourage everyone else to switch off their sets. Maybe if those immature children in Washington were aware that nobody was watching them, they would start to behave like adults. Fat chance. I think I will go for fame and fortune.

Sorry, wrong number

The first to hit the catwalk at the Miss World Tax beauty contest that spanned year-end was Lady Justice New Zealand with a December 12 landmark tax avoidance decision. Following close  on her high-tax heels on December 19 was Lady Justice Canada with an insight into the application of the General Anti-Avoidance Rule and  only a day later Lady Justice Denmark strutted along with her first Beneficial Ownership Case. But the most stunning of them all exploded onto the runway on January 19 with all the self-confidence of an odds-on favorite.

Lady Justice India’s Vodafone case has eclipsed just about everything else in the international tax world over the last ten days. “Her justice system has been gloriously vindicated,” her sponsors effused, omitting to mention that the Supreme Court had just totally laid waste a number of orders of the Bombay High Court at the end of a four and a half year legal battle that had cost countless rupees and substantially any remaining goodwill towards the Indian taxation system. A closer inspection, following removal of the Lady’s blindfold, revealed two heavily bruised eyes.

I do not propose to delve deeply into the details of the case which has received wall-to-wall coverage (if you have a free evening, google: india, vodaphone, supreme court, duh-which-words-in-the-law-didn’t-you-understand-?) but , in a nutshell, for those who have been more concerned with trifling matters such as Iranian sanctions and the US election it went like this:

A Cayman Island subsidiary of  the Hong Kong based Hutchinson Group sold its shares in another Cayman Island company to a Netherlands subsidiary of the UK based Vodafone group. It just so happened that somewhere way down the chain under the purchased Cayman Island company was an Indian company with a gargantuan Indian mobile phone business. The Indian tax authorities were not terribly pleased that they had missed the chance to tax Hutchinson on the capital gain on sale of the Indian business that they claimed would have applied had the Indian company been sold directly (but that is a whole new story that we will not go into here), so decided to slap a $2.5 billion tax bill on – wait for it – Vodafone, for not having withheld the required Indian tax when paying for the Cayman company.

Now, for people like me with warped tax-drugged minds this did not, when the case originally saw the light of day, come over as quite as moronic  as it must sound to normal human beings who do not drool at the mouth. An albeit diminishing number of countries do still allow the taxation of the sale of indirect holdings in their jurisdictions and, indeed, the strict enforcement of withholding tax obligations on a payer, including criminal penalties for non-compliance, is regularly a cornerstone of, at least domestic, tax collection policy. 

The problem is that, now that the dust has settled, clearly none of this applied to India. The judgment was quite simple really – every single one of the tax authorities’ claims was rejected and the orders of the Bombay (should that, politically correctly, be Mumbai?) High Court were emphatically overturned. I am no expert in Indian tax law but, reviewing the Supreme Court decision, it did seem to be almost a case of just joining up the dots. The tax authorities  may be forgiven  (although I would not agree)  for begrudging $2.5 billion slipping between their fingers but I fail to begin to  understand what happened in the Bombay (Mumbai) High Court.

Who needs foreign investment, anyway?

There are several reasons why India is a highly favored location  for investors today. None of them relate to taxation or the legal system. The tax system is antiquated and rates are too high. The proposed new Direct Tax Code leaves much to be desired. Bureaucracy is horrendous and, as Vodafone discovered, even the Bombay/Mumbai High Court couldn’t  be relied on to get it vaguely right.

In his award-winning novel “Midnight’s Children”  set around  India’s first thirty years of independence Salman Rushdie’s  hero, Saleem Sinai, says “No people whose word for ‘yesterday’ is the same as their word for ‘tomorrow’ can be said to have a firm grip on the time”.  In case nobody noticed – “The times they are a-changin’ “. It is evident that there is still much work to be done.

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