Tax Break

John Fisher, international tax consultant

Archive for the tag “tax. international tax”

It takes two to tango

Clothes maketh the man?

Clothes maketh the man?

Apart from the snow-white attire, it could have been, quite literally, two Old Joes getting together for Saturday lunch and a chinwag. Joseph Ratzinger and Jorge Bergoglio made history at the Castel Gandolfo outside Rome last week when, for the first time in at least 600 years, two popes met face to living face.

Watching their rather wooden performances before the cameras (neither of these gentlemen was groomed for Prime Time), it was the awkwardly staged prayer session  that caught my attention most. Here were two highly influential individuals who, despite their united front,  personified diverse spiritual and temporal states of the world.

Theologians have debated the contradiction inherent in God’s attributes of Justice and Mercy for Millennia. Here was the austere Pope Emeritus Benedict XVI, an aloof intellectual who had made his career looking for Truth through reconciling religion and science, praying with Pope Francis I who, despite his Jesuit background, has an emotiocentric approach to his calling. While Benedict XVI was more at home clinically wrestling with the scientific discovery of the God Particle than confronting the unfolding human tragedy within his own Church, Francis I (why do they insist on calling him “The First” ?) is more at home with the Sermon on the Mount. To anybody other than a dogmatic Christian, the meek inheriting the Earth might make no moral, rational or logical sense, but it does make people  feel good (especially if they are meek).

Then there is the temporal contrast. The German Pope, from the Northern Hemisphere and Northern Europe, for whom rules, discipline and tradition are sacrosanct, and the Argentinian/Italian (his father emigrated) Pope from the Southern Hemisphere and the Mediterranean basin of Europe, for whom life is too short to get caught up in the red tape so it makes more sense  just to hug and be friends.

The Euro crisis  involves both the trade-off between justice and mercy and a clash of cultures between Northern and Southern Europe. It was interesting to note how the citizens of Ireland coolly accepted their  fate (and, with a recent successful bond issue, the country is well on its way to recovery) while the Greeks and Spanish  kicked back with emotional protests.

All these guys pale into rational insignificance when compared with Cyprus. Cyprus is not in severe financial difficulties –  it is bankrupt. There is little room for useful restructuring.  Justice, mercy, logic and emotion will not help the country that has become Europe’s biggest basket case as it careers headlong towards Purgatory.

There has been a mixture of rational and emotional reporting on the Cypriot crisis over the last few weeks. It all started with negotiations for a bail-out package with the Troika – the European Central Bank, the IMF and the EU Commission.

Cyprus’s banks had invested rather too heavily in Greek banks and, when  the EU Council of Ministers decreed, as part of the Greek bail-out in 2011 that private investors would need to take a 50% haircut the then Cypriot Finance Minister  – who was present at the meeting – didn’t seem to realize that he needed to object so as to save his own country from bankruptcy. This speaks volumes about Cyprus which, quite incidentally, had a  genuine communist president at the time (even Russia and China had already given up on that nonsense).

Did someone mention haircut?

Did someone mention haircut?

With a new conservative government installed in January that was reputed to be capable of walking and chewing gum at the same time, a deal was negotiated whereby all depositors in Cypriot Banks, including the average Joe with deposit insurance up to €100,000,  would take a haircut – defined for some reason best known to the parties involved as that dreaded word “Tax”. The universal haircut is understood to have been the suggestion of the Cypriot Finance Minister. Now, at this point the Troika should have woken up and remembered from 2011 that the Cypriots do not have a very good track record on these financial things. Instead, they did not seem to realize that – by exposing insured deposits – they were risking a run on every slightly dodgy bank in the Euro-zone. This speaks volumes about the ECB, IMF and EU Commission.

In the event, when the news hit Cyprus all hell broke loose and Parliament threw out the proposal. Although the Cypriot people and much of the world’s popular press took a tear-jerk position on this (the BBC interviewed eloquently irate retired British expats living on the island with authoritative Home Counties accents) the Parliament’s decision gave the EU a second chance. The Cypriots, on the other hand, were left  needing to find €5.8 billion in order to be eligible for a €10 billion loan.

The deal that has now been reached is that small depositors (up to €100,000) will be protected while Cyprus’s second largest bank will be wound-up and its largest bank restructured. Although not yet clear, apart from shareholders and large creditors of the bankrupt bank being more-or-less wiped out, the haircut of large investors in the Bank of Cyprus is likely to be up to 60% with compensation in the form of worthless shares. In the meantime, as banks reopened a few days ago, draconian capital controls are being enforced to prevent a run on the entire system.

The result for Cyprus is that, with the restructuring of the banks, its offshore financial business – which is fundamental to the economy –  has been effectively eliminated. Much of the money invested in Cypriot banks is thought to be Russian laundered funds such that a Russian investor who sent a bed sheet to the Cypriot Laundry can now expect to get back a pillow slip (if he is lucky). He will not be a happy investor which may make the average Western European citizen smile, but this probably means an end to the Cypriot economy as we know it, which also means that the average Western European citizen will soon have the smile wiped off his face. It seems the only hope for Cyprus is reunification with the Turkish north paving the way for increased tourism and successful exploitation of the gas found off its coast. Confidence is so high in Cyprus that those English residents with clipped accents mentioned above will take comfort in the decision of the British government to divert their State pensions into UK accounts.

They never had this trouble when the Church was in charge

They never had this trouble when the Church was in charge

It is tempting to think that there could have been another solution for Cyprus involving, perhaps, a less onerous bail-out. Rationally and in the name of justice there was not. It is a country that built its future on, at best, legal offshore financing that is going out of fashion and , at worst, Russian money-laundering. But what about emotionally? Could, and should, the Troika have turned a blind eye and advanced more funds?Didn’t someone once say “Let he who is without sin cast the first stone”?

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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