Tax Break

John Fisher, international tax consultant

Archive for the tag “Tax haven”

Maintaining The Berne Rate

Swiss Chocolate Soldiers

Swiss Chocolate Soldiers

Sorry, sorrowful Switzerland. This pious country, which has been supplying the Vatican with its psychedelic army for the last five centuries, has been forced to take heed of the words of Handel’s Messiah (with apologies to Isaiah): ‘Every valley shall be exalted, and every mountain and hill shall be laid low.’ After hundreds of years  where, thanks to the impossible terrain, the Swiss have ‘made watches not war’, the Western World’s  tectonic shift from bang-bang war to economic war (other than dealing with the primitives of the Middle East), has seen Switzerland flattened.

Their woes started with an attack on their banking secrecy laws, progressed to the nuking of their financial institutions for dirty dealings, and now, knowing that the game is up, they are undergoing a complete ‘voluntary’ overhaul of their corporate tax system.

Switzerland has been a tax haven for as long as the term has had meaning. The first ever international tax treaty, in 1872, was between Great Britain and the Swiss Canton of Vaud. And it has been all downhill since then.

According to draft legislation published last month by the Swiss Federal Government, all those fun, ring-fenced, foreign-owned companies – mixed, domiciliary, holding, principal, Swiss finance branch – would be phased out by 2029. (Twenty-twenty-nine! There could be another World War by then; in fact, maybe  that is what the Swiss are banking on.)

The Swiss tax situation is precarious

The Swiss tax situation is precarious

Having said that, Switzerland is not about to hike its tax take. That would be tantamount to abseiling down Mont Blanc without a rope. The draft legislation is a potpourri of give-aways marketed by  other – slightly less in-your-face – jurisdictions.

There is going to be a patent box, a notional interest deduction, a step-up on corporate migration, a step-up on transition from one of the old regimes (in 2029), a reduction in Cantonal tax rates,  cancellation of the reviled 1% capital tax (that has a habit of becoming 2%), a participation exemption, unlimited loss carryforward, a modified UK style group relief,  and reduction of net wealth tax.

It is tempting to conclude that the Swiss are following the age-old custom of chucking as much as possible against the wall and then seeing what sticks. It is almost inevitable, in the era of BEPS, that there will be a chiseling away at many of these benefits worldwide. Whatever happens, by going for broke, the Swiss should continue to be one step ahead of  the market.

These are better times for the Swiss watch industry

These are better times for the Swiss watch industry

On the other hand, it is definitely time for Switzerland to expand its non-financial sector. Despite the ubiquitousness of the cheap quartz watch over the last 40 years, the Swiss have reinvented the market for the quality precision piece. Time may be on their side after all.

The sky’s the limit

"What did I do wrong? I only asked for the top floor"

“What did I do wrong? I only asked for the top floor”

Winding my way up the world from Western Australia last week, the doors of my mind opened on a vision of Elisha Otis . Elisha Who? Who Otis? Who Who? Odds on, anyone reading this blog has seen the name at least once in the past 24 hours. At the New York World’s Fair in 1854 Otis daringly demonstrated his safety mechanism for elevators that prevented them from falling in the event the cable broke (a device now ubiquitous but generally absent from Hollywood disaster movies).  Otis, the founder of the first (and still largest) elevator company that bears his name, made skyscrapers possible, King Kong an icon and Hong Kong an eyesore.

Taking up on that last point, arriving in Hong Kong last week I decided to try a repeat of my first visit to New York a third of a century ago. Then, striding out of Grand Central  onto 42nd Street I was gobsmacked by the sight of the Art Deco Chrysler Building, the tallest building in the world for a brief 11 month reign until brashly superceded by Al Smith’s Empire State. Exiting Hong Kong Central I expected to be dumbstruck by the fabulous Business District Towers that appear in pictures taken from nearby Victoria Peak. The reality was somewhat different. Walking along a labyrinth of roofed concrete walkways with occasional offshoots to building entrances along the way, I eventually came to an escalator that took me down to what I assumed was ground level because, firstly, there were no more stairs going down and, secondly, there were antiquated trams, up-to-the-minute buses and cars going by at speed on the narrow road. I am sure that, had I been a contortionist, I could have enjoyed the surrounding architecture but, as a mere mortal, I would have had to lie flat on my back to have any chance of getting a view from the compressed concrete mass in which I found myself. That, in turn, would have meant being sliced by a tram, flattened by a bus or trampled by 3000 blissfully unaware commuters engrossed in their smartphones, faceless thanks to green standard-issue surgical masks, like something out of Pink Floyd’s “The Wall”.

My first impressions of Hong Kong were, I am afraid, underwhelming. Traveling along Hong Kong Island and into mainland Kowloon on the MTR Subway, popping up to street level at random stations like a mole with a mission, everywhere seemed much the same – tall buildings, people, relatively narrow streets, more people, shops and even more people.

When it comes to tax, however, Hong Kong is quite overwhelming. Styled as an ideal holding company location with the same longing for respectability as the massage parlours  advertised on the euphemistically worded signs propped up by young ladies on street corners, there is much to recommend this overpopulated enclave. Offering a territorial basis of taxation, the 16.5% corporate rate looks respectable but is generally heavily diluted. In recent years, recognizing that the days of privacy are up, Hong Kong has pursued an energetic programme of  tax treaty negotiations. An educated population with sky-high average IQ means that there is a ready supply of plausible managers for holding companies; there is also a well-oiled legal system and a fully functioning stock exchange.  The local managers of a company occupying no more than a single drawer in a Trust Company’s office  may be able to successfully argue that the company is legitimate as there is no room in Hong Kong for a company occupying two drawers. Only royalties face withholding tax but, in any case, the building of a factory required to pay them would probably displace thousands of residents into the South China Sea  – space is of the essence and manufacturing no longer seems quite the thing.

Human face of Communism

Human face of Communism

The only downside of Hong Kong as a Holding Company Location (dare I say, Tax Haven?)  is that it is tucked under the armpit of a rather large country not known for its championing of laissez-faire and existentialism (or any  big words other than “communism”). A rather big downside.

Georgia on my mind

Reagan proved adept at defeating Georgians

Reagan proved adept at defeating Georgians

When, on August 16,  I saw the announcement that Bert Lance had died, memories of the disappointments of that period of my life known as “coming-of-age” came flooding back.

Lance was a Georgian banker (born 82 years ago a little closer to Atlanta than Tbilisi) who took the train up from the South to Washington when Jimmy (pronounced Jimmuh) Carter insinuated his way into the White House in 1977. As the peanut farmer’s first, and short-lived (not literally, as you know), Director of the Office of Management and Budget he epitomized – along with fellow Georgians Ham Jordan and Jody Powell – the final decommissioning of Class in the capital. A bunch of, albeit intellectually competent, bumpkins – they and their boss (not to mention the boss’s mother and brother) ran roughshod over all that was held sacred in the undisputed Temple of the Western World.

For a late teenager just at the tipping point between childhood and adulthood, when a future as Prime Minister, Finance Minister or Chartered Accountant appeared equally feasible (but not, sadly – as I discovered in a Superman comic – President of the United States, which was reserved for Natural Born Americans that did not include either Clark Kent or me),  the disappointment from this Pol Potian destruction of the ruling class was mind numbing.

Well, just as the whole memory experience was making its way back on the slow train to the recesses of my mind, this morning I noticed an article in The Economist that made me instinctively slam on the brakes.

The Gambia, which for those of you who do not know, is a little sliver of a country in West Africa, has decided that it wants to be an International Financial Centre. IFC is a euphemism for that most heinous of tax  bogeymen – the Offshore Jurisdiction. This is, of course, chutzpa at its most naked. What makes the smallest nation on the continent, with per capita GDP of around $500, think it can satisfy the enhanced 21st century requirements of a successful (if there is still such a thing) Tax Haven?

I may have a few possible answers.

At least there are no sharks on the banks of the Gambia River

At least there are no sharks on the banks of the Gambia River

While the Gambia does not have a plethora of retired bankers, lawyers and accountants like the Channel Islands, it does have lots of peanut farmers. In fact, the economy is built on tourism and peanuts. If the patron saint of peanut farmers – St James Earl Carter III, along with a banker or two to peanut farmers,  could make it to the top of the world, why could they not , at least, achieve modest success in the international financial markets?

Furthermore, watching all those dramas and documentaries about the centre of the financial world – the City of London – it would have not been lost on Gambian leaders that the protagonists are always in offices overlooking the River Thames. A little-known fact about the Gambia is that the entire country is, in fact, one long riverbank (or, to be more precise, two long riverbanks) – the river in question being, you guessed it, the Gambia. What could be more natural than for the world’s newest financial centre to be one long (or two long) impersonations of the City of London.

In fact, as The Economist sanely points out, the Gambia’s chances of success are pretty slim. Offshore Financial Centres are under increasing scrutiny and pressure from the international community. In the end, it will only be those with substantial professional infrastruture and minimum political risk  (such as the Channel Islands) that are likely to survive in one form or another.

Real heroes use their real names

Real heroes use their real names

Jimmy Carter, Bert Lance and friends certainly managed to knock out of me any political delusions of grandeur I may have had. In fairness, it didn’t help that the boss on the other (my) side of the Atlantic was a chap by the name of James (pronounced ‘Jim’) Callaghan who had all the charisma of the former Inland Revenue Union official he was.

Ironically,  Bert Lance has accompanied me throughout my career, much to the detriment of my monthly timesheet. He is attributed with popularizing the term “If it ain’t broke, don’t fix it” that became one of my professional principles. Some advisers would say I am nuts.

The lion that squeaked

How doting parents view the school play

How doting parents view the school play

We all remember those excruciatingly painful dance sequences in end of year school plays. As a long-in-the-tooth tweed jacketed teacher attacked the untuned keys of the upright piano while simultaneously pumping furiously at the worn pedals, budding Nureyevs and Fonteyns would take to the stage. With eyes adamantly fixed on their neighbours the children would twirl to the right and swing their arms to the left in accidentally syncopated time with the music. One of the incontrovertible Laws of Motion was that there was always one  twit lacking rhythm who would insist on twirling to the left and swinging his arms to the right; he couldn’t help himself – the act was as involuntary as breaking wind in the headmaster’s study.

I have waited 40 years to observe similar ineptitude on the world stage. Thank you France. Or should I say, Andorra?

Last week, the Co-Monarch of Andorra met with his joint and several Prime Minister. It was a cordial meeting. Because there are only 85,000 citizens of Andorra,the microstate stuck in the Pyrenees between France and Spain, there is no need for a full-time monarch  let alone two full-time monarchs (the other is a Bishop, confirming the Combination of Church and State). In his spare time  the non-ecclesiastical one is President of France. As everyone who reads a newspaper with more words than pictures knows, there is a worldwide move spearheaded by the EU, G8, G20, OECD United Nations and every other populist organization in the world  to force greater transparency (exchange of information, withholding tax on deposits etc.) in traditional tax havens. This is a logical approach to ensuring that the governments of home countries are able to catch and tax earnings that would probably otherwise escape their grip (unless, as if often the case, it is members of the governments themselves that are depositing the money offshore).

Where's Wally?

Where’s Wally?

It was, therefore, yet another out-of-step move for President Wally (unfortunately we know where HE is) when he proudly announced that the Prime Minister had agreed to institute a personal income tax. Duh? There were no details of the extent of the tax (surprise, surprise) and similarly no mention what the tax would be used for – tiny Andorra has generally been doing quite nicely from tourism, duty-free and “financial services”. There is no moral obligation on any country to impose an income tax unless it needs to – and Andorra patently doesn’t need to.

I admit (proudly) that I have never had any dealings with Andorra – until a few years ago I thought it was a fictitious state in a black-and-white movie, but when I saw that they had instituted company tax in 2012, I knew that I could have written the script for them.  The company tax was set at 10%, a low but no longer crazy rate. However, if the company is in the finance industry or holds IP or is involved in international trade (in practice, almost every company except for the Candy Store in Andorra High Street), there is an 80% reduction. I truly admire those adherents of “you can fool all of the people some of the time” who genuinely believe that the average OECD economist doesn’t understand that an 80% reduction on 10% is ALWAYS 2% . But what a tragedy it would be if everybody had to pay a horrific 2% tax – so they instituted Holding Company status, which pays no tax at all. To all intents and purposes they managed to get back to where they started – plus ca change, plus c’est la meme chose.

So what is the, as yet unannounced, income tax rate likely to be?

From Half-Prince-President Wombat’s point of view, if the aim is to prevent wealthy French from hiking it over the Pyrenees, the number to beat is 75% which, despite being stubbed out by the Supreme Court, is still on his agenda. But Andorra is one of those countries that likes to fall below the radar. Indeed, after declaring war on Germany in World War I, it was forgotten in the Treaty of Versailles and continued in a state of belligerency with Germany until 1958 – despite having declared neutrality in World War II (Hitler was never one for the intricacies of international law so he didn’t have the place turned into a car park for a Panza Division). So my guess is that when the Prime Minister gets back to his mountain lair he will give himself a few months to return to anonymity and then quietly come up with a rate that warmly hugs a Very Round Number.

Half-mad King?

Half-mad King?

Meanwhile the Royal President is presumably very proud of his day’s work last week and hoping his decisive action will lift his ratings in the polls. At the last count his popularity rating was 24% (even Louis XVI would have beaten that) – proving beyond all reasonable doubt that nearly a quarter of all French are stupid. Methinks the man is  Half-Prince and  Half-Wit. I wonder what he would have  looked like 40 years ago in the Dance of the Sugar Plum Fairy?

World without borders

German parachutist infiltrates London Olympics

Blitzing Mannheim last Tuesday in advance of a meeting the following morning, I soon tired of the centre of town with its Water Tower, Paradeplatz  and street names like P3 and Q5. Settling  into my hotel room, I turned on the TV. Confronted by Mary Poppins dubbed into German – at least in British war movies they made the Germans speak English with a middle-European accent – I decided to chance my luck with the radio embedded in the dashboard next to the bed.

Where is the Turkish music?

The radio was an experience in itself, bringing back memories of the car radios of my childhood. By rotating a knob a red plastic marker glided along the horizontal dial – there were no pre-tuned stations. Trying FM first and fully expecting to be blasted by Beethoven or Bach at every stroke of the knob, the only music I hit upon was a Turkish pop channel. My opinion of Turkish music was formed in the era before public voting in the Eurovision Song Contest when Turkish singers were considered national heroes if they scored any points at all; evolution definitely rid Turks of the music gene. But it was medium wave where the fun really started. As I moved between wavelengths in the hope of colliding with the BBC World Service, I listened to the whistles and wooshes as stations slowly appeared out of the audio fog and then receded again into obscurity. It occurred to me that seventy years ago across that embattled continent many would have searched for Alvar Lidell broadcasting from London with the only reliable news of the day, as Goebbels’s propaganda machine churned out its incessant lies.

In fact,  as competitors from CNN to Sky to Fox entered the market, the BBC  always managed to retain its name as the world’s number one reliable news source in the broadcast media. A quarter of a century after leaving the borders of that green and pleasant land, the BBC is still for me, in the words of WH Auden, “My north, my south, my east and west”.

Bond Girl – born 1926

However, a foul wind may be blowing through the Beeb’s corridors. There was the mildest hint at the spectacular opening ceremony of the London Olympics last weekend. In a move that would have done justice to the Beijing Olympics four years ago, the allegedly Marxist director Danny Boyle managed to ignore the Empire (too insulting to some) and  World War II (too insulting to one) even though, thanks to the former, London is today the most truly cosmopolitan city in the world and, thanks to the latter, it was not difficult to find a site for the Olympics in East London since the Luftwaffe had done a pretty good demolition job seven decades earlier. Meanwhile, Boyle took  neatly choreographed digs at some British sacred cows – the Queen and the BBC among them.

Bond Girl – born 1925

Few non-Brits or those under 40 would have paid any attention to a flash of legendary BBC weather forecaster Michael Fish from 1987 publicly informing a woman who had called that day that she need not worry about a rumoured Hurricane on its way to Britain – you see, there had not been a Hurricane in Britain for some 300 years. Well, when I woke up the following morning and ventured outside, I discovered  that a tree had taken root in my neighbour’s roof and the street was littered with debris. Miraculously, the Hurricane – hitting around 3am in the morning – had killed nobody.

The BBC’s continuing fall from papal infallibility came home to me a few weeks ago when they ran an item on the news declaring that, according to a new study, at least $21 trillion of assets are being managed in tax havens. The item went on to explain that this was bigger than the US and Japanese economies combined and this tax black hole could solve lots of the world’s economic problems. We were told that the study was written by James Henry, former Chief Economist of McKinsey and Co for the influential Tax Justice Network.  And to make sure that the BBC would be viewed as thorough, they even interviewed a British tax expert who said that, while he could not disprove the figures, they seemed very big (rocket science collides with taxation once again).

His brain hurts

As an international tax geek this item was clearly of real interest to me so, hard-wired with my 20th century education that insists I independently check all facts, I went searching for the influential Tax Justice Network and this important study. Well, the website can best be described as the on-line equivalent of “Behind the wash basins at Waterloo Station”. Getting a real feel for who and what this organization purports to be was not easy (although I think I got there in the end). Most worrying of all, the study “The Price of Offshore Revisited” was not yet available. What was there (after a virtual treasure hunt) was a  brief press release which the BBC seemed to have quoted faithfully and mindlessly. Taking a look at the BBC website version of the item, I realised that the tax expert consulted as possible counterweight to the report, had clearly seen even less than the BBC. All he seemed to be saying was – “Blimey, that number is too big to make sense”.

I kept revisiting the site in search of “The Price of Offshore Revisited” until, last week – Eureka! – I found it , albeit off site. Mr Henry’s study was, indeed, interesting reading  and he is clearly a serious dude. While he arrives at some interesting conclusions, including that – in the absence of an offshore industry – emerging nations that are currently debtor nations would turn into creditor nations (which, Mr Henry, I don’t think would have a causal effect on credit unless, horror of horrors, exchange restrictions were imposed or, as you seem to discount, material sums found their way back as investment in the source country), his central thesis is something known to everyone – that the amount of tax being avoided or evaded in emerging countries would potentially have a major positive impact on their economies.

One-man balance of payments problem

I took something else away from this study, however. It is a regular chant of the Libertarians that use of offshores in tax avoidance (as opposed to tax evasion) schemes is highly moral since any diversion of funds from Big Bad Government to private hands will increase the efficiency of the economy. Even leaving aside the specific woes of emerging countries stripped of basic tax revenues it appears, according to the report, that money parked in offshores is generally invested in low-risk investments – if a wealthy investor wants to take risks he is happy to do that in the full view of his government (of which, he might be a member). So, while these trillions of dollars may serve to lower interest rates in the world economy they are essentially crowding out private investment by pension funds, insurance companies etcetera that need low risk investments while depriving the world of much needed risk capital – potential “creative destruction” that  Joseph Schumpeter declared so critical to the future of a free market economy.

Overall, the BBC, along with some American news companies that picked up the story at the same time,  did a pathetic job here and would have been well served to wait for the report. It is perhaps not a coincidence that the BBC has adopted an American term in recent years: “BREAKING NEWS”. As an expatriate who relies on the BBC, would it be too much to ask that it keep the News WHOLE?

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