Tax Break

Who said tax is boring?

Archive for the tag “VAT”

The Unsatanic Taxes

funnyroadNobody who has read Salman Rushdie’s classic ‘Midnight’s Children’ can be indifferent to the juxtaposition of India and Midnight in a phrase or sentence. So, the recent announcement that India’s new GST law (VAT by any other name would smell as sweet) would come into effect, amidst much fanfare, at midnight on July 1 was enough to make my heart flutter like a punkahwallah’s punkah.

The world’s biggest democracy has finally joined the vast majority of the globe’s tax-setters in a cross-twenty-nine-state system that, when the technological problems are sorted out, should improve India’s tax-raising efficiency and, thus, help that great country in furthering its economic growth.

That is not to say that VAT is the Mother Teresa of all taxes. Its biggest problem is that it is regressive –  it taxes consumption at the level of the poor-man-in-the-street who, the poorer he is,  spends a higher proportion of his income on surviving. This is traditionally combatted by lower rates or exemptions on basic things like food. Indeed, India – in keeping with its tradition of making everything as complicated as possible – has introduced five rates of VAT  plus a stratospheric concoction for dealing with untouchables like luxury goods and tobacco.

Of course, there will still be those who manage to get round the tax, legally or otherwise. Time will tell whether devious residents latch onto the ubiquitous Carousel Fraud phenomenon (involving the import and export of the same goods multiple times – a bunch of Brits were caught a few years back when they got lazy and stopped changing the plugs on phone chargers between France and England). And then there was the hard-to-believe wheeze of the Spanish theatre that sold VAT-exempt carrots for admittance to its performances together with a worthless piece of paper called a ticket. The only problem (apart from the Spanish tax garrotters catching up with them) was that hungry patrons couldn’t prove their right to re-entry to the auditorium after a toilet break during the intermission.

At the end of the day, VAT works. One of the few countries that does not seem to agree is the ‘biggest’ democracy (as opposed to the ‘biggest democracy’). A few years ago, at lunch at a conference in Berlin, a group of American experts were discussing ways of plugging the impossible US deficit, coming up with all sorts of supply-side ideas. Thinking that V.A.T was the sort of acronym (actually sayable, like M.A.D – Mutual Assured Destruction) that Americans would die for (especially when said with an English accent), I suggested that imposition of such a tax would surely solve all their problems. I was completely frozen out. V.A.T is a dirty acronym in the eyes of Uncle Sam. My luncheon partners looked like they wanted to drag me in front of Senator Joseph McCarthy’s Un-American Activities Committee. The irony, of course, is that while V.A.T undermines the ‘redistribution of income’ philosophy of most of the ’red’ nations (such as Britain and Europe) imposing it, the American belief in ‘equality of opportunity’ is completely at peace with its workings.

The Indians still have a long way to go. Their direct tax system leaves much to be desired – the witch-hunt of Vodafone to cover the seller’s capital gains in an offshore purchase a while back, and its treaty-defying Dividend Distribution Tax being but two examples of the rot.

As Rushdie put it in Midnight’s Children, ‘I admit it: above all things I fear absurdity.’ Thankfully, his beloved India is finally taking steps in the right direction.

Near-Death Of A Salesman

Every one a goer!

Every one a goer!

I  am prejudiced against salesmen. Shop salesmen. Company salesmen. Door-to-door salesmen. You name ’em, I’m prejudiced against ’em. I am not proud of the fact and sincerely apologise to any salesman who, attracted by the pictures or vulgar colours, has found his way inadvertently to this blog only to be insulted for his troubles.  My feelings are not entirely rational. A minor background in macroeconomics instructs me that consumer demand is critical to the future economic health of the world, that asceticism is a luxury only to be afforded by the lucky few, and that it would be an unmitigated disaster were the meek to inherit the earth.  A little, harmless porky from a zealous salesman in Europe can lead to a butterfly flapping its wings at someone pulled out of poverty in the Far East, or something like that.

I do not expect governments to share my prejudice, but events last month made me wonder. No fewer than 8 countries raised their VAT rates on January 1. The intention was noble – aiming to cut spending and raise taxes in order to reduce their deficits; VAT is an efficient weapon in the fiscal armoury, but the timing could not have been more inept. Allow me to explain by way of an example from the University of Life at Finchley.

Once upon a time in May 1984  there were Three Taxbreaks – Mummy Taxbreak, Daddy Taxbreak and Baby Taxbreak. They lived in a quaint maisonette that had been jerry-built 25 years earlier in the post-war building boom. Life was ideallic but for one solitary problem: rising damp. Mummy Taxbreak invited countless (probably two, but the passage of time plays havoc with one’s memory) workmen to try to fix the problem, but to no avail.

Then one evening, as the rain beat down on the porous front wall, there was a ring on the door-bell. Daddy Taxbreak opened the front door  to find a  young Cheshire Cat in a polyester shirt, polyester tie and polyester suit (the shoes were probably imitation-leather plastic) carrying a brief-case and grinning profusely at what had previously been  the closed door but was now Daddy Taxbreak’s face. Momentarily caught off guard by the relief that this was not yet another of those semi-literate missionaries flogging back copies of The Watchtower, Daddy Taxbreak acceded to the cat’s request to come in (it must be remembered that Daddy Taxbreak was 26 years old and had yet to learn the importance of keeping the drawbridge up at all times).

You can make a fortune out of anything these days

You can make a fortune out of anything these days

To cut a short story even shorter, it transpired that the Taxbreaks were not the only Rising Damp sufferers on the estate and the Cheshire Cat’s company was offering a revolutionary approach to the problem where, for less than £200 (an absolute fortune), they could insert little spheres of special material at strategic places in the wall which would absorb and expel the uninvited water. He opened his briefcase to reveal what looked like a Geiger counter (or what Daddy Taxbreak pictured a Geiger counter to look like) and removed a little rectangular electronic device with two sharp pins at one end. Before proceeding to prod the various walls in the main room (“More rising damp may be lurking undetected, sir”) he succeeded in pricking Daddy Taxbreak’s membrane of gullibility (Mummy Taxbreak would later claim that she was never convinced, and Daddy Taxbreak decided to believe her). “I must tell you, sir, that if you sign today, you will be able to avoid the VAT that is going to be imposed from June 1 on house improvements – this is a big saving.” Rising damp was replaced in Daddy Taxbreak’s mind by rising vomit – but he let him proceed anyway.

As he worked  his way around the room  driving his little pins into the wall, watched attentively by Baby Taxbreak, there was suddenly an almighty flash and the Cheshire Cat  was literally thrown backwards across the room against the opposite wall (there was also an almighty  bang, of course). If you are going to jerry-build a house, you might as well go the whole way and, it later became apparent, the main electricity cable had been inserted far too near the surface of the wall which now had an almighty hole in it.  As a result of this incident the Taxbreaks were subsequently able to have the entire maisonette redecorated thanks to an over-generous insurance company that insisted on paying the higher of the two estimates the Taxbreaks provided. What is more, it transpired that the entire problem with the rising damp was caused by a flower bed which the Taxbreaks paid twenty-five quid to have filled in and never caused a problem ever again.

Oh, I almost forgot the poor Cheshire Cat  (How could I?). He lived to darken more front doors. He was miraculously only slightly shaken and, eagerly accepting the offer of a drink by Daddy Taxbreak, was given a hot cup of tea. Seeing him politely off the premises, minus a sale and minus his little rectangular electronic device which was  now well cooked and residing in the kitchen bin, Daddy Taxbreak  pointed out that he was a trainee Chartered Accountant and the expansion of the VAT base on June 1, whilst affecting hot takeaway meals and home improvements, should not stretch to the service he was offering – but nice try and good luck with the next moron.

I assume, dear readers, that you do not need any further explanation regarding the VAT hikes in January, but for the benefit of any salesmen who, armed with an adequate dictionary, have made it this far, I will elaborate.

The French bought millions of these in December to beat the January VAT hike

The French bought millions of these in December to beat the January VAT hike

Since the 2008 crash, governments have had to deal with the potentially contradictory policy imperatives of deficit reduction (reducing government spending and increasing tax take) and stimulating consumer demand which fuels growth and, in turn, increases tax revenues. A great way to get people to spend is to inform them that , in two months time, whatever they are thinking of buying will be more expensive. Whatever they might not have ultimately  bought in two months time, they are likely to buy now and while they are in the mood or in the sights of a good salesman, are likely to buy things they never realised they didn’t need – thus further stimulating the economy. An announced VAT rise, clearly designed in itself to raise revenue, will do more long-term economic good in a depressed, non-inflationary economy if it leads consumers to buy now (one of the reasons VAT rises are generally announced well in advance). So what were Governments thinking when they announced VAT rises for the week after Christmas – the one period in the year when the western world never needs encouragement to spend? They should take a leaf out of Japan’s book. Shinzo Abe’s Government is upping the Japanese  rate in April. On the other hand, they don’t celebrate Christmas.

Tax that must not be named

Big Brother

Big Brother

Standing in the Great Hall of Hogwarts one day this summer in the company of my youngest son and half of the picture-popping population of Japan, I was the only muggle who, when asked by the Warner Brothers Studio Guide which House I would want the Sorting Hat to direct me to, did not reply Gryffindor. To my offspring’s  immense embarrassment, I went for Slytherin which produced by far the most interesting characters in the Harry Potter pantheon.

As Halloween loomed ominously over the foggy horizon last week, I had reason to rejoice over my unconventional choice of House, as an old colleague dropped by the office to drain my brain over a cup of steaming coffee. He just happens to be the kid brother of Lucius Malfoy, Lord Whatshisname’s trusted lieutenant. (If any parseltongue speakers happen to be passing by this blog on the way to spying on something more interesting, I wish to state categorically that my old colleague is an exceptionally nice guy whom it is always a pleasure to meet. Any relative of Lucius Malfoy is a friend of mine – really.)

If you fancy scaring someone this Halloween and you happen to be passing through Washington DC, creep up on a member of the House Ways and Means Committee and whisper “V.A.T.” in his ear.

Washington does not like VAT. In a city that breeds acronyms with pride, VAT is a dirty acronym.

Republicans and, to a lesser extent, Democrats  will – while frothing at the mouth – provide an excellent list of reasons not to impose a VAT in America: it hasn’t proven itself; the tax is regressive (clobbers poor more than rich); it will lead to less spending in the economy and hence recession; it will lead to inflation; it is not transparent; it will encourage Big Government. They have a point – the point at the top of their wizardy Dunce Hats.

Obama's Healthcare Halloween Costume

Obama’s Healthcare Halloween Costume

If these politicians would strain their heads for a moment to see beyond  the Atlantic Seaboard, they might notice that VAT has been successfully adopted in around 150 countries (It will surprise American politicians that there are more than 150 countries. They used to think there are only 4  – America, Canada, Russia and Abroad). The tax is, on the face of it, regressive (wealthy people spend less of their annual income on consumption)  but this is countered by the freedom to introduce negative income tax for lower-income groups (or at least raise the threshold for paying tax) as well as the fact that VAT is effectively a lump-sum tax on wealth – over a lifetime even the wealthy tend to spend a large chunk of their dosh and so their capital (which is otherwise free of tax) partially goes on VAT. Moreover, governments often exempt transactions considered basic living expenses (food, clothing, stay at the Kensington Hilton). While experience has shown that the imposition of VAT leads to a one time increase in prices which could have an effect on demand, as part of a government’s macroeconomic policy that can be offset by decreases in corporate and income tax rates which boost the economy. There is little evidence of inflation as a result of VAT and transparency can be guaranteed by insisting on the VAT amount being included on price tags (which some countries have actually outlawed in supermarkets and retail stores because it confuses the consumer – just like the abominal sales tax in the US). As regards the fear of Big Government, VAT is a relatively efficient tax, the rate of which can be adjusted at a stroke – but while during the inflationary 1970s major increases did occur, nowadays – in normal economic circumstances – increases tend to be incremental (a recent exception is Japan, where the tax has been historically exceptionally low).

The real reason that US politicians do not go for a federal VAT appears to be none-of-the-above. The American political system is too populist for its own good. Because of the Primaries system in US elections Members of Congress have their eyes permanently fixed on re-election (especially in the House of Representatives with two-year terms) so that the Whips have limited power to rein them in (they also have nothing to offer them by way of patronage since they cannot serve simultaneously in Congress and the Administration).

Not-So-Sweet Nutcracker

Not-So-Sweet Nutcracker

To understand the contrast with Britain: my favourite Whip story comes from 1979 when the Labour Party was reduced to ignominious opposition by the Thatcher juggernaut. Newly elected Jack Straw (much later Labour Foreign Secretary) was confronted by the fearsome Walter Harrison. Without saying a word, the legendary Whip grabbed Straw by his privates and squeezed hard (I shall refrain from the graphic details as my kids read this). Shocked and in pain, Straw managed to gasp: “What did I do?” The reply from the blunt Yorkshireman was quick in coming: “Nowt, but think what I would do to you if you ever crossed me”.

Overall, the Americans do not seem to have much of a choice in the long-term. Even if they get beyond the current recurring gridlock, the dream to slash corporate tax rates while slashing the deficit will surely not be achieved without a VAT. As opposed to Japan, the US still has the luxury of controlling the printing presses of the world’s reserve currency. The threat of that position being taken by the Euro seems to have subsided by default (literally). Whether the Yuan, too easily controlled by an authoritarian government, could take its place is doubtful. But the party surely cannot go on for ever.

US politicians would do well to come to terms with a federal consumption tax before the burgeoning deficit consumes them. Wishing you all a gruesome Halloween.

Birthday Bloody Birthday

Life begins at 55

Life begins at 55

One night a couple of weeks ago I met up with an old school chum and his wife visiting for the holidays. Over one of those multi-coloured salads that replaced steak and chips as the late-night staple round about the same time our hair went grey, he mentioned that, just before coming away, eighty friends had joined him for a birthday party “including a magician”. Ever the accountant, I quickly did the calculation in my head, remembering that he and I had spent seven years in the same class, and ventured: “55th birthday party? Aren’t you planning making it to 60?”

The world has gone mad with anniversaries.

When we were young, apart from all those balloon and trifle things when we were 5 or 6,  we were brought up to expect a 21st birthday party, a wedding, a silver wedding anniversary, a golden wedding anniversary (if we were lucky), a funeral and good-bye. Jewish boys would have the 21st swapped for a 13th unless they were Dustin Hoffman in the Graduate, in which case they would get both with a bit extra on the side.

As the April 15th tax filing deadline looms, Americans may be forgiven for marking a century of the Federal Income Tax. Back in 1913 that was no small achievement, requiring the 16th Amendment to the Constitution that had previously forbidden the imposition of  direct income taxes by the Federal Government.

I might also  escape a full-blown raspberry were I to mention that, had I not been handbagged into writing an unscheduled appreciation of Baroness Thatcher a few days ago,  this would have been my 75th post (forget the standing ovation).

But when the BBC reminded me on April Fools’ Day that exactly 40 years had passed since the introduction of VAT in the UK, numbers started to whizz round in my head.

25th, 50th, 75th, and 100th anniversaries make some sort of sense (I suppose) – but why on earth do we have to ‘celebrate’ 40 years of a necessary but reviled tax, a mid-decade birthday or, for that matter, all those obscure anniversaries that appear on the Google banner forcing you to google them to understand (“The 338th birthday of Wing Wong Wu”) ?

My hunch is that it is a combination of three things: man coming to grips with a secular world; 24/7 news looking for the vaguest connection to a story;  and any excuse for a good time.

They never had it so good

They never had it so good

Once upon a time, when God’s servants and their friends ruled much of this planet, the world was something like a Mongolian Transit Camp – an utterly miserable stopover between somewhere nobody remembered and a perfect eternal destination nobody had yet visited. You got hammered during your stay in the Transit Camp (unless you were one of God’s servants or their friends, in which case you did the hammering). Time had little meaning because all there was to hope for was eternity.

One day God’s servants and their friends were pushed into the corner of the Transit Camp and scientists told the inmates that there was nothing but the Transit Camp so they had better make the most of it. And the inmates turned the Mongolian Transit Camp into the Western World.

If all man has is the space and time in which he exists, it is natural that he should try to exploit his space to the utmost (the comforts of life) while sharpening his perception of time. We all anchor time according to our own experience. Thus, at 55 (yep. I am 4 weeks younger than the other guy) my memory stretches back more or less exactly 50 years. My conception of all points in history is a function of that half century. The introduction of VAT I actually remember by chance (I got an early 15th birthday present of a new guitar from Macari’s on Charing Cross Road on March 31 before they slammed on the 10% tax). Blimey, is it 40 years already? Tempus fugit.  And everything  before 1963 is pictured in black-and-white; I remember being totally disoriented when I first saw rare World War II footage in colour.

In the 21st century we are bombarded with news. Although there appears no limit to the extent to which a story, however insignificant,  can be masticated, ruminated, milked and churned  ad nauseam, editors are always on the look-out for anything (ANYTHING) newsworthy. Used to the constant talk here of the Iranian nuclear threat and Hezbollah rearmament, I was amused on a recent trip to England to turn on local radio and hear about a female pensioner who had stolen two plant pots from a local nursery. So with material like that, if you can find any excuse (ANY EXCUSE) to delve back into history and talk about something as utterly interesting as the introduction of value added tax, you will do it.

Any excuse

Any excuse

Increased leisure in the modern world ironically forces people who have rationally refuted any meaning in life, to look for the meaning of life. When people worked 15 hours a day 6 days a week they didn’t have much time for that sort of thing and, to the extent they did consider anything, outsourced it to the local priest or rabbi (once upon a time you didn’t hear much about imams and the like in the western world). If there is leisure and not much meaning you at least need a rational excuse for the leisure. Enter anniversaries. Doesn’t matter what, where, how. Anniversaries are the excuse. Let’s party.

I almost succeeded in escaping my 55th birthday a couple of days ago. I fielded several “Happy Birthdays”  gracefully (and gratefully)   at work and a few former employees even contacted me, which was especially gratifying. My son called from Australia and we chewed the fat. Then I arrived home to discover that his 19-year-old brother had gone out, bought the ingredients for a celebratory evening meal and, with a little advice from his mother , come home and cooked it ( fish – delicious).

OK. I’m hooked. Whose birthday is next?

Tax Wars: The Authorities Strike Back

Gagwriter extraordinaire

Gagwriter extraordinaire

Suicide is not a laughing matter. Last week marked fifty years since American poet, Sylvia Plath, took her own life, and the benefit-of-hindsight news stories on the subject were uniformly depressing. It is interesting, therefore, that one of the most successful comedy series in television history opened each week with a song about suicide. Thirty years ago this month  Alan Alda climbed into a helicopter, circled over an improvised “Good-bye” message set in the Korean soil, and, together with M*A*S*H,  flew into the sunset.

It transpires that, after seeing the 1970 film,  it was “Suicide is painless” with such cheerful lines as: ” The game of life is hard to play, I’m gonna lose it anyway”,  that inspired Larry Gelbart to script and produce a TV series. Played in a minor key, the melancholy tune exposed the funny, but almost tasteless lyrics, as pure irony – the song was anti-war. Screened when the Vietnam war was at its most painful to the American people (not to mention, the collaterally damaged residents of Cambodia and Laos), Gelbart fought with CBS over the infantile canned laughter that was shoe-horned into every pathetically unfunny US comedy series of the time – noting that there was no canned laughter in the real Korean War. He ultimately achieved a compromise whereby he was allowed to omit the puerile cackling from operating theatre scenes (MASH stood for Mobile Army Surgical Hospital). It is to Gelbart’s  credit that he managed, like his subsequent triumph with Dustin Hoffman’s cross-dressing “Tootsie”, to avoid turning the whole thing into a sick (sic)  joke.

We tax planners, of sedentary build and heavier step, are sometimes less nimble with our words and actions. Tax planning can sometimes be a sick joke, warranting a single finger salute down one’s own throat. Take Spain, for example (sometimes, I wish they would).

If they consider this fair, no wonder they don't pay tax

If they consider this fair, no wonder they don’t pay tax

When the Spanish Government hiked the VAT rate to 21% last September as part of the austerity programme resulting from the Euro crisis, a theatre in a small town in Catalonia found a way round the increase. Staple foods were still only liable to 4% VAT, so the theatre owner received permission from the town council to set up a vegetable stall outside the box office, where theatregoers could purchase a carrot for €15 – €17 inclusive of 4% VAT (the difference arising, presumably, from variances in size of the carrot). Free with the carrot came a theatre ticket. It is understood that, prior to the commencement of performances, patrons were asked – in addition to turning off their mobile phones – not to munch their carrots (which, apart from the noise, presumably might be needed for re-admission if they popped out in the interval). Had I been the Spanish authorities, I would have garotted the lot of them and fed them to the bulls.

This kind of shtick gives tax planning a bad name. It is the equivalent of throwing a custard pie in the face of the government to the accompaniment of pathetic (canned) laughter or, to be more on topic, spitting out a liquidised carrot giving the “hilarious”  impression of spontaneous vomiting. Yuck!

It appears, strangely,  that there is nothing illegal in what the Catalonian Jesters did. On the other hand this kind of tax avoidance is definitely way beyond the parameters of what members of  the Spanish Cortes had in mind when they conjured up the legislation.

There are currently moves around the globe to curb excessive tax avoidance, in the form of General Anti Avoidance Rules (universally known by the acronym GAAR, which onomatopoecially  sounds pretty much like someone with a single finger stuck down his throat).

Britain’s new rules should enter into force in the next few months while India, to the relief of foreign investors still digesting the Vodafone case, has delayed implementation until 2016. Australia and New Zealand have had rules for donkey’s years while Canada came on board in the 1980s and China a couple of years ago. The US has something  slightly different because the US always has something slightly different.

Occasionally, committees have been known to do a good job

Occasionally, committees have been known to do a good job

Although, in principle, the GAAR is a pretty slam dunk concept, it is in practice highly controversial. On the one hand governments need to be able to curb the most blatantly aggressive tax planning; on the other, investors and businessmen crave certainty while a GAAR instills fear (often justified) that virtually everything is up for grabs. Methods to try and achieve maximum fairness include having a regular tax authority committee, rather than individual tax officers, to decide on GAAR cases accompanied by very narrowly defined terms for applying the GAAR. Ultimately, the GAAR is, by definition, subjective and there cannot be any perfect answer. It depends from which angle you look at it, and both tax authorities and tax advisers often contort themselves into the strangest of poses to obtain the weirdest of views.

With all the drama of the tax wars (dear reader, allow me my fantasies) it is probably high time  for a TV spin-off of another major film. How about the mega-successful, Les Miserables ? The tax profession would be very happy with the current cast – Hugh Jackman as the morally superior tax planner Jean Valjean making the world a better place and Russell Crowe as the stickler-for-the-letter-of-the-law tax enforcer Javert. The world’s tax authorities might, however, have a problem with this. They are more likely to go for the late Heath Ledger, with a bucket of make-up thrown over his head and an entire red lipstick smeared over his lips, as a psychotic Valjean and Christian Bale as the black-caped saviour of the universe. Had Larry Gelbart still been around to take on the project, he would have been challenged by “One day more”. Written in a major key, it includes the sickest of Javert’s lines  “I will join these little schoolboys, they will wet themselves with blood”. On second thoughts, maybe he would have just turned up the canned laughter and comforted himself with the fact that all the characters were French.

Far East in deep water

Where’s the motto?

If the motto of the United States is “In God we trust”, the motto of Australia should be “No worries”. We northern hemisphere folk who, unlike our antipodean friends, have summer in the summer and winter in the winter believe that, come Christmas,  an Aussie’s problems boil down to finding room for another shrimp on the barbie while his guests luxuriate in the pool swigging cans of XXXX (a beer for illiterates, pronounced 4X).

Australian defences are ready

I was, therefore, shocked to the depths of my didgeridoo when, in the middle of last winter (real winter, that is) I was informed by a representative of one of the Australian State Governments that  her government invests an inordinate amount in defence. My first impulse was to ask whether they were expecting an airborne strike by New Zealand sheep, the idea being so ridiculous. When I was told that the concern was Chinese imperialism, I was still gobsmacked – China has never struck me as that way inclined. It occurred to me that they were probably just scaremongering  so that when Julia Gillard, the prime minister, travels abroad she has something more serious to talk about than Australia.

Well, as Harold Wilson once said, “A week is a long time in politics” and the last couple of months have shown that those Bruces and Sheilas are not as dangerously brainburned as they insist on making us think they are.

The South China Sea has been witness to a series of petty maritime incidents between various nations that are frankly reminiscent of what was happening in our northern neck of the woods exactly one hundred years ago.  With spats over lumps of rock with such unlikely names as Scarborough Shoal, Spratly and Paracel there have been faceoffs between China and Taiwan, China and Philipines, China and Vietnam, South Korea and Japan (the Chinese navy must have been on vacation that week) and, most recently, China and Japan. It seems that all the minnows have been tickling the dragon under its armpits (I don’t know whether dragons have armpits) to test how far they can go before being incinerated. Meanwhile, the Americans, bound to keep the peace in the region, follow developments closely and frighten the hell out of the rest of us with the threat of going in and really warming up the party. The overriding concern, of course,  is Chinese expansionism, but if World War III does break out in the Australian outback’s back-yard, the conflict’s roots will likely be traceable to a VAT hike. Read on.

Beware!

Earlier this month the Japanese government purchased two small islands in a private transaction (I can picture it now – “Have you met our new neighbours ? Delightful people . Very quiet. They are called Japan.”). This really narked the Chinese who think they own them and would have liked to move in themselves. There have been all sorts of demonstrations in China and one newspaper even suggested skipping diplomatic options and going straight for the nukes. Most surprising of all, Xi Jinping, the next leader of China, having forgotten to meet Hillary Clinton and various other fat cats over the previous two weeks,  came out of hibernation to berate his neighbours. The question everyone is asking is: “Why did the Japanese do it?”. The  question everyone should be asking is Why did Mr Yoshihiko Noda, the highly pragmatic Japanese leader, do it?”.

Rewind a couple of months. Faced with the impossible arithmetic of covering pension costs of an increasingly aging population (the Japanese are skilled at not dying), the effects of an earthquake and nuclear accident, and fearing a Europe-like crisis  Mr Noda announced that consumption tax (VAT to you and me) would be raised from 5% to 8% in April 2014 and 10% in October 2015. The Liberal Democratic (which means conservative) opposition could not object to this austere measure but, following defections from the governing Democratic Party, extracted a promise of early elections from Noda as the price for passing the legislation last month.  Noda, blatantly doing what he genuinely felt was necessary for Japan’s future, effectively committed Hara-Kiri and is expected to lose the election convincingly.

As this story was unfolding, the maverick Governor of Tokyo  – reputed to be something of a loose cannon – started moves for his administration to buy the abovementioned islands in an act of, what many have interpreted as nationalistic provocation. Hence, Noda stepped in to frustrate that gentleman’s plans and, ultimately, to try and defuse the situation with the Chinese by ensuring nobody actually set foot on the islands. Despite acute early reactions, there are indications that tensions are starting to wane.

It would be tempting to wrap up with “And they all (probably) lived happily ever after”. Had Noda not tampered with the consumption tax, they might have done. But he is now looking down the barrel of an election shotgun and is probably about to be blown away. And there’s the rub. One of the leading candidates in this week’s contest for Liberal Democratic Party leader, who would almost certainly become prime minister after the General Election, is Nobuteru Ishihara. His father, Shintaro Ishihara is a famous author who has lately made a name for himself as none other than…..the maverick Governor of Tokyo. Like father, like son? Interesting times. I am thinking of inviting my worried Australian friends to join us in the Middle East – even if we are a bit short on shrimps and XXXX beer, not to mention Christmas.

Of mice and men

It is lucky the President didn’t ask himself what Dean Martin would have done

When challenged by an aide as to why he had changed his mind about invading the tiny island nation of Grenada, Ronald Reagan is reported to have replied “I sat back and thought: What would John Wayne have done?”

That was nearly 30 years ago and the protracted  7 week campaign was a huge military success for the world’s No. 1 military power dwarfing Britain’s earlier victorious 10 week recapture of a bunch of rock formations from the Argentinians.

The way irritating  little  tax haven islands have been  behaving lately it might be time for a refresher course in “Who’s Sheriff  round these parts?”

The Cayman Islands, as most people reading this blog will know, does not have much of a history of Direct Tax. In fact, it does not have ANY history of Direct Tax. As such it is among the OECD’s ultimate nightmare nations because, whatever is done to tackle Harmful Tax Competition, it is difficult to hammer a country that says it will not tax anyone.

Foreign workers arriving in Cayman Islands

Therefore, it was something of a surprise when Caymanian premier McKeeva Bush announced last month that his government would be imposing a tax on salaries known as a community enhancement fee. Surprise turned to fury when it turned out that only foreign workers would be required to pay the tax. What made matters worse was that the tax was cynically devised to encourage employers to replace a current compulsory pension contribution with a contribution towards the tax which would enable the Cayman Islands to compete with the Bermudian employment tax system while netting more tax. The lame excuse given was that they were under pressure from the UK (Cayman Islands is a UK whatchamacallit) to balance the budget – and this avoided the need for “painful” budget cuts. To cut a short story even shorter, last week the proposal was cancelled . What amazes me is the absolute cheek of it all. Here is a nation, whose main industry is the denial of tax to others – with a population of  55,000 there are 9,000 mutual funds, 260 banks and 80,000 companies forcing other countries to either borrow or cut public spending – that thought it could tax with impunity and still only inflict the pain on foreigners.

What happened the last time the British left

However, Caymanian chutzpah pales when compared to the Channel Islands. Famous for inventing the offshore industry as well as two breeds of dairy cow, Jersey and Guernsey government representatives have  been bleating rather than lowing  in recent months. In an interview with the Guardian newspaper, the Assistant Chief Minister and former Bailiff of Jersey even went as far as to threaten independence from the UK (how will the UK survive?) although he was quick to stress, in good old-time conservative banking fashion, that this would be “quite a long way down the road”. Given that the islands are the last remnant of the Duchy of Normandy, the rest having been lost to the French by King John (great name, lousy monarch)  800 years ago, “quite a long way down the road” could be any time not in the next 500 years. .

 Idle threats apart, what was the gripe? At the end of last year the British closed down an expensive VAT avoidance scheme that was causing extreme distortions in the distribution of goods. The EU  exempts low value products from VAT on import from non-EU countries. Although the Channel Islands are  UK Crown Dependencies they have their own governments and are not part of the EU. As a result British and other mail order companies were exporting their low value goods to Channel Islands subsidiaries who then sold them to UK and other customers without VAT. This gave a clear pricing advantage over local suppliers (the customers are invariably private individuals who cannot reclaim the VAT). Worse, they were also splitting much larger deliveries into small components to circumvent the VAT requirement.

More recently the Times newspaper uncovered a widespread direct tax avoidance scheme. UK resident wealthy individuals would be employed by a Jersey entity called a K2 which would charge for their services. Rather than paying them a large salary or dividend, the Jersey company would pay a small salary to be assessed to tax in the UK and give them a tax-free loan resulting in tax paid of around 1%. For some reason, British protests at this clear act of unfair play together with closing the VAT loophole got the government so riled that, despite being a camembert cheese’s throw from the Normandy Coast and the hands of any potential Continental European aggressor, they would like to consider going it alone (one day).

Guernsey was marginally less annoying when told that, while their zero-10 corporate tax system (everybody pays zero tax except financial institutions and local real estate businesses) was not considered Harmful Tax Competition, they would have to cease charging Guernsey resident shareholders tax on deemed dividends and await the real thing. This proved a minor blow for the Bailiwick’s budget balancing but the Treasury Minister accepted it; on the other hand he lamented that  external forces had forced their hand. What did he really expect?

“Mr Gorbachev, pour me another drink!”

The Channel Islands have Bailiffs rather than Sheriffs. Who cares? If they sent in John Wayne he would, as always, just play himself and sort them out good and proper. After all, it was thanks to his philosophy that Grenada became the law-abiding paradise it is today and that the Soviet Union fell apart.

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.

Rocket tax

Where is the Higgs Boson when you need it?

At the dawn of my career when I would flit from audit client to audit client, red and green pens at the ready, every accounting department would resonate at least once each day to the gravelly voice of Bonnie Tyler singing  “Every now and then I fall apart”.

Well, last week scientists finally proved (almost) that she was talking rubbish and people and things and the universe don’t fall apart. This is  because of something called the Higgs Boson. What really got up my nose were  all those goofy scientists, whose parents were too tight to pay for orthodontic treatment, coming down off Mount Olympus to explain to us mere mortals the significance of the discovery of the “God Particle” in a multitude of idiots guides, guides for dummies, table-tennis balls on trays of sugar and impossible cartoons.

Who, in heaven’s name, do these physicists think they are? It occurred to me that I should return the compliment, so if any scientists read this blog – this post is meant for you.

The cost to the American taxpayer was $170 billion.

Everybody knows that taxation is rocket science. It is full of equations and graphs that mean nothing to the scientist in the street but make people with doctorates in taxation feel that they have not wasted their lives.

The European Union is currently facing a major crisis among the countries that make up the Eurozone. As I have pointed out  in previous posts, the only way the Euro has a future is if the countries achieve fiscal unity, a significant level of political unity and there is cultural convergence. Following negotiations last week, the first two are looking increasingly likely in the medium term – but nobody is talking about the last. This is complex stuff and invites a plethora of  courses in Euro for Dummies. To try and make it simple, I will use the analogy of the Higgs Boson to explain.

It is no coincidence that the countries causing Euro problems are predominantly in Southern Europe (Greece, Spain, Italy, Portugal, Cyprus – Ireland is a special case). It is a fact of life that the weather around the Mediterranean is a lot more clement than in the North. There is incontrovertible empirical evidence to show that when the weather is good and you have a Mediterranean coast down the road, there is a desire to spend less hours in the office. The incontrovertible empirical evidence stems from my experience of having spent half of my life so far (hopefully only a half-life) in the smog of London and the other half with a view of the Mediterranean from my office window.

No escape – 24/7

As mentioned in my last post there is a widespread belief among tax professionals in “Tax Neutrality” – that tax should not affect the allocation of economic resources. One of the many divergences from this rule is the tax treatment of leisure. When people’s work income is taxed their desire to work diminishes and their desire for leisure increases. Ever since Corlett and Hague (1953) it has been recognized that, to rectify this disequilibrium, leisure should be taxed. However, since governments cannot tax something intangible, they should tax leisure “complements” while, possibly, offering tax relief for tax substitutes.

Getting difficult? Let’s shoot over to the Higgs Boson. Scientists have known for eons that atoms are made up of electrons and a nucleus. The nucleus is made up of protons and neutrons which, themselves are made up of quarks and lots of other bits and pieces. But it was not clear what gave all these particles mass – in other words what kept everything together. Peter Higgs (and others) developed a theory in 1964 that the missing ingredient was an invisible particle of force which came to be called the Higgs Boson. As particles went flying madly around they collided with the Higgs Field (made up of Higgs Bosons) which permeates the whole universe. Depending on the nature of the particles these were slowed down at various rates and success by the Higgs Bosons. Some particles, such as photons, are so aerodynamic, that they shoot through the Higgs field at the speed of light. The existence of the Higgs Boson was (almost) proven this week by crashing protons head-on in the 27km Large Hadron Collider spanning the Swiss-French border near Geneva.

Southern European compromise?

Now let’s imagine that the citizens of the Eurozone are particles and that tax is the Higgs Field. The workers of Northern Europe are slowed down by taxation, making them more interested in leisure but it takes such effort and money to create meaningful leisure in most of the miserable months of the year that they are not slowed down significantly. The workers of  the Mediterranean Basin, on the other hand, are slowed down totally by the tax because their leisure in outdoor activities such as the beach and  barbeques at the back of the house, is cheap. 

It follows, therefore, that for the Eurozone to survive – through, among other things, increased productivity in Southern Europe – leisure needs to be taxed. The way to achieve that is by increasing consumption taxes (VAT) and other charges on the products that complement cheap leisure. Examples would be charging for using beaches, banning outdoor cooking on weekdays, increased VAT on swimsuits (wouldn’t help much in parts of Greece) as well as deodorant (which would encourage people to stay in air-conditioned offices).

Sounds pretty horrible. Agreed. The alternative would be for the Southern European populations to behave responsibly. The prognosis is not good. It would require a quantum leap in behavioural patterns. In the meantime the Eurozone crisis is a case of an irresistible force (Germany) meeting an immovable object (Southern Europe).

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