Tax Break

John Fisher, international tax consultant

Archive for the tag “US taxation”

Going it alone?

It would appear Americans have long preferred blondes

It would appear Americans have long preferred blondes

Ever since Marilyn Monroe’s less famous namesake, James, came up with his Doctrine almost two centuries ago, America has toyed with isolationism. They tried it in the First World War, and it didn’t work. They tried it in the Second World War, and it didn’t work. And Barack Obama has spent his presidency unsuccessfully trying to raise the drawbridge to the Middle East.

But there is a bit of isolationism going on at the moment that is not catching everybody’s eye: Tax Isolationism.

As the nation fires its engines for the four-yearly circus that is the Presidential Election, candidates for the Republican nomination are outdoing each other in unpassable and unworkable tax reform proposals. Meanwhile, the nominee-presumptive for the Democratic ticket has made her own comments on the issue.

What is remarkable is that all the candidates have concentrated on lowering tax rates and closing loopholes, conjuring up numbers they each know they will not have to justify. After all, America is one of the few countries in the world where the Government’s Budget is a wish-list rather than a statement of intent (Congress never passes Budgets as proposed). They are looking at America as if it were a self-contained island. Their sole material tip of the hat to other countries is the universal objection to inversion transactions, which have been rife in recent years and serve to reduce the US tax base.

In the meantime, BEPS is fast taking shape, and the US Treasury is belatedly realizing that, as European nations apply the rules and import more profit to their shores, in a zero-sum game the big loser is the U.S. of A. which is by far the busiest player in the international economy.

The big question now is whether the US will try and torpedo part of the BEPS program. At this late stage that would not go down well internationally. As regards automatic exchange of information, America may end up trailing much of the world since the Federal authorities evidently have limited legal right to demand States’ statistics.

What did he see in her?

What did he see in her?

On the other hand,  America’s antithetical view to John Donne’s meditation, ‘No man is an island,’ may not be all bad. As Mrs Arthur Miller herself once observed, ‘If I’d obeyed all the rules, I’d never have got anywhere’.

The spotlight beside the golden door

When did she renounce her first religion?

When did she renounce her first religion?

Fifty years ago today, the New York Times announced that Elizabeth Taylor  had failed in her attempt to renounce US citizenship. Required to disavow ‘all allegiance and fidelity’ to the United States, she found herself  unable to do so. Now, allegiance and fidelity are terms Ms Taylor had a lot of experience disavowing – eight lots of experience, to be precise: Mr Hilton, Mr Wilding, Mr Todd, Mr Fisher, Mr Burton (Take one), Mr Burton (Take two), Mr Warner and Mr Fortensky.

Ms Taylor, somewhat disingenuously, declared her reason for renouncing her citizenship as wanting to have the same citizenship as her then husband-for-the-first-time , Richard Burton. Had Burton, by reason of his birth, been a Welsh Nationalist (which he was patently not), the argument may have had some traction. But Taylor did not need to seek the same British citizenship as her husband for the convenient reason that she was British, born and bred.

The only reason that the Cleopatra star wished to be rid of her American passport was that she was living and working in Europe at the time, and she did not want to have to pay tax in the US.

Nothing has changed in fifty years. People are renouncing their citizenship right, left and centre (although, on this occasion, I suppose that should be ‘center’). Whereas, in the conscience-ridden and patriotic ’60s ordinary people had understandable difficulty in renouncing allegiance and fidelity – nowadays, if it will save a buck or two, who the hell cares about such outdated emotional claptrap?

Thaddeus Stevens who roomed with Al Gore at Harvard

Thaddeus Stevens who roomed with Al Gore at Harvard

But, of course, as in so many other respects, this aspect of  US Tax Law is insane. Eritrea is the only other nation that taxes income on the basis of citizenship. I admit that I have never been to Eritrea (in fact, I would not know where to find it on a map, so it is just as well I have never tried to get there), but my assumption is that Fifth Avenue it is not. One can almost sympathize with successive Eritrean governments trying to plug their fiscal hole with takings from comparatively wealthy citizens abroad. One could also sympathize, if one were living a hundred and fifty years ago, with Thaddeus Stevens and his House Ways and Means Committee wanting to clobber Yankees escaping the Civil War. But things have moved on since then. The  dysfunctional American tax system allows multi-national corporations to shelter profits overseas, provides countless tax breaks to domestic taxpayers and has enough loopholes to fill whatever you can fill with loopholes. So, choosing to chase expatriates not currently benefiting from the public spending of tax revenues is barmy.

Beyond the idiocy of citizenship-based taxation, it is the offer of a ‘Get out of jail free’ card by relinquishing citizenship that I, a non-American with no aspirations to become one, find distasteful. I am very proud and happy that I became an Israeli citizen a quarter of a century ago. This is my home. This is the place where  I raised my children and the place where they are now raising theirs. But I am also proud of being British. It was Britain that offered my grandparents refuge when, over a century ago, they had to escape the stink-hole that was, and possibly still is, Ukraine. It was Britain that stood alone against the greatest evil yet known to man in 1940 and 1941. It was Britain that gave me the education that enabled me to get on in life. Britain does not present me with a dilemma. There is no reason for me to consider giving up my citizenship.

Expatriate Americans, on the other hand, faced with horrendous annual reporting requirements, as well as potentially horrible taxes, have to make a real decision. For those with a conscience, it is an almost impossible situation. How does a native-born American disavow ‘all allegiance and fidelity’? Even I, a non-American, would have difficulty making a  statement like that about the one nation on the planet that, when push came to shove,  has held it all together for the last hundred years.

Still liable to tax

Still liable to tax

Come on Uncle Sam. This year marks the 150th anniversary of the end of the  Civil War. If you can make peace  with Cuba, you can  make peace with your expatriates. They are the best ambassadors you’ve got (although I’m not sure about Liz Taylor – she was a bit of an embarrassment at times, even for an American).


The Yanks are coming

This post is dedicated to the memory of Orni El-Ad, my mentor and friend, who introduced me to the world of taxation and taught me how to “think tax”. Orni died suddenly this weekend at the premature age of 64. May his memory be blessed.

And then came the Zeppelins

“The Children’s Book” by A S Byatt is, without doubt, one of the most absorbing novels I have ever read. Set in the waning days of the Victorian era and first two decades of the 20th century, it is a saga of interwoven families where the adults gradually shrug off their Victorian correctness while the children gain their voice after a long period of being “seen but not heard”. 

One of the most poignant moments in the book is the attendance by the chief protagonists at the gloriously atmospheric first night of J M Barrie’s Peter Pan. Fooled momentarily into nostalgia for the Darling Family and the adventures of Wendy, Michael and John, the reader quickly regains the sad perspective that this idyllic world is sliding helplessly towards 1914 and the utter carnage of the Great War.

Years ending in 14 to 18 have always given me the creeps and that book got me marching in the direction of 2014 with much trepidation. It was, therefore, with a palpitating heart that I approached the much heralded latest proposed FATCA regulations which are full of 2014, 2015, 2016, 2017 and beyond (the way they are going they might even get to 2039 and  my heart will have a whole new reason to palpitate). In fairness, however, cause of death from FATCA is far more likely to be due to 389 pages of acute boredom than a grenade lobbed across the wire by Jerry.

The Foreign Account Tax Compliance Act (FATCA), which was enacted in 2010 and, according to the latest proposed regulations, is due to commence hostilities on January 1, 2014, is a supreme effort by the US legislature to combat offshore tax evasion by US citizens. At its core it is an ultimatum to nothing less than,the entire world’s financial institutions to act as mercenaries on behalf of the US Treasury by providing information about US account holders and deducting 30% tax at source on payments to identified and suspected US tax evaders – or themselves face 30% withholding on all taxable payments from the US.

You scratch my back James and I'll scratch yours

Due to wholesale opposition from America’s allies who saw this extraterritorial reach as an act of imperialist belligerence, there was, until recently, considerable doubt as to whether it would prove just another example of US saber rattling. However, a Joint Statement on February 8 by the United States, France, Germany, Italy, Spain and the United Kingdom abandoning all those tax evaders seeking a safe haven in exchange for reciprocal spying services by the Americans, means that it is probably time for any American with anything to hide to get his head down in the trench, pull his tin hat firmly over his ears and pray.

Foreign financial institutions (FFI’s) will need to enter into an agreement with the IRS sometime during  the first six months of 2013 in order to be in place for the first winter offensive starting January 1, 2014. In 2014 and 2015  names, addresses, taxpayer identification numbers, account numbers and account balances will need to be reported, while in 2016 any income paid to an account will be required. From 2017 gross proceeds paid to the account will be demanded.

In the meantime, with effect from 2014, participating FFIs, having performed appropriate due diligence to identify their American customers, will need to start withholding 30% tax on such payments as US source dividends, interest and royalties to recalcitrant individuals (basically anybody who is not willing to play) and recalcitrant non-financial foreign entities (NFFEs) aka companies with more than 10% US ownership. Such payments to non-participating FFIs would suffer the same fate. From 2015 proceeds from asset sales will also be subject to withholding.

Right for once

Implementation of the  most Rambo-like proposal has been postponed until  2017 at the earliest and will likely be hit by a stray, but lethal, shell sometime before that. With a view to really thrusting and turning the bayonet, the IRS want to force the participating FFIs to withhold tax on payments that do not even originate in the US using a formula based approach of applying the ratio of US to non-US assets on the FFI’s balance sheet to its payments to recalcitrant individuals and NFFEs. Well boys, you can push your luck and go “over the top” whenever you like but don’t be surprised if  the other side is just waiting to see the whites of your eyes before halting you in your tracks.

Not all entities will need to enter into an agreement with the IRS, an exemption applying to those where the risk of recalcitrant Americans hiding under a tarpaulin in the corner of the trench is not great. Considering the requirements for becoming a deemed FFI, it is not entirely clear what the advantage over entering into an agreement is and it has been suggested that it may just be a decoy.

Ultimately, it is the buy-in by foreign governments that will make this work. Local secrecy laws could have totally derailed the project whereas it is now likely that agreements will be worked out with participating governments for information to be provided to them for sharing with the US authorities. Meanwhile, banks in several jurisdictions are shouting “Yankee, go home” to their  American customers before the regulations come into force.

Looking to the future, the tax evader’s lot is not an enviable one as he is forced to retreat with his  funds into undesirable corners of the world where their risk of loss is greater. As the world goes global places to hide, like Peter Pan’s Neverland, are ever harder to locate. The IRS recently announced yet another Amnesty, offering offenders the chance to wave a white flag and pay their way out of trouble. In the meantime, advanced troops were sent in to lay Switzerland waste. Speculation is now rife as to where the crusading troops will go next .

The attitude of  the US authorities can probably best be summed up by the chorus of the most famous American song of the First World War:

Over there, over there,
Send the word, send the word over there
That the Yanks are coming, the Yanks are coming
The drums rum-tumming everywhere.
So prepare, say a prayer,
Send the word, send the word to beware –
We’ll be over, we’re coming over,
And we won’t come back till it’s over, over there.

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