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Archive for the tag “Tax fraud”

Bad Cumpany

scaramander

‘Come, come Mr Bond’

If, like me, you have been wondering for decades what the European Parliament is there for, wonder no more. Following a recent vote, the august institution is considering  setting up an investigations unit to tackle two humongous European fraud schemes  named improbably  ‘cum-cum’ and ‘cum-ex’. The first warning that something was afoot came in 1992, and the fan turned brown in 2017, but the wheels of power turn slowly in Strasbourg. (Or was it Brussels? Or Luxembourg?)

For those without a Latin education, the schemes translate as ‘with-with’ and ‘with-without’. It would be nice to leave it at that, but I had better explain.

Both schemes revolve around dividends on stocks. A stock is cum-dividend when a securities buyer is destined to receive a dividend that a company has declared but not paid. That is the status quo (more Latin) until the date at which the stock trades ex-dividend – when the dividend will go to the seller. Thanks to lacunae (Latin noun – first declension nominative plural, like mensa/mensae) especially in German law, but evidently in about ten other European jurisdictions, bankers and the other usual suspects were (possibly still are) able to bleed national treasuries of scarcely imaginable sums.

The cum-cum smacks more of an old-style tax avoidance scheme than hardcore evasion. Stocks of German companies held by foreigners who were not eligible to  dividend witholding tax exemption were ‘lent’ (effectively sold with an agreement to repurchase , – but it isn’t written that way) to bona fide German banks shortly before a payment date. The stock went back at a lower price without the dividend. Naughty, but with loud protests that it only made hay while the legislators slept. There was one exemption, and the bank had a technical right to it.

Godfather

He knew how to make sure a secret was kept

Cum-ex was a far dodgier form of exploitation, which did not rely on foreigners. It did, however, require collusion and, on the grounds that ‘two people can keep a secret as long as one of them is dead’, it was bound to be found out eventually (having said which, the German and other authorities seem to have made gargantuan efforts to miss what was going on beneath their noses). Basically, a bank would ‘borrow’ stocks cum-dividend within two days of the dividend payment date and would sell them (short) to a third party. Delivery was required in two days, by which time the stock had gone ex-dividend. The procedure in force until 2011 in Germany (and heaven knows what is still happening elsewhere) was that the bank had to make a compensatory transfer between the seller and the buyer for the net after-tax amount of the dividend, and then issue a certificate of withholding to the buyer even though he did not actually receive the dividend. The theory went that the seller would no longer be entitled to that withholding as he had transferred the dividend amount to the buyer, and therefore would not receive a withholding certificate. Aye, and there’s the rub. The short seller of the stock was not the ultimate owner and had not suffered the withholding tax. The ultimate owner also received a witholding tax certificate (if handled correctly, the number of withholding tax certificates could be multiplied) enabling two or more ‘owners’ to cash in on the same tax benefit. This is not clever tax avoidance. It is clearly tax evasion. And it has cost European state coffers an estimated €60 billion.

mob

The words ‘company’ and ‘companion’ derived from the Latin ‘cum panis’ – with bread

But, at least we know we can now sleep safe at night in the knowledge that the European Parliament is on to it. It has only taken them 26 years. Rumour has it that MEPs are soon to issue a communique announcing the end of the Second World War. The suspense is killing.

 

Cry for Argentina

Tax Advisor's traditional battle dress

Tax Advisor’s traditional battle dress

Any professional Opinion Letter writer knows that the invention of the footnote was a godsend. Enabling the eternally cautious tax lawyer or accountant to throw caution to the wind in the main body of his document, the footnote can be stuffed with endless bits of what the paying client calls ‘fudge’ and the expert refers to as  ‘caveat’.

Hilaire Belloc, the writer of those early twentieth century ‘Cautionary Tales’, penned the most famous footnote in literature:

He had a lot of stocks and shares

And half a street in Buenos Aires*

*But this pronunciation varies

Some people call it Bu-enos Airés

Read today, it appears  ironically prescient that a Cautionary Tale resorted to Argentina as the seat of a person’s wealth. A hundred years ago, in 1914, Argentina was among the world’s 10 leading economies, a showcase of what South America could achieve. Today, in 2014, Argentina is a basket-case – a national cautionary tale, if ever there was one.

One of Argentina's more successful exports

One of Argentina’s more successful exports

After a hundred years of intermittent catastrophic military rule, as well as not much less catastrophic civilian administration, Argentina’s last century is best remembered for Evita!, The World Cup, and the Falklands Fiasco. Not much of a record. At times it has looked like it might disappear down the plughole of history.

Current Argentine President, Cristina Kirchner, is agonizingly playing out the last year of her disastrous administration. Inflation is thought to be running at over 40% (Government Statistics are known to be in the ‘damned lies’ category), the country defaulted (again) on its sovereign debt this summer, and the peso has been in free-fall. Meanwhile, the Vice President has been indicted on fraud and corruption charges, but – and why not, indeed? – hangs on to office.

What is interesting is that, despite all this nonsense, the Argentine Revenue Service is going strong and to hell with the economic consequences, as if it were 1914 all over again and Argentina were on the way to overtaking the US.

Among the less exciting developments, thanks to Exchange of Information with the French, the authorities have uncovered a thousand unreported foreign bank accounts. Although nobody is making the connection, it may be no coincidence that a number of HSBC employees have been arrested for allegedly enabling tax fraud. Tax Amnesties are now being offered to those who come out with their hands up, waving a cheque book.

At the same time, the Revenue Service has gone to town on Transfer Pricing. They have shot broadsides at such  companies as Procter & Gamble and GE. In the case of P&G they even suspended their operations for a while recently, which could not have been conducive to the sweaty population’s personal hygiene.

In taking on the multinationals, Argentina should remember that it takes two to tango

In taking on the multinationals, Argentina should remember that it takes two to tango

Of course, the Argentines have a history of picking their wars. They thought Mrs Thatcher wouldn’t hit back when they invaded the Falklands in 1982, but were comprehensively taken to the cleaners. It will be interesting to see how this widening conflict with multinationals pans out. I reckon it will all end in tears.

And meanwhile, the Vice President, facing fraud and corruption charges, carries on in office….

 

 

 

Crime and Punishment

The German answer to  British schadenfreude

The German answer to British schadenfreude

Of all the words that have made it across the much-trampled terrain of Western Europe and the inhospitable waters of the Channel into the welcoming arms of the English language, one of the most improbable must be “Schadenfreude”. Adopted into the language after the defeat of Germany in the First World War and the imposition of punitive reparations, it was  appropriate that  the expression of malicious joy in the misfortune of others should be in a tongue the bastards about whose misfortune the Brits were most maliciously joyful could freely understand – the bayonetting of the wounded, so to speak.

I believe that we all  have bouts of Schadenfreude from time to time. For the last few years the Germans have been positively unbearable over the plight of the Southern Europeans. I admit that the first section I instinctively turn to on receipt of my monthly English accountancy magazine is “Disciplinary Hearings” – one day they will get the fish-faced obese manager who insisted on me making his morning coffee at the outset of my career.

There was no joy whatsoever in following the climax of the Magnitsky case in Russia last week . Despite the fact that this was a Tax Attorney convicted of major tax fraud – the sort of thing that brings our profession into disrepute (ho, ho) – there were a few mitigating circumstances.

Firstly, there but for the grace of Tsar Nicholas go I. Had George V’s doppelgänger not “encouraged” my grandparents to move residence to his cousin’s green and pleasant land in 1905 , I suppose I could have been in this fellow’s position.

Enough material for a book

Enough material for a book

Secondly, Sergei Magnitsky – along with his co-defendant William F Browder, an American/British Fund Manager and financier – was almost definitely innocent of  all charges concerning the fraudulent claiming of tax benefits for the employment of disabled persons . The two gentlemen had uncovered a massive tax fraud by government officials and decided to blow the lid on it. This was a bit like standing in a forest trying to explain to an eight foot high grizzly bear, in perfect Russian, that you had clipped its cub’s earhole because it had rudely said “Boo” to you. Not a sensible time to renew ones monthly bus pass.

But the saddest, and maddest, thing of all was that Mr Magnitsky is, well, a bit dead  – and has been since 2009 when, already a year in custody, he was denied critical medical treatment. This did not seem to be enough to stop the Russian wheels of justice from continuing to grind. Indeed, if it was not all so sad and macabre, the story would be funny.

The courtroom had the standard posse of security guards even though there were no defendants in the dock (Mr Bowder was in London and, in a rare act, Interpol told the Russians to scuttle off when they applied for his arrest. Mr Magnitsy, as I have already pointed out, had other difficulties in being present). After finding Magnitsky guilty, the judge – in an act of great courage in standing up to the rotten State – did not impose a custodial sentence on Mr Magnitsky thereby giving official sanction to his continued resting in peace.

The most brilliant, and incriminating, line came from none other than President Vladimir Pukedin as reported in the New York Times: “I don’t know the details, but I know anyway that Mr. Magnitsky died not from torture — nobody tortured him — but from a heart attack,” .  I sympathise Mr Spewtin. Forget the details. It would be unfortunate, after all,  for you to be confused by the facts, wouldn’t it? Vlad’s ventriloquist dummy Prime Minister (or whatever title the Impaler ordered him to take this week) Medvedevdevmedved etc,  told Bloomberg TV that “He was a corporate lawyer or accountant, and defended the interests of the people who hired him.”  Well Mr Medwhateveryoucallit, I think that you will discover that, beyond the walls of the Lubyanka Prison and the ranks of the KGB, that is what lawyers and accountants are supposed to do. And, if I already have your wooden ear –  it wouldn’t hurt you to touch up on your facts either. Was he a “corporate lawyer or accountant?”. Maybe tell your aides to lay off the clear liquid for a while and prepare your briefs a little more diligently.

The ongoing tragedy from this circus is that, in retaliation for a US move subsequent to Magnitsky’s death to prevent Russian human rights abusers from traveling to the United States, Mother Russia banned  the practice of adoption of Orphans by US families denying them the chance of a decent future. Go figure.

I would like to take this opportunity to thank Tsar Nicholas posthumously ( readers will recall that he ended up being peppered with bullets together with his family) for helping my grandparents with their relocation and ensuring that I grew up in a free society.

Reading “War and Peace” many years ago I learnt that Russian high society used to like speaking French, so “plus ca change, plus c’est la meme chose” – this week there was yet another Russian Show Trial.

Rest in peace

Rest in peace

Meanwhile,  President Putin is hosting a G20 summit a central feature of which is the war on tax evasion. I rest my case.

What a wonderful world

Subtle

Subtle

Although we are a family of fairly avid readers, other than a few coffee-table staples, books do not  feature in our living room. Well-leafed and generally abused volumes are neatly filed on bookshelves in bedrooms and on our upstairs landing, or unceremoniously dumped in unlikely corners of the house (I stumbled on a haphazard pile on the staircase to the roof the other day). Some authors are more popular than others but we rarely sport a full set. We have all read the Complete Juvenile Works of JK Rowling (including The Tales of Beedle the Bard) but would be hard pressed to lay hands on more than two installments, both of which are by now missing critical narrative. Dickens, Austen, Le Carré and PD James are well represented in various fonts and sizes. But, perhaps our most preserved  set, neatly placed above our youngest son’s desk, is Terry Deary’s Horrible Histories.

Now, I am sure Mr Deary would not consider it  libelous were I to state that this is not great literature. In fact, I am not sure it passes as literature at all. With titles like “The Terrible Tudors” and “The Even More Terrible Tudors”, the illustration packed volumes  tell us, in graphically comic detail, just how horrible life was in the bad old days – pretty horribly.

Reading (or, to be more precise, leafing through)  the Horrible Histories, it is easy to be lulled into complacency about the present.

Heil Hitler!

Heil Hitler!

I am beginning to think that the world is not quite as nice a place as I would like to think it is. To be clear, when I say “world”, I do not mean the  majority of the 200 or so countries that constitute that  carbuncle on the face of modern civilization, the United Nations. One day, when those rogue nations are free-speech toting liberal democracies, Mr Deary will be able to make another fortune writing their Horrible Histories.  I am referring to cosy countries like yours and mine that think they are approaching the final synthesis in the Hegelian dialectic when all households will have at least one  TV in every toilet.

To be even clearer, I am also not referring to the horrendous actions of individuals and organized groups. There will always be outliers in every sphere of society. It is western governments that are the problem. They have become very good at repackaging old nasties in inoffensive euphemisms and glossy camouflage. And  if we, the silent majority, do not watch out – they will get away with it.

Take torture, for example. The activities at such sunny resorts as Guantanamo Bay are  regularly referred to as Enhanced Interrogation Techniques, which sounds like a project undertaken by a management consultancy firm. Even the mention of Waterboarding gets me humming Beach Boy tunes rather than thinking  of medieval Ducking Stools.

Even our own tax world has its fair share of practices cleaned and rebooted from yesteryear.

There was the 504 year sentence handed down last year to a Greek tax miscreant. Apart from the absurdity of a sentence that cannot possibly be served, what possesses any modern system to deprive a man of his freedom for all eternity for a crime that did not involve the taking of another life. We all (other than many of the members of that august institution, the  United Nations) are appalled by stories from more than 200 years back of young men being hanged for stealing sheep.  To all intents and purposes, there is not a colossal difference.

"Tell us the whereabouts of your father, boy, and we will give you $104 million"

“Tell us the whereabouts of your father, boy, and we will give you $104 million”

And what about the award  of $104 million that the IRS made last September  to a single Whistleblower in the UBS case? The first thing that came into my mind when I read the story was W F Yeames’s painting of a Parliamentarian’s  interrogation of two young children in the English Civil War, as he tries to establish  the whereabouts of their father. If there was one quality rammed into me by the British school system it was the Eleventh Commandment, “Thou shalt not sneak”. Honour among thieves was a real value and we would have rather faced the stick than split on our schoolmates. To be fair, teachers expected and respected that behaviour and often punished the snotrags that “told tales” (mind you, it didn’t stop the bloody sadists using the stick anyway). Waterboarding, at least has the possible justification that its use might save many lives. What is the IRS’s excuse?

Then, a few short weeks ago, none other than Her Majesty’s Revenue and Customs, for the second time in less than 6 months, published on Flickr mug shots of the 32 “Top Tax Criminals of 2012” .  When I was a kid, I used to pass a big blue plaque every day in our local high street that read “On this site stood the Parish Cage or Lock-up”. My (incorrect) assumption throughout my childhood was that this was the site of the local Stocks, where petty criminals would have their heads, hands and feet secured, allowing passers-by to take free aim with eggs and tomatoes from the nearby Tesco’s that had passed their sell-by dates. I actually had a taste of this as a young (innocent) adult. In charge of a children’s summer camp one rainy August, my team organized a Summer Fare. One of the star activities was throwing anything that went mushy on impact at yours truly tied helplessly to a chair.

Publishing the photos is the same concept of public humiliation that I thought had gone out with the Stocks and Public Executions outside Newgate in the 19th century. What is more, all but one of the wretched cons are behind bars already serving out their sentences and they are unlikely to be seen around town for some time to come. So what was achieved?

There is one thing, though, that can be said in favour of the British system. Publishing the photos HMRC announced that they were serving a collective 155 years and 10 months in prison. Had this been been Greece, that wouldn’t have even covered the third off for good behaviour of a single one of them.

I am not an anarchist. I passionately believe that people should not be allowed to break the law with impunity. However, the punishment should fit the crime. Furthermore, governments should think about the negative effects on society as a whole of efficient but, essentially unethical, laws and practices. There has been a lot of publicity recently about the outrage of the British Parliament over the tax practices of US multinationals. As I reported a few weeks back, Margaret Hodge – who led a Parliamentary investigation – told the representatives of Google, Amazon and Starbucks: “We are not accusing you of being illegal, we are accusing you of being immoral”. I suggest you get your own House in order first, dear.

Risks of the import/export/import business

The crooks used to die laughing

Back in the sixties when my all-time superhero,  Batman,  used to dress like he was going to a neighbourhood Halloween party, actors Adam West and Burt Ward would issue warnings to stupid children not to try any of their stunts at home. That was sound advice.

While they had the full attention of the little weirdos they might also have told them that, when they grow up, they shouldn’t try crime. Because, while stupid people might get a real kick (and “pow” and “splatt”) out of crime, when they get caught (and stupid people who think they can swing across skyscrapers with capes catching between their legs DO get caught) it really messes up their social life.

I reckon it is precisely these sorts of wackos who  go in for VAT fraud. VAT fraud is very tempting. As will be seen from my “VAT Fraud for Dummies” below, it carries the very real advantages over regular aggravated burglary of not involving physical violence and offering theoretically unlimited gains.

It’s a dog’s life sentence

The problem is that when you get caught, as happened to a gang in England recently, the judge tends to get enthusiastic when it comes to sentencing. One genius  copped a 17 year sentence last month. For any Americans reading this, British custodial sentences compare with American ones like dog lives compare with human ones – so for 17 years read 119 years (and for VAT read an indirect regressive tax designed to fall on final consumers and hated by every Yank who hates Barack Obama).

The most popular form of VAT fraud operates best in the European Union. This is mainly because the Europeans, as a matter of policy, trust each other. They trust the Greeks, the Italians and the Spanish just as much as they trust the Germans and the French – and that is official.

In describing “Carousel” fraud I will actively omit a few essential steps so that, just in case some fat con sunning himself next to a pool on the Costa Del Sol with a cocktail in one hand and his computer in the other is reading this, he will NOT be able to commit the crime of the century (and then get caught).

It starts in, say, France where a member of the syndicate (you need a lot of goons for this game which increases the risk of someone singing) exports mobile phones to Britain. It is almost always mobile phones or similar devices although carbon credits have recently joined the list. The French exporter does not charge VAT because, as an export sale, it is subject to zero rate VAT. In Britain – where VAT is not charged at the port because the British and French are in bed together in the EU lovefest – the VAT registered purchasing company  on-sells the goods with a profit to another British VAT registered company charging whatever rate of VAT Britain’s coalition government is charging that month (for VAT fraudsters – the higher the better – so bring it on, Dave). The first British company then conveniently forgets to pass over the VAT to the UK authorities and ultimately “disappears” with the VAT it has received from the next company which is its accomplice. So far, apart from breaking the law, nobody is better off. From here on, depending on the level of “sophistication’ of the perpetrators the goods may now pass through a number of “legitimate” companies in the UK charging and reclaiming VAT until they reach the final UK company that makes it all worthwhile (until they get caught). That company exports the goods to France issuing a zero rate VAT invoice (“There’s a hole in m’ bucket, dear Liza, dear Liza..”). Under VAT law, the exporter can now reclaim the VAT it paid to the company it purchased the goods from. The final upshot is that the first UK company has disappeared with cash supplied by the syndicate but ultimately “refunded” by the British government. Best of all, the whole process can start again with the French company exporting to the UK – so the same stock of goods can be sold several times and multiples of the VAT amounts “lifted”.

In the early days the tricksters used to, at least, play the game. There was a stock of mobile phones that moved around the market. Then somebody woke up to the fact that, unless you were really unlucky and got hit with an audit, nobody ever needed to see the goods – but to be on the safe side they packed up boxes in warehouses with bricks and a layer of phones at the top. Later, it appears that even the cost of the bricks and their transport between companies bothered them so many did away with the goods altogether.

You can’t put a round peg in a square hole

This is nicely reflected in how two such frauds were blown in recent years. A while back HMRC did an audit on a stock of mobile phones in England and discovered that their chargers did not have British square-pinned plugs and were hence unsellable in England. More recently, a case was uncovered because the invoices were for models of mobile phones that, due to a manufacturer’s delay, had not yet reached world markets. As I said above, these are the same stupid morons Batman and Robin were talking to.

You will be pleased to know, however, that the great bureaucracy, the EU, has not stayed silent. Several years into this mess (it is estimated that VAT fraud runs into the billions) the EU Commission  finally proposed two weeks ago that, for a limited period only, certain very specific categories of goods (including mobile phones) should be accounted for using the “reverse charge mechanism. This is a method whereby, broadly, VAT is not charged by the seller but is instead accounted for by the purchaser until the final sale to the consumer.

Could somebody tell her that she is supposed to be DOING the frisking?

This reminds me of  US airport security since 9/11. Every time I take my shoes off in a US airport so that they can check for explosives similar to those once concealed by a British citizen boarding a flight, I think of two things. Firstly, the only deadly thing about my shoes is the odour. Secondly, that there is a terrorist who has just walked through security with a cleverly hidden device chuckling to himself about the stupidity of Homeland Security in thinking  he would try the same schtick twice.

But VAT fraudsters are not terrorists with an ideology and a mission. They are greedy fools most of whom are lucky to be less stupid than the European bureaucrats sent to stop them.

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