Tax Break

John Fisher, international tax consultant

Archive for the tag “tax amnesty”

They shoot horses, don’t they?

And how much tax do you think you will have to pay this year?

And how much tax do you think you will have to pay this year?

“It’s under starter’s orders – and they’re off!”  2013 has scarcely made it out of the stalls and two stories are already vying for a place in the Winner’s Enclosure at the annual Let’s-Knacker-The-Taxpayer Steeplechase.

First to gallop off the page and nearly knock out my eye was the disclosure by the Wall Street Journal that the Indian Government has come knocking  on Vodafone’s door asking when it can expect to receive the $2.5 billion owed to it. Readers will recall that, after a  long-running dispute between the telecommunications company and the Indian Government over a withholding tax issue, the Government fell badly at the final Supreme Court fence.  However, a minor setback like this could not deter the Trustee of the biggest democracy in the world, and the Lok Sabha promptly passed retroactive legislation (to 1961, to really put the boot in) to ensure the Government would still win the race. Following international uproar last year, it was widely thought that the Indian Government had backtracked, but this was evidently not the case. The parties are now said to be locked in negotiation to try to find a way out of the impasse. It’s anybody’s bet what the outcome will be.

Next, The Economist informed its readers that MMX, a Brazilian mining giant, had been presented with a $1.8 billion tax, fines and interest bill representing 90% of its market value. This was in the wake of similar demands sent to other major companies. Brazil, as everyone knows, has more types of tax  than Heinz has varieties of food. It is almost impossible to get tax reporting right but that does not explain the telephone number amounts the tax authorities are chasing. It appears that the only way of dealing with these claims is by spending 15 years in the court system by the end of which, either a convenient tax amnesty comes along or the companies gamble on a favourable court decision.

Darling! The postman just delivered our 2012 Tax Return

Darling! The postman just delivered our 2012 Tax Return

Whatever the case, the governments of India and Brazil – members of Jim O’Neil’s BRIC Quartet – are suffering from sunstroke. The other two – Russia and China – less exposed to  sun, sand and democracy (sorry, Comrade Putin) are faring much better on the taxation front. India’s government, immobilized  for years by geriatric dementia is a well-known basket case – although the elevation of its disastrous Finance Minister to the presidency and replacement by an old  favourite of the business community, was supposed to offer the start of a cure. Brazil, on the other hand, has been trying to feel its way forward and find ways to cut the number of taxes. Faced with various regional problems, however,  President Dilma Rousseff has, so far, felt herself unable to deliver. In Sao Paolo a couple of years ago, I sat through an interminable speech by former President Fernando Henrique Cardoso.  He admitted that he had been to blame for the carnival of taxes when priorities were to bring inflation under control, get  the country moving and keep the military in their barracks (I made the last one up – but I’d wager  he would have liked to have said it) – but now it was time to scrap the lot and become a normal country. Deaf ears.

What is sad is that, countries that are so critical to the sustainability of the world economy in the next half century, are using every opportunity to give prospective investors the heebie-jeebies. It would appear that, no less important than reasonable tax rates (I hear former French President Bling-Bling is thinking of moving to London – sacrebleu!) is certainty about the tax to be paid.

What is interesting, however, is that evidently none of this makes it into macro-economic modeling. Now I admit I am on dangerous ground here. My last day of formal macroeconomic study was a third of a century ago and, when I raised this point with  none other than the editor-in-chief of The Economist at a conference a while ago, he took one look at my disappearing hairline (I am being kind to myself) and politely commented that, while I was clearly a young man, macroeconomics had moved on since my university days. He did add, however, that he agreed there was something in what I said (which was probably because he was desperate to get past me to the coffee).

It was none other than his own Economist ( how much name dropping can I do in one post – President of Brazil, Editor of The Economist?) that ran an article last week on – you guessed it – macroeconomic modeling. It turns out that macroeconomists managed to get through the entire 20th century – Great Depression, Milton Friedman and all – without factoring Banks into the basic equation. In a world where everything left out was ceteris paribus (the term meaning “other things being equal”  makes me tingle with nostalgia), banks were assumed to just be facilitators between lenders and borrowers. Blimey! In reality banks have been upsetting the apple cart for generations and, what with their showing in the recent Financial Crisis, it is a relief that they are now being included as independent factors. But what about taxation?  Tax is obviously there – always the something minus “t” to establish numbers and multipliers. But the idea that taxes are, or should be, neutral was abandoned years ago. The destabilising effect of wacko tax policies needs a place at the macroeconomic table. What India and Brazil are doing with their strong-arm tactics is not only not “ceteris paribus”, it is “casus belli” and many other impressive Latin phrases I can’t quite think of at the moment.

Dodgy business

Dodgy business

2013 has a long way to go and a lot of fences to clear. Ever since my very  first audit assignment at a Betting Company I have had my doubts about Horse Racing. But India and Brazil are famous for their fair play in Cricket and Football, respectively. For all our sakes, let’s hope they get their eye back on the ball. Carpe Diem (that’s another one for you).

Amnesty International

English: United States Internal Revenue Servic...

Image via Wikipedia

The casual observer may be forgiven for thinking that last month’s announcement by the Israeli Income Tax Authorities of a  new amnesty  program for foreign undeclared income was motivated by the realization that if – as the US authorities close in on tax evaders – Israel does not act fast, all the “captured” tax of US citizens living in Israel will flow into the coffers of the US Treasury.

 

Back in 2005 the ITA started a Voluntary Disclosure Program to enable Israeli tax residents to come clean on their undeclared income. The scheme, which was open-ended,  offered immunity from criminal prosecution but not much else. The announcement in November 2011 that Israeli residents coming forward by the end of June 2012 could hope to pay the tax, without interest or penalties, on undeclared foreign income was a far more tempting proposition.

The conditions under which the foreign undeclared income is eligible for the amnesty, beyond the requirement that the applicant has broadly not been caught red-handed,  are flexible – but the sample list given by the ITA provides an indication as to the  extent that this was aimed at immigrants: undeclared income from foreign assets inherited from, or gifted by,  a foreign resident; undeclared income from foreign assets that were purchased using funds that arose from income taxed in Israel or income that was not liable to tax in Israel; and undeclared income from foreign assets that only became liable to tax from 2003 when the Israeli system moved from a largely territorial basis to a worldwide basis. 

Remembering that  Israeli-born residents were heavily restricted in their ability to invest legally abroad until the end of the last century, the bias towards Olim from “Western Countries” (which is a euphemism for the US, since the English, French, Canadians and others are just a statistical error in the ITA’s worldview of lost tax) is obvious.

Now that the IRS has won the battle in Switzerland and  should  soon finish bayoneting the wounded, it is widely rumored that the next stop on its tax-grabbing crusade will be the Holy Land. Hence,  the timing could not be better for the ITA to step in and suggest that people pay up in Israel, which in most cases has the first right to tax. This may have a mitigating effect on subsequent disclosure to the IRS, given its newly instituted softer approach to dual citizens (see earlier post), especially where they have declared the income abroad – but it is too early  in the day to draw any firm conclusions.

The potential downside in the whole affair is that any application under the amnesty is to be considered by a Star Chamber of senior income tax officials. There is a promise  that, even if an application is rejected,  the facts will not be used in evidence elsewhere.

When I read this, it reminded me of my first year in High School. There was a particular teacher who had an unfortunate habit of boxing pupils around the ears (which, judging by his level of intelligence, is probably what happened to him as a child). We quickly learned, as he approached, to raise our hands to cover our heads. He would then go through the standard ritual (which took longer each time, as the months rolled by) of telling a poor victim to put his hands down because he was not going to hit him; I do not need to finish the story.

However,  in practice, it seems that it may be possible to initially present the facts to the ITA anonymously and only name names when it is fairly apparent that the application will be accepted.

Overall, these are interesting times for people who have undeclared income and there is a window of opportunity that  could be, for many, the Last Chance at the OK Corral.

Season of goodwill at the IRS ?

“And to you taxpayers out there, let me say this: Make sure you file your tax return on time! And remember that, even though income taxes can be a ‘pain in the neck,’ the folks at the IRS are regular people just like you, except that they can destroy your life”.

Thus wrote American humorist Dave Barry at the end of a column some years ago describing his frustration at having been chosen by random sample for a tax audit.

As a European (or, more correctly, after David Cameron’s recent walkout at the EU summit– as a Brit) I have always viewed with a mixture of curiosity and horror the workings of the US tax system. It is bad enough that the US is substantially the only country on Mother Earth that still insists on taxing its citizens as well as its residents due to Abe Lincoln’s pique at Americans deserting the country during the Civil War (Guys – get over yourselves, already).

But, to add insult to injury, Uncle Sam’s recent adoption of a policy of wholesale persecution of the world’s banking system (including the soon-to-smoke –you-out  FATCA regulations)  in search of  unreported assets and income of its citizens, is beyond a joke.

To sweeten the bitter pill the IRS has offered Amnesties – the latest being the 2011 Offshore Voluntary Disclosure Initiative (OVDI) which, from my experience, was less an amnesty and more a case of “Come out slowly with your hands above your heads” – the terms were so draconian that, despite the genuine fear of the IRS gradually closing in on them, many people followed Jack Benny’s response to a gun-toting gangster demanding “Your money or your life!” – “I’m thinking it over”, he said. The September deadline passed and many did nothing.

But finally, in this season of goodwill, there are signs that the IRS is softening its stance slightly. On December 7 the IRS issued a Factsheet aimed at Dual Citizens living outside the US. The IRS recognizes that such individuals may have failed to  file their Income Tax Returns and FBARs (Report of Foreign Bank and Financial Accounts) in a timely manner, the latter requiring filing by June 30 each year. The standard penalties that will generally apply are explained but, where it can be shown that there is “reasonable cause”, penalties can be reduced or cancelled. Reasonable cause normally means that a taxpayer “exercised ordinary business care and prudence in meeting his tax obligations but nevertheless failed to meet them”.

There is a list of the sort of things that need to be taken into account  when deciding reasonable cause but possibly of most interest in the  Fact Sheet are the “real situation” examples provided. There appears to be a move to finally show the milk of human kindness to the dual citizen living abroad who has not intentionally evaded US tax and who comes forward voluntarily to report. Ironically, this could mean that those who ultimately shied away from the recent amnesty could now land a better deal.

Of course, as always, there is a sting. The IRS are unlikely to entertain anonymous applications to establish whether “reasonable cause” will apply, so it would appear that there is an element of risk which needs careful analysis before making a move.

Perhaps the IRS are finally turning their backs on an attitude that HL Mencken summarized  as:  “The haunting fear that someone, somewhere,
may be happy”.

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