Tax Break

John Fisher, international tax consultant

Archive for the tag “Tax residence”

Votes for taxpayers!

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Some suffering is not pointless

I was sorry to hear that former US president and Nobel Peace  laureate Jimmy Carterhad  broken his hip last month.  I was not sorry to hear that the incident had ruined his planned turkey hunt in his home state of Georgia. I – like the lion’s share of the western world – have a visceral dislike of the pointless suffering of wildlife.

The Americans continue to do things their way, while the rest of us are becoming more and more constrained by multinational consensus. The latest example came last month when a Swiss referendum ensured the application of a new corporate tax regime, as well as restrictive gun laws. On the face of it, this was an example of absolutely raw democracy in action. In Switzerland, all it takes is 50,000 signatures on a petition to guarantee a national referendum on parliamentary laws. And that was the case here.

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What choice do sovereign states have anymore?

But, beneath the surface, the reality was different. Both proposals had, broadly, been up for national vote previously, and both had failed. This time, the people knew that Switzerland’s much-loved-by-foreigners tax friendly principal companies, finance branches and private tax rulings were dead in the water, thanks to BEPS and related international agreements  pushing for a level playing field for domestic and foreign businesses alike. Meanwhile, persistence with the country’s liberal gun laws would mean exclusion from the EU’s much-prized border control free Schengen Area.

Companies of all stripes will now be subject to the same rate of tax, deductions being given for EU friendly R&Dcosts, patent box and the write-off of hidden reserves. To help cover the expected shortfall in tax revenue, and  pacify the lefter leaning elements of society,  there is to be an increase in social security related taxes. At the same time, residents of Switzerland will have to get used to less freedom to bear arms.

The message to the Swiss from the international community was loud and clear – you can vote any way you like, as long as it’s ‘yes’. Two thirds of voters duly obliged in both referenda; the rest are helping police with their enquiries (that bit isn’t true).

Careful thought about the Swiss situation  raises the long-standing question of the importance of nations and, with it, the importance of citizenship. Before the ascendancy of the nation state, the 17th century poet John Donne meditated that, ‘No man is an island, entire of itself; every man is a piece of the Continent, a part of the Main’. Napoleon, Bolshevism, two World Wars, Apple and Amazon later, and nations have limited control of their own destinies, while hundreds of millions of their citizens live beyond their borders. Despite the passing centuries, we are evidently not done with Donne. And, despite a declaration of the League of Nations scarcely 90 years ago that: ‘Every person should have a nationality and should have one nationality only’, growing numbers of people collect citizenships like their grandparents once collected cigarette cards. 

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This bloke was a US citizen until recently. What was that quote of Baldwin?

The time has surely come to reassess the State/Individual connection. In  a world where -with a few prominent exceptions – compulsory conscription to defend the nation is no longer necessary, too many people fit Stanley Baldwin’s assessment of: ‘Power without responsibility – the prerogative of the harlot throughout the ages’.  An excellent candidate for consideration to, at least partly, replace citizenship in assessing an individual’s rights and responsibilities vis a vis the State, would be long-term tax residency.

Who knows? Monaco might one day be a permanent member of the United Nations Security Council.

Playing the residency card

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Who were they?

On a recent bus tour of Barcelona, the  recorded commentary declared the ‘immortal’ words of exiled Catalonian  President Josep Tarradellas on his return in 1977: ‘Citizens of Catalonia, I am here’. This immediately conjured in my mind the immortal line from the BBC’s Goon  Show: ‘Everybody’s got to be somewhere.’   Great philosophy it aint, but the concept of ‘being here’ has been a cornerstone of modern international taxation since its salad days a hundred and fifty years ago – ‘where you are’, rather than ‘who you are’.

Despite an intuitive tendency – demonstrated countless times over the years in meetings with prospective clients – to think that international taxation depends on ‘who you are’ (French, German, Spanish, Catalonian), citizenship actually plays a minor role in establishing where direct tax is paid. There are only two countries that tax on the basis of citizenship. One is the African state of Eritrea. The other – slightly larger and louder – is the United States of America. Everyone else looks at ‘residence’ – essentially ‘where you are’. The only time citizenship kicks in is when two competing countries tied by tax treaty are totally stumped.

The confusion is forgivable when you open international taxation journals. Recent news included Montenegro’s joining the ranks of those countries selling citizenship for a mess of pottage. For as little as a  250,000 Euro investment and 100,000 Euro donation to the Government, it will be possible to achieve citizenship within 6 months.  Apart from being delightfully situated next to Bosnia and Serbia (complete with NATO membership), it offers the bonus of potential EU membership by 2025 (if the current European order lasts that long), with the advantage of  access to the rest of the EU. Apart from Americans (and perhaps wealthy Eritreans) who might court the idea of a second citizenship to enable them to give up the first (thus avoiding draconian tax reporting and, possible, additional tax payment), the principal attraction of these schemes is Visa access for those from even less popular countries (and EU access, where relevant). Tax doesn’t get much of a look-in.

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You would also want another passport

Israel is firmly in the ‘residence’ camp and its statute law is well-developed. It is therefore surprising that, in a recent High Court appeal decision concerning a poker player who claimed to be resident nowhere (‘everybody’s got to be somewhere?’), one of the justices declared that a person who is a resident and citizen of Israel, especially one who was born and raised in Israel, even if he goes abroad for a prolonged period, will only shake off residency if he does something clear to break that residency and establish residency elsewhere. Examples cited are renouncing citizenship, and sale of house and assets in Israel. Less convincing would be academic studies or a foreign company posting.

This is diverging a long way from ‘where’, and giving a degree of importance to ‘who’.

As Israel is a member of the OECD and signatory to many double tax treaties based on its model, treaty interpretations will take precedence over domestic law, although there may be an increase in the incidence of mutual agreement procedures. But, it will be interesting to see how matters develop with non treaty countries, as well as the rare situations where an individual claims ‘not everybody has to  be somewhere’.

For tax advisor and country

"Tax Resident Kane" doesn't have the same ring to it

There is a framed football shirt hanging on my son’s wall. It is half blue, half white – the blue half sporting the insignia of the Israel Football Association and the white half the Three Lions of England. Scrawled in indelible marker across the English half is the inscription “Good Luck, Bobby Charlton” ( for the benefit of American readers -and absolutely NOBODY else on earth – Sir Bobby Charlton is to English football what Babe Ruth was to American baseball).

My son is part of an ever growing phenomenon in the modern global village- the dual citizen. The Economist ran an article last week questioning the continued relevance of citizenship as a basis for a person’s rights and responsibilities vis a vis a particular country given the almost ad hoc way in which citizenship can be acquired. The recommendation, in a world where the military draft is becoming increasingly rare, was for tax residence to supersede citizenship.

Hallelujah!  If you have been wondering what we international tax advisors  are going to do for a living when the European Union institutes the Common Consolidated Corporate Tax Base (CCCTB) and the US Congress adopts a Territorial Tax Basis – we are saved!  As soon as The Economist’s proposals are accepted by the world’s legislatures anybody wanting to do whatever citizens do in a country will need to prove  tax residence, and that means fees.

At a cursory glance the concept of residence looks fairly consistent internationally – many countries insisting that, if an individual spends over 183 days (six months in plain speech) within their borders, they are resident. But, as the Eagles said:  “You can check out any time you like, but you can never leave” – in addition to differing  applications of the 183 day rule between a single tax year and straddling two tax years, nation after nation traps individuals with further multi-year calculations  as well as a host of additional tests that point in only one direction – the national piggy-bank. Warring tax authorities are forced into the tie-breaker clause in the double tax treaty they hopefully concluded earlier and, given the subjective nature of some of the tests, they often end up fighting it out around a negotiating table.

What does all this mean for this brilliant alternative to citizenship? Fast forward to 2015. Giovanni, the Italian plumber we met a few posts back  who is now working under Single Market rules in the UK,  turns up at his local Town (City) Hall on March 15,  to register to vote in the upcoming  General Election. The clerk asks for proof of his days present in the UK since last April 5 (the potty fiscal year end there). Giovanni proves 200 days but the clerk, after calling the tax residence hot line,  points out that in calendar year 2014 he was probably still resident in Italy under Italian law since he was present there for 239 days in the calendar (fiscal) year, and, it was as yet unclear, whether he would be similarly classified in 2015 depending on future circumstances. He tells him to go and get a tax opinion. Giovanni, who despite being a plumber is not flush with cash, tells the clerk that he cannot afford an opinion. “In that case”, the clerk informs him, “We can approach the Italian authorities and institute Mutual Agreement Procedures under the tax treaty”. Being Italian, Giovanni has an inbred aversion to tax authorities, especially those he has not been reporting to for the last thirty years, so he scrams fast –  internationally disenfranchised.

Then there is  the situation of tax exiles. On the assumption that, as long as there is tax there will be tax exiles, in a world of economic growth their numbers are likely to increase. So it would seem quite possible that, in the foreseeable future, Monaco and Andorra could become so popular that one or both of them could claim a permanent seat at the United Nations Security Council.

World War III

Personally, if there is a need to change the current system, I would go for pledge of support to a national football team. When push comes to shove everybody only really supports one team and, although I have never asked my son whether he is for England or Israel, I do recall taking his older brother to an Israel v Argentina game in the early nineties with Diego Maradona playing (Americans -ask your friends). There was almost a riot between Argentine fans and Israeli fans – ironically the Argentinian contingent being made up almost exclusively of people who had fled the Junta in the early eighties and sought and found refuge in Israel.

And if you think there is anything trivial about the football idea, Bill Shankly,the legendary manager of Liverpool famously said: “Some people think football is a matter of life and death. I assure you, it’s much more serious than that.”

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