Tax Break

John Fisher, international tax consultant

Archive for the tag “tax competition”

Telling it like it is (?)

The person who drew the map ran out of ink

The person who drew the map ran out of ink

Alan Coren, the late editor of Punch, once wrote that, while touring Europe he climbed to the top of a hill to get a panoramic view of Luxembourg  – only to find there was a tree in the way.  The first time I flew into Luxembourg airport  a few years ago, was also the first time I had flown in a propeller plane since 1966. Luxembourg is size-challenged.

But when it comes to tax,  Luxembourg is a country that punches way above its weight. For years, it has been proud of its friendly tax environment (it has been in the game so long that, when I started out, the rage was 1929 Holding Companies which, I believe, had something to do with 1929).

Despite Luxembourg’s disproportionate influence, I was still a little surprised when, a few months ago,  that bastion of bankrupt democracy, the European Parliament, forced Jean Claude Juncker on the European Commission as its president. As much as the EU likes to claim it is about politics, it is clear that it remains attached to its birth mother, the EEC (European Economic Community). As such, the work being done in its various forms by the G20, OECD and EU concerning illegal state aid, suggests that anybody from Luxembourg would be an unlikely candidate for any economic portfolio, let alone the big job. Not only did the top job go to a Luxembourgian, it went to one who had been Finance Minister since 1989 and Prime Minister from 1995 until 2013. So, when the sparks started to fly following the (absolutely superfluous) revelation last week that hundreds of multinationals obtained ‘sweet’ tax arrangements in Luxembourg, it wasn’t as if Juncker could even blame ‘the other lot’ when they were in power, because he personally (let alone his party) had been in power for a quarter century.

Ideal tax rate for Luxembourg

Ideal tax rate for Luxembourg

Instead, he bunkered for a while, before making an unanticipated appearance at a press conference today. It was Monty Python time. Informing the assembled rabble that tax administration in the Grand Duchy ‘operates autonomously’, he responded to a journalist who queried why – given that his period of office had coincided with a bonanza time for corporate tax schemes – anyone should believe him, with the churlish: ‘Because I said so’. Asked whether his credibility as a European leader had been shredded, he replied to an Italian inquisitor: ‘I am as suitable as you are’. Heady, diplomatic stuff.

In any event, Juncker plans to march on, leading the onslaught on illegal state aid and  other State sponsored tax avoidance. While admitting that he is politically responsible for everything, he has reportedly claimed that he had nothing to do with the tax arrangements. Juncker is an honorable man, so he deserves to be taken at his word.

Today’s press conference led me to thinking about writing an entirely fictitious sketch about the prime minister of a small western tax haven. Any likeness to any person, living or dead, is entirely coincidental.

Scene: The Prime Minister’s Office in the Principality of Taxembourg. Prime Minister, Jean Paul Messerschmitts, is sitting at his desk. Enter the Tax Commissioner.

TC: Prime Minister, I have come to talk about  projected  Tax Revenues for the year ahead.

PM: Why are you talking to me about it? Collect whatever tax you like and then I and my Cabinet will see how much there is to spend on welfare, education and things

TC: But, sir, I need to talk to you about the incentives we are giving foreign investors.

PM: I do not have time.

TC: When will you have time, Prime Minister?

PM: Can’t you see that I am always busy? Today, I must screw in three new light bulbs in my office, followed by my unveiling of a new ATM cash dispenser on the High Road. Then, this evening, I am hosting a dinner for a retiring Traffic Warden. Tomorrow promises to be another hectic day. Being Prime Minister AND Finance Minister is tough, you know. Set up an appointment with my successor for 15 years time.

TC: Prime Minister, I am sorry to have troubled you with such a trifling matter. Why should you have to be bothered with my nonsense when you must deal with important matters of state? I promise not to trouble you again.

PM: Schtum! Schtum!

Exeunt

pinocchioNow that all the fuss is behind him, Mr Juncker will be able to get on with the task he was, sort of, elected to undertake. With his immense experience, I am sure he will do an excellent job.

Turning left at the end of the world

Australian prime minister leaving lunch meeting?

A few years ago the president of one of those numerous archipelagoes peppered across the Pacific Ocean made an accusatory statement about Australia that threatened a diplomatic incident. Listening to an interview on the BBC with the then Australian foreign minister my mind was tuned to expect a suitably circumlocutory diplomatic reply. “Frankly, he is talking a load of crap” was the actual response – the minister probably calculating that the Polynesian ruler would be too busy eating his mother-in-law to be bothered to take the matter further.

Mature Australian

 

The Aussies are a truly wonderful species – they say what they think and they do what they say and to hell with the consequences. In fact,  despite my buttoned up Britishness, some of my best friends are Australians and I can always expect to be sent home laughing at some outrageous statement that I could never have got away with myself. What I would not expect is to be taught a lesson  by them in the fundamentals of taxation. But that is exactly what is happening at the moment – and they are acting in a far more mature manner than their counterparts in Europe and North America – which, to be fair, is not saying much.

As of the beginning of July Australia is introducing two new taxes, neither of which are particularly loved by Labor prime minister Julia Gillard but appear important to her coalition partners, the Greens (that is the Green Party rather than Mr and Mrs Bruce Green of Wallamaloo Street, Perth). The Mineral Income Rent Tax (30%) which will apply to sectors of the hugely profitable mining industry is designed to redistribute wealth while the Carbon Tax is designed to substantially cut greenhouse gases. The Carbon Tax, initially fixed at a fairly random A$23 per tonne of carbon emissions will morph into a Cap and Trade system in 2015 allowing the market to decide the fair price while limiting overall emissions. As both taxes, especially the carbon tax, are regressive – they affect lower income people most because they up the price of basic goods like electricity – much of the revenue from the new taxes is to be funneled back to consumers by direct monetary grants and tax breaks as well as assistance to farmers and industry to meet lower  emissions targets.

But what really caught my eye was the expected effect of all this on this week’s Budget speech to be delivered to Parliament by Wayne Swan (not – as you might think – a gyrating contestant in the latest season of America’s Got Talent, but Australia’s Finance Minister and current holder of Euromoney’s Best Finance Minister Award).

There has been a lot of lobbying for a significant corporate tax rate cut to be partly funded by the revenue from the two new taxes. Currently at the unfashionably high rate of 30%, the recent Henry Tax Review recommended lowering the rate to a more competitive 25%.

Can I interest you in a factory in Dublin with 400 employees?

No way, mate! The government is determined to push the country into budget surplus in the next financial year, so the rate is going to drop all the way to…29% and to hell with any whinging possums who don’t like it. Here is a case of fiscal responsibility (Greeks might like to look that up) coupled with a gutsy position that racing to the bottom in tax rates is not some Holy Grail. The concept of competitive tax rates is problematic. While competition may be healthy in predominantly all sectors of the economy – that is not what taxes should be about. Taxes are about funding what is needed outside the scope of the market to maximise the lot of civil society as a whole. The fact that corporate taxes have been abused by countries from Ireland to the Baltic States – especially in their lust for the refugees from the American system – does not turn tax competition into a moral goal, let alone an ideal. The race to the bottom should not be confused with the Laffer Curve -seeking the rate at which government revenue is maximised is what fiddling with the tax rate should really be about.

The tax world needs more Australias. Amen.

Princess Alexandra showing Miss Goolagong what ladies ought to wear for tennis

Of course, Australia is not perfect. It did a pretty good job in the, not so distant, past of  making the indigenous population miserable – including forcibly removing children from their families which was heinous. When then prime minister Kevin Rudd made his famous apology in Parliament to the Aborigines in 2008 it took me back to the Wimbledon of my youth. In 1971 the Center Court rang to the Umpire’s call “Game, set and match to Miss Goolagong” as that exotic young lady took the Women’s Singles title. When she won it the second time ten years later, I had a creeping suspicion that she would take out a duster and can of silver polish to clean the winner’s dish – “Game, set and match to Mrs Cawley” was just too Australian. G’day, cobbers!

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