Let’s talk about tax.
Or more particularly let’s talk about the taxation of US citizens living abroad.
I just love the Royal Family. Yeah I know it goes against any and every possible progressive and egalitarian ideal I hold but phish.
I grew up reading my grandmother’s Women’s Weekly and their coverage of Princess Anne’s (first) wedding and the Silver Jubilee. Over time this progressed to Diana, Fergie and their babies. And the Womens Weekly became the Hello magazine. Complete with Princess Beatrice aged two at a society wedding. So good.
And season two of The Crown has landed. Brilliant. I mean seriously- what about Philip?
Of course season one was dominated by the spectre of the abdication of a King who wanted to marry a divorced American woman. As well as the sister of the Queen who wanted to marry a divorced man.
So it was with every sense of delighted irony that I watched the recent engagement of Prince Harry to a divorced older mixed race American woman. Whose father might be catholic. ROFLMAO.
And my delight became complete when the Washington Post pointed out Meghan and Harry’s children will be subject to FATCA and US residence taxation. Oh and I have been meaning to write about the joys of US citizen taxation since like forever. So finally here was my angle.
The British Royal family – the gift that keeps on giving.
First key thing is that all people born in the United States or born to at least one US parent – like Harry’s children will be – are US citizens. And at this point such people who don’t live in America can get a little over excited. I can work in America woohoo. No green card or resident alien stuff for me! Transiting through LAX will be a breeze.
All true. But much like the British Royal Family – US citizenship is also the gift that keeps on giving.
Now dear readers we have covered tax residence of individuals before. The tests that determine whether a country can tax on the foreign income of its inhabitants. And most countries have some version of the being here or owning stuff rule to work out whether someone is tax resident.
But thanks to American exceptionalism they go one step further. The US applies residence taxation to its citizens even the ones who don’t live there. So with foreign income and US citizens it is now possible to have the country of the source of the income, the country of ‘main’ residence and the US in the mix. So for Harry’s kids: with that Bermuda dosh: there could be Bermuda; United Kingdom and the United States all with their hand out. Just as well Bermuda not big on taxation. Such a relief. That is if Hazza pays tax in the first place.
Now for lesser New Zealand mortals who might be born in the US or have a Meghan Markle equivalent mum or dad: the US/NZ tax treaty is kinda important. And if they have income from any other country that country’s US treaty will also be your friend.
Because in all those treaties is a nifty little clause called Relief of Double Taxation. Aka such a relief – no double taxation. So let’s look a a situation where a New Zealand tax resident with a US born mum – NZUSM – earns $100 Australian interest income. Australia will deduct 10% tax or $10. New Zealand will also tax that income and another $23 ($33-$10) tax will be paid in New Zealand.
Then – because who doesn’t love a party – so will the United States. Giving an Australian tax credit of $10 and a New Zealand tax credit of $23. Depending on the US tax rate for the NZUSM – they will have to pay more tax; pay no more tax; or get surplus credits to carry forward.
Now for something like interest or any other income source New Zealand taxes; this is just annoying. Maybe a bit more tax to pay but not the end of the world.
The full horror comes when NZUSM has types of income that the US taxes but NZ doesn’t. You know like capital gains? Taxable in the US. And the horror becomes squared when NZUSM realises that the US uses its – not NZ’s – tax rules and classifications to calculate the income. Who would have thought?
So that look through company or loss attributing qualifying company where income has been taxed in hands of shareholders – treated as company the US – maybe not so clever after all. Coz what about a LTC loss that was offset against the taxable income of NZUSM – coz it is all like the same economic owner? US – no loss offset allowed – full tax now due. In the US the LTC is discrete NZ company. Nothing to do with NZUSM.
And then of course there is FATCA. For like ever the US has a requirement that its foreign based citizens report their balances with foreign banks. Now quelle surprise – compliance wasn’t great. So the US then said they would collect the information from the foreign banks directly and if they didn’t comply they’d impose a 30% tax on fund flows from the US. Did concentrate the mind somewhat.
Now the US is using this information to enforce compliance. And the NZUSMs of the world are not best pleased. Finding out there was a dark side – albeit one pretty well known – to the whole I can work in the US thing. Unsurprisingly there is a wave of people seeking to renounce their citizenship. Alg except the tax thing goes on for ten years after such renunciation. And such renunciation can’t be done by parents for their children.
So while Harry may have finally found his bride; he has also found the US tax system. What could possibly go wrong?
Let’s talk about tax.
Or more particularly let’s talk about the tax rules for deregistering charities.
It has been a big intellectual week for your correspondent. Tuesday night White Man Behind a Desk. No tax. An interesting riff on immigration that Michael Reddell clearly wasn’t the tech checker for. Wednesday night Aphra Green Harkness Fellow on US criminal justice reform coz States just ran out of money. I tried to run an argument that this was the good side of low taxes. Didn’t resonate – go figure. And Wednesday morning – Roger Douglas on turning taxes into savings coz #taxesaregross.
And it was on the lovely Roger I planning to write but on Friday was the Greens on how there were bugg@r all foreign trusts reregistering. So I thought I’d write about that and the genius decision to require disclosure rather than taxation.
And as if that wasn’t enough. Saturday morning the latest Matt Nippert on a US and charities thing. An elderly couple with no heirs wanting to transfer wealth to a charitable institution – awh lovely. So nice they chose NZ. But also Panama, low distributions and references to the IRS. Ok. Initial reaction was it looks like FATCA avoidance coz NZ charities are outside its scope of reporting to IRS. Really must get on to my ‘US citizenship is not a good thing for tax’ post. It has been in the can for longer than this blog has been running. So embarrassed.
But one thing really caught my eye. The charities had voluntarily deregistered. Mmm interesting.
Your correspondent now moves a tiny bit in the Charities NGO sector. And from time to time I hear ‘should we stay a charity? Coz need to be careful over advocacy and ActionStation isn’t a charity and it is alg for them.’
To which I try to reply in my best talking to Ministers language: ‘ That’s one option. It would mean handing over a third of your reserves in taxes or all of your reserves to another registered charity. But totes – if that is what you want.’
Strangely the conversation doesn’t continue.
Coz the law changed in 2014 to stop the rort of charities getting lots of lovely tax subsidised donations, not distributing; deregistering and then keeping all that lovely taxpayer dosh for themselves. Go Hon Todd!
Now on the face of it this should apply to our friends here very soon. Section HR 12 applies a year after deregistration and turns the reserves – less wot go to another charity – into taxable income.
Except there doesn’t seem to be anything explicit that makes it New Zealand source income. Possibly personal property or maybe indirectly sourced from New Zealand. But the source rules are kind of old school and want to bite on real stuff not deemed income. No matter how worthy of New Zealand source taxing rights it should be.
And of course none of this matters dear readers if the entity is New Zealand resident. Coz everything gets taxed! And as the trustees are a New Zealand company – high chance it will be. So alg.
Coz if the dosh in the charity all came completely from non-residents – the trust rules make it a foreign trust. And foreign source income aka income wot doesn’t have a New Zealand source is not taxed. So initial view – unless the source rules can bite on this deemed income or the trust isn’t a foreign one – there will be no wash up for our friends here.
Now on one level that is cool. The final tax was all about clawing back the tax benefits given on the initial donations and the charitable tax exemption on income. Here it would have been tax exempt anyway. So alg.
The other argument is that these guys intentionally registered as a New Zealand charity. Got all the good stuff like potentially non- disclosure to IRS as well as being to say they are a legit NZ charity. But now don’t get the bad stuff.
And NZ gets the bad name but not the income. What does that sound like? Oh yes the NZ Foreign Trust rules.
So glad that – according to the Greens – is coming to an end. Shame it had to be such a resource intensive way of doing it.
Let’s talk about tax.
Or more particularly let’s talk about the deadweight costs of taxation.
For those of you who have liked this blog’s Facebook page you will know that your correspondent was recently a little over excited at getting a credit for tech checking White Man Behind a Desk‘s video on Tax Avoidance.
For those who have yet to watch it. Do it now! Like immediately. The rest of this post can wait.
There are a number of videos in their stable including indigenous rights; prisons and now Tax. My world is complete.
Particular favourite is the one on Social Bonds. ‘That’s friendly Pierce Brosnan and friendly Daniel Craig’. Again its like they made it specially for me. It has tax and prisons. Including a brilliant discussion of contracting out and Serco’s role. Who are now apparently also bidding for: ‘the nighttime; the colour Magenta; and the feeling of hope.’
If I could just like teach Robbie some more tax – he could so take over this blog.
Anyway no more spoilers – go and watch this one too. Please come back though. You can like us both. Wellington peeps WMBAD is live at Circa. Go and see him!
Now in Social Bonds is a quite inspired discussion of tax economics – aka taxes are gross. And also a pretty good imitation of tax economists. Robbie – if you are reading this change ‘incentives’ to ‘distortions’ and you will have totally nailed it.
For the rest of you as a bit of a public service I thought I might unpack the ‘nya, you know ahh, mnew, gross’ discussion at 1 minute 30. Coz in that Robbie is talking about the deadweight cost of taxation.
Now we all know about the compliance cost aspect of taxation. And should we ever doze off on that one the Business lobby groups will be more than happy to remind us. And we all also know about the administrative costs of taxation – aka the great public service that is Inland Revenue. But the cost of taxation through behavioural changes is often hidden or not acknowledged.
And these behavioural changes are called deadweight losses or excess burden or efficiency losses. They relate to the activity or production or purchase that won’t happen simply because there is a tax on it. The other costs – compliance and administration – are still real ones but in these diagrams they are assumed away to explicitly show the economic costs.
This is to be contrasted with the loss of income or wealth that has simply been transferred to the government in the form of taxation. In our diagram the deadweight cost is in red and the tax collected in blue. Interesting colours politically. Possibly an American diagram.
Now the degree to which this happens is a function of the ‘elasticity’ of whomever or whatever is subject to the tax. Aka the slope of the demand or supply curve.
And the textbook example of a product that is highly inelastic is insulin for diabetics. The demand for it will occur irrespective of its price. Taxing it will be a one for one transfer from the diabetic to the consolidated fund. This is the theory. And as the mother of a Type 1 diabetic can confirm it is also totes the practice. In this case the demand curve will be completely vertical meaning no deadweight cost. Woohoo or total tax grab – up to you which one.
All blue now no nasty red.
Income tax is much harder. I do know in the early 2000s when I returned to work and still had young children, the 39% tax rate actually made my decision to cut my hours easier.
And Treasury looked at this for the natural experiment that was the 39% tax rate. They found for wage income the elasticity was 0.414 – so more elastic than insulin but less than cigarettes. And for non-wage income it was 0.909. Although with non-wage income the genius decision not to lift the trust rate at the same time means it could be recharacterisation of the income rather than no longer earning it.
And yeah I know I have mixed up demand and supply in the chat above but the guts is all the same. More inelastic the whatever is – if you impose a tax on it the lesser the behavioral change and the lower the deadweight cost.
Now the decision to talk about all this stuff dear readers isn’t just a mind w@nk on my part. Last week as you may remember the lovely Hon Steven announced that his benevolent government was planning to cut taxes through the increase in thresholds. Well only if you like vote them back in. Coz its not like the red team will give it to you even if the green team voted for it …? Too hard for me. Think I’ll stick to tax.
So with $2 billion a year to spend – what are the efficiency gains/reduction in deadweight losses? Turning to the – focus group named – line item Consequential Adjustments. Page 26. Nothing. There is a discussion of an increase in consumption and higher business profits coz people get more money to spend. But no actual mention of any increase to labour supply as a result.
But looking at the RIS though page 28 – there is expected to be a 0.28% increase in labour supply aka reduction in deadweight cost from the package chosen.
Yep. 0.28%. Aka 0.0028. Not quite sure my aging focal length can pick up something so small.
But then that makes sense. The deadweight loss thing operates on the marginal rate and there wasn’t much of a change in all of this.
Now let’s all take a moment to think about what they could have done. Smooth out the tax and transfer interface. Here the effective marginal tax rates are pretty nasty.
And with $2 billion a year to spend it wouldn’t have been too hard to have created quite meaningful efficiency gains from focussing on those.
Then that really would have been a budget for low and middle income families.
Let’s talk about tax. Yes dear readers – tax. No prison reform no yoga stuff. Just nice emotionally simple tax.
Or more particularly let’s talk about the recent Australian Budget announcement of a levy on banks aka the Great Australian Bank Robbery.
Your correspondent has now completed her yoga teacher training and so is available for weddings, funerals and bar/bat mischvahs. Highlights of the course included injuring herself while dancing and getting zero on the first attempt on the final exam.
It’s not like I haven’t failed things before but when the question was – reminiscent of the Peter Cook coal miners sketch – ‘who am I?‘ to fail – mmm – more than a little surreal. Now even the first time thought I had answered in a sufficiently right brained way – lots of introspective emotion involving personal power and connection with others – aahhh no.
But your correspondent is a resilient adaptive individual – even before the course – so regrouped with – ‘complete‘.
I couldn’t make this up. Subsequently found other correct answers included: me; enough – and my particular favourite – light. Ok right. Thanks for sharing.
And it all really did make me crave balance. Which in my world after eight full days on yoga is the left-brained world of tax. I had planned to write about the Australian transfer pricing case Chevron but this week has been the Australian Budget with a big new tax on their banks. And as I have had a few questions on this and I am trying to be more topical – here we go:
Now the bank tax thing seems to be part of a package of the Australian government responding to the Australian banks bad – but probs more likely monopolistic – behaviour. Also potentially a political response to appointing a popular Labour Premier – and good god a woman – to be head of the Bankers Association. And my word the banks must have been bad as they only found out about it on Budget Day and it starts on 1 July without – as far as I can see – any grandfathering.
Wow. Just wow.
So what is it?
It is a levy on big banks liabilities that aren’t:
- customer deposits or
- (tier 1) equity that doesn’t generate a tax deduction.
It targets commercial bonds, hybrid instruments (tier 2 capital) and other instruments that smaller banks can’t access coz they are small. And as it will form part of the cost of this borrowing- under normal tax principles – the levy would be tax deductible. But even allowing for this tax deduction it is supposed to raise AUD 6.2 billion over four years. So not chump change.
What is its effect?
Now there can be no argument that the levy will effectively make such instruments more expensive to use. And here the public arguments get really sophisticated:
- Malcolm Turnbull says that ‘other countries have them’ and it would be ‘unwise’ for banks to pass it on to borrowers; and
- the Treasurer Scott Morrison (ScoMo) is telling banks to ‘cry me a river’ when they have expressed a degree of displeasure.
Awesome. Thanks for playing.
Now while this is predicted to raise revenue; it is by no means clear that this is its primary objective or even if it will occur. The reason being it only applies to big banks and to certain types of liabilities. To me this looks like a form of corrective tax like cigarette excise rather than a revenue raiser like an income or consumption tax like GST.
And much like a tax on cigarettes; pollution or congestion; this tax is 100% avoidable – legitimate tax avoidance even – by funding lending with an untaxed option like customer deposits. In theory anyway. It is likely that banks will have maxxed out how much they can borrow from the public at existing interest rates.
But with this extra tax; the relativities will change. Meaning there is now scope to pay more for the untaxed deposits but less than the tax if Banks want to maintain the same level of lending. Bank costs will still go up but through marginally higher deposit rates incentivised through the tax – rather than the tax itself.
In this scenario the Australian government still gets the costs of the higher interest deduction but not the revenue. But Australian savers win.
As the big banks are the dominant players in the market – this increase in interest rates for depositors will also impact the smaller banks as they will need to pay the higher rates to continue to attract depositors too. So no actual competitive pressure from the small banks and possibly less actual tax. Genius.
An alternative equally revenue enhancing scenario is that banks wind down assets – lending – and become smaller. Less lending but higher cost of borrowing if demand stays the same.
Who bears the cost?
As they do in New Zealand anytime extra taxes are mooted; the Australian banks are arguing that these extra costs will be borne by borrowers. Now in a fully competitive market without barriers to entry the more price dependent – or elastic – the demand for loans is the more it will fall on the shareholders. But lending overall will fall with the imposition of a tax which in turn will have housing market impacts if fewer people can get a mortgage.
With barriers to entry – like hypothetically say banking regulation – they are already pricing to maximise their profit so I would be inclined to say it will also hit shareholders. And the fall in price of banking shares would indicate that is what shareholders think too.
Except that if deposit rates go up instead; the cost structure of the entire banking industry will go up. And if no tax is actually being paid but the cost is being transferred through higher deposit rates then the banking industry will have political cover to pass the cost on to borrowers.
Now if this schmoozle is all about the banks paying more tax then either a higher company tax rate on big banks or increasing the requirements for non- interest bearing capital would have been far simpler. While the former is pretty transparent that it is a blatant tax grab from the banks; the latter less so. They both have the advantage though of ensuring tax can’t be opted out of as well as keeping the competitive pressure from the smaller banks.
But both would form part of the banks cost structure and so – depending on the pressure from the small banks and how elastic demand is – be passed on in some form to borrowers. However if the government really wanted only the shareholders to pay then a one- off windfall tax would be the way to do it.
Whether or not the banks – and their shareholders – should actually be treated like this is another story. But Cry me a river ScoMo: at least be transparent and do it properly!
It goes without saying that this is truly cr@p process. All the detail seems to be in ScoMo’s press statement. Although – legislation by press statement – is an unfortunate feature of Australian tax policy.
And as for the Malcolm Turnbull ‘other countries have it too’ argument. From what I can see this was to pay back the government for the bail outs they gave the banks over the GFC. While Australia does have deposit insurance I wasn’t aware of any like actual bailouts.
It is though kinda reminiscent of the diverted profits tax which is also a targetted tax on a group of bad people. Except that might have a non-negative tax effect. Here we have – to extent it is passed on in higher deposit rates – higher costs industry wide causing less, not more, tax paid by this industry. Let’s just hope for Australia’s sake the savers are not all in the tax free threshold.
So nicely done ScoMo and Big Malc. Possibly more Lavender Hill mob than Ronnie Biggs. But much like the Australian fruit fly; keep it on your side on the Tasman. It makes even this revenue protective commentator blanch and our banking tax base can so do without it.
A commentator on the blog’s facebook page has suggested that this levy makes sense in terms of addressing the huge implicit subsidy that is the Australian deposit guarantee scheme. I have absolutely no issue with this being charged for in the form of a levy on the banks. Naively I would have thought that such a levy would then be based on the deposits covered by the guarantee not the liabilities that aren’t. Apparently that’s not how Australian politics works!
The discussion can be found in the Facebook comments section for this post.
Let’s (not) talk about tax.
Let’s talk about yoga stuff.
As part of her assessment for yoga teacher training your correspondent has had to read B K S Iyengar’s Light on Life and write 500 words on something that ‘spoke to me’. As 500 words is blog length and we have now all handed in our essays I thought I’d post it as a bit of ‘light’ relief after all the tax stuff.
Think of it – dear readers – as the blog equivalent of alternate nostril breathing which is supposed to balance out the hemispheres of your brain. Although that exercise after a couple of rounds doesn’t so much balance out your left brained correspondent as make her want to run screaming from the room. So like all yoga; work with your comfort levels and rest or stop when you need to. Listen to your body.
But first a bit of background. Yoga is not actually what non-yogis think it is. Non-yogis think of it in terms of contortionist poses – that they are like far too stiff or inflexible to do. And this isn’t helped by the whole instayogi thing. Beautiful fit young people doing postures average people can’t do on beaches or tropical islands that average people can’t afford to go to.
There are 8 limbs of yoga: the postures or asanas are but one of them. And that not to under rate them. As an ex runner I would say: come for the flexibility; stay for the brain calming and inner peace.
I had hoped to work in the ideas of Marianne Elliott social activist and yoga teacher. In particular her framework for progressive social change which I have paraphrased (and adjusted slightly) as involving:
- The official rules laws and structures we live by;
- How we treat each other; and
- How we treat ourselves.
And it is in the latter that yoga is referenced. But the essay I have to write is very short and I didn’t start soon enough to do a decent job with both Marianne’s and Iyengar’s ideas. For people who are interested in this combination I would suggest reading direct from Marianne’s work and skipping the rest of this post.
And yes this will be the last non-tax post for a while. Yes it is a tax blog and I will return to tax stuff in a couple of weeks after my teacher training is over.
“We have been asked to read Iyengar’s Light on Life and write about what spoke to us. It is fair to say that yoga has changed my life. But not in a way that is particularly obvious from the outside.
My family has REALLY BAD GENES meaning living as long as I would like may not be possible. So I have organised my life to ‘do something different’ when I turned 50. That ‘something different’ broadly is working for progressive social change.
So this was in my head reading Light of Life. To be fair while I struggled with the book; there were a few things that really did resonate with me:
Role of asana
Iyengar says that asana is the physical process that relaxes the mind which in turn allows pranayama – breathing – to unlock the prana – energy – blockages in the body. Which in turn calms and focuses the mind.(Page 14)
This is absolutely my experience. In the time leading up to my fiftieth birthday I had many competing ideas and emotions. Normally would rush to decisions that may or may not be the right ones for me and those around me.
Now it was my physical yoga practice that I kept coming back to. It might have sorted out my posture but more importantly it kept my mind clear and proceeding with calmness and focus.
I am a little nervous though of his concept of right pain as a tool for growth (page 49). As what I had thought to be ‘right pain’ in chaturanga has lead to a shoulder I am still trying to fix a year later.
Asteya and Aparigahaha
Non-stealing and non-covetousness like non-violence ahimsa, are tenets that are blindingly obvious ones for any philosophy. Iyengar, however, takes them further than I have seen before.
Non-stealing includes not taking more than you need. When combined with non-covetousness this means that taking more than you need could mean deprivation for others. And to Iyengar wealth being tied up in a few hands is also theft or covetousness.
To be faithful to these yamas wealth – as energy – must circulate otherwise ‘it will stagnate and poison us’. ‘Energy needs to flow or its source withers.’ (Page 245) This particularly resonated with me given according to Oxfam 8 men have as much wealth as half the world.
What I am increasingly seeing in New Zealand – through our out-of-whack property market – is wealth being captured through those that own property from those that don’t. And so by capturing all the wealth we are poisoning our children’s potential to live the lives we have lead.
But here’s the thing. Those who have the most won’t let that happen to their children. So opportunity and material comfort will only be available to the children of families that already have it. The exact social ill that families such as mine were escaping 100 years ago by coming to New Zealand.
So although Iyengar’s primary message was of one of inner freedom – embedded in that was the other eternal truth – that the personal is political.”
Let’s talk about tax.
Or more particularly let’s talk about tax residence.
There is currently is a big to do about Peter Thiel both here and in the foreign press about exactly how did a US billionaire become a New Zealand citizen. Soz can’t help with that. But on my Facebook feed this morning is coming the question – so is this guy tax resident? Now that I can do off the public stuff and is pretty much probs yeah/nah. But citizenship – scmitzerzenship – really not relevant much at all.
There are many concepts of residence used in the bureaucracy. The main one is permanent residence – an immigration concept – which pretty much gives the recipient the rights of a citizen except maybe you can’t stand for Parliament.
Tax residence however – who would have thought – is a completely different concept. While in practice most New Zealand permanent residents and citizens will be tax residents. It is by no means a dead cert.
Now why tax residence matters is that residents are taxed on any foreign income earned and fully taxed on New Zealand income. Tax non-residents are not taxed on foreign income and have concessionary rules on how New Zealand income is taxed. Think Google.
For an individual there are two ways – you can become tax resident and a number of ways you effectively lose it.
The two ways are:
- Being here – an individual who is physically in New Zealand for 6 months in ANY 12 month period becomes New Zealand tax resident.
- Connections to New Zealand – even if you are here less than 6 months in any twelve month period if you have a house you live or have lived in while you are here AND you have other connections you will become subject to tax in New Zealand on your foreign income.
So looking at Mr Thiel. According to reports the dude has two houses in New Zealand. Combined with his New Zealand citizenship and the stuff wot he did to demonstrate commitment to NZ – not free from doubt but – I would say there was a pretty high chance he would hit the connections to New Zealand test. And yes tax friends I am talking about a permanent place of abode but there are non tax people who read this and we’d all agree as terms go it is not the most intuitive.
Now you might be thinking dear readers – woohoo – New Zealand can tax his foreign income. Hello mega surplus and Scandinavian levels of public services.
Ah but not so fast there is now the small matter of the US/NZ tax treaty.
On the basis that he is a ‘naturalised American’ he is also tax resident of the US and they will also claim taxing rights on his foreign income. And here the treaty will sort that out:
- First question is which is the country where he has a home available to him? Ah probs both. Next question.
- Second question which country is where his personal and economic ties are stronger? Mmm tough. A late forties ‘naturalised American’ with business interests there and a confidante of the President v really likes NZ and invests in tech companies. Tricky but I think we can call it for the US.
Now is this tax dodging or tax avoidance? Should we feel aggrieved as New Zealanders that he is a citizen but unlikely to be a tax resident?
I defo don’t think this is tax dodging or tax avoidance as there is nothing cute or clever or structured in being taxed where your stuff is and where your links are stronger. Given the NZ diaspora who are NZ citizens – not all of them will be residents under the two tests and even if they are they will also have the benefit of their treaty. And in theory anyway he should be paying tax on his foreign income in the US.
But I can only hope that when the ‘exceptional circumstances’ were being weighed in Mr Thiel’s application the Minister knew that while we were getting a citizen – given how international tax works – it was unlikely we were getting a taxpayer.
Let’s talk about tax.
Or more particularly let’s talk about Oxfam’s recent press release on inequality and tax.
Now dear readers when I moved to weekly – hah – posting it was because this blog was supposed to be my methadone programme. Getting me off tax and on to other issues. So when I posted last night – after having posted 3 times last week – I gave myself a good talking to. This had to stop. One post a week was quite enough to keep the cravings at bay. To continue in this vein would risk a relapse.
But this morning while I was getting dressed my husband came and turned on the radio. Rachel LeMesurier from Oxfam was talking about inequality and then she talked about tax and then Stephen Joyce came on and then he talked about tax and then he talked about BEPS.
Just one more little post won’t hurt I am sure and I’ll cut down next week honest.
Oxfam has compared the wealth of 2 New Zealand men Graham Hart and Richard Chandler to the bottom 30% of all adult New Zealanders. Now the inclusion of Richard Chandler seems to be a rhetorical device as from what I can tell he hasn’t lived here since 2006. So very unlikely to be resident for tax purposes.
In the interview Rachael Le M also made reference to the tax loopholes that support such wealth. So using what is public information about Graham Hart and what is public about the tax rules I thought I’d make a stab at setting out what these ‘loopholes’ are.
Now first dear readers please put out of your head anything you have heard about BEPS or diverted profit tax or any of the ways that the nasty multinationals don’t ‘pay their fair share of tax.’ None and I repeat none of this is relevant when dealing with our own people. It might be relevant for the countries they deal with but not for New Zealand. I am hoping that officials will also explain this to new MoF Steven Joyce as when he came on to reply to Rachael – he talked all about BEPS. Face palm.
Graham Hart is a serial business owner. Buying them sorting them out and then selling off the bits he doesn’t want all with a view to building up a Packaging empire. A Rank Group Debt google search also indicates that a substantial proportion of all this buying and selling was done through debt. And at times quite low quality debt which would indicate a proportionately higher interest rate. A number of his businesses are offshore.
So then what ‘loopholes’ – or gaps intended by Parliament – could Mr Hart be exploiting?
The first and most obvious one is that there is unlikely to be any tax on any of the gains made each time he sold an asset or business. The timeframes and lack of a particular pattern – as much as Dr Google can tell me – would indicate that the gains would not be taxable.
The second is that income from the active foreign businesses will be tax exempt and any dividends paid back to a New Zealand will also not be taxed. Trust me on this. I’ll take you all through this another day.
The third relates to debt. Even though it assists in the generation of capital gains and/or the exempt foreign income it will be fully deductible. Now because of the exempt foreign income there will potentially be interest restrictions if the debt of the NZ group exceeds 75% of the value of the assets. A restriction true but not an excessive one given exempt income is being earned.
Now also in Oxfam’s press statement is a reference to a third of HWIs not paying the top tax rate. I am guessing some version of one and three plus the ability to use losses from past business failures is the reason.
Unsurprisingly Eric Crampton of the New Zealand Institute is not sympathetic to Oxfam’s views and points to our housing market as the main driver of inequality. So then in terms of tax and housing the other tax ‘loophole’ then would be the exclusion of imputed rents from the tax base.
Now one answer could be Gareth’s proposal. That is if someone could explain to me how to tax ‘productive capital as measured in the capital account of the National Income Accounts’ in a world where tax is based on financial accounts according to NZIFRS.
The second could be a capital gains tax even on realisation and the third some form interest restriction or clawback when a capital gain is realised. Oh and taxing imputed rents.
How politically palatable is this? Not very given National, Labour, Act, New Zealand First and United Future are all opposed to a capital gains tax – at least Labour for their first term.
But then maybe it is stuff for Labour’s working group. Will be interested to see this all play out.
Let’s talk about tax.
Or more particularly let’s talk about the Republican party’s recent proposal to impose ‘border adjustments’ as a reform of their corporate tax system.
To date this has passed me by. Slowly though things have percolated up to various feeds I follow. All talking about how Trump can balance the budget and punish companies that export jobs. The first I saw looked like a GST where imports are taxed and exports aren’t. Fair enough I thought if the US wants to impose import duties – ok but nothing to do with me. I do income tax not tariffs. I won’t be commenting. Good luck with the WTO on that. And our US tax treaty only covers federal income taxes not value added taxes so no issue there.
Then I saw something that said it was income tax. Sales to foreigners wouldn’t be taxed and purchases from foreigners wouldn’t get deductions. And no interest deductions coz it was a cashflow tax. Whoa I thought – that’s odd. How do you deny interest deductions as they are a cashflow? And what about restricting deductions for local purchase costs when you aren’t taxing foreign income? How’s that going to work?
But in that article Professor Alan Auerbach is talking positively about the proposals. Penny dropped.
A few years ago Prof A came to New Zealand with some other academics and gave two presentations on destination taxation that I am embarrassed to say did not understand one word of. Awesome so that is what this is about and I will have to do some actual work to comment rather than accessing my increasingly failing tax memory.
Having now done some work – that is I found the good professor’s 2010 paper and read it – I can see why I didn’t understand. It is a major change in how income tax systems work and so nothing really would have resonated.
Now let’s see if I can paraphrase the 29 pages.
Focus is on taxing cashflows that originate in the US – so:
- Foreign sales not taxed;
- Foreign purchases not deductible;
- All domestic purchases – including capital items – are deductible;
- All domestic borrowings – full amount borrowed not typo keep breathing – are taxable;
- All domestic lending is deductible; and
- Foreign borrowing and foreign lending – not respectively deductible or taxable.
Wow just wow. So wish I had followed this when Prof A came out. I would have had soooo many questions.
The advantages of this are said to be:
- Tidies up the US treatment of foreign income and removes the incentive to move US income to havens because the US would tax it even less. Yep agreed.
- Treats debt and equity equally and removes the tax preference for debt. Yep does that too as while capital items are fully deductible the full amount that is borrowed – so long as it is borrowed domestically – is taxed.
Issues with this though kinda are:
- Not only originally US income could find its way back from abroad. So could most actual foreign income actually earned overseas – as Auerbach is proposing the US become the MacDaddy of tax havens.
- No deductions for foreign purchases but deductions for the same domestic purchase. Mmm what does that sound like? Ah discrimination according to the US/NZ treaty – is what it sounds like. Article 23(4) to be precise.
- Foreign purchases not deductible but domestic sales taxable. Mmm how long will it be before foreign subs start servicing the US market? Now that can be stopped if they reform their controlled foreign company (CFC ) rules – but a CFC is by definition foreign – and isn’t foreign stuff out. It can also be stopped through a reform of the permanent establishment rules as proposed by the OECD but isn’t that a nasty pinko Obama thing?
- Domestic borrowings fully taxable but foreign borrowings not. Too easy. Bye bye local banks. Hello City of London.
There are other things like I am not at all sure that full deductibility for long lived assets is at all the right policy as it doesn’t match the decline in their economic life. So the longer lived the asset the greater the tax expenditure – because why? Is there a shortage of long lived assets in the US economy? And accelerated depreciation was the basis for the double dip leases that were all the rage around and before 2000. But maybe the requirement that the asset has to be in the US will protect them this time.
Now that was 2010 and an academic paper. Let’s see what has actually proposed by policy makers – Paul Ryan nonetheless.
Paul Ryan’s 2016 tax policy allows: full deductions for capital expenditure; repatriation of foreign dividends tax free; ‘border adjustment’ aka taxing imports and exempting exports; ‘streamlining’ subpart F aka CFC rules and denying deductibility for net interest. So pretty much Professor Auerbach’s proposal with a corporate tax cut to 20c and not the foreign bank preference.
As a big interest whinger – here, here and here – I am going to be really interested to see how interest denials stay the course. The rest of the proposal looks pretty standard right wing with a bit of foreign bashing with the foreign purchase deduction denial. But denying interest – wow – that is huge. Further than I would go even with a reduced corporate tax rate. But then maybe the interest deductions will flow into foreign countries at the same time the income is flowing out. All the more reason for New Zealand to a make sure we have interest deductions for non- residents properly sorted. Next week’s post promise.
In Paul Ryan’s thing there are some spurious references to the WTO and how they are mean to the US – I think that is called doing their job – but no reference to the tax treaty breaches. But the IRS international tax counsel know all about these issues and I hope they are being funded properly – coz buckle up boys – their competent authorities are about to get really busy. Oh and it’s Article 23(3) in the US treaty with China.
And the servicing of the US from say Canada and Mexico – don’t know how far drones can fly – pretty sure though it’s higher than the average wall or fence. But that is my bet as to what will happen when imports are denied a tax deduction. Not more tax revenue and not more jobs. And lots of warning for the companies who can start looking at border real estate. Just like the GOP – so very business friendly.
Yep. Making America great again – one own goal at a time.
Let’s talk about tax.
Or more particularly let’s talk about one of our own. Deborah Russell – tax academic – who has recently put herself forward to become the Labour MP for New Lynn following David Cunliffe’s resignation from Parliament.
I first met Deborah in early 2005 when she joined Inland Revenue policy. Before she started there was discussion of her two unusual features. She had a PhD and – at that time – didn’t know anything about tax.
A month or two later I was at meeting which Deborah and her manager attended. I can’t remember the point of that meeting but in it Deborah had to give a short outline of what she was working on – an FBT issue I think. In her two minutes she suscinctly and crisply nailed the point of the FBT rules, the current problem that needed fixing and the technical solution. Now tax peeps we all know how hard it is strip away the detail and simply convey the key messages and Deborah – ‘who didn’t know anything about tax’ – was doing that from almost the first day she started working in tax.
I also particularly remember the blissed out look on her manager’s face while she was talking. He couldn’t believe his luck. He had won the pools with her.
She became a well regarded member of the division as much for her intelligence and work rate as her good humour and willingness to help her colleagues – professionally as well as personally. All while she was the mother of quite young children herself. She had a number of unglamorous projects including creating a tax expenditure for bloodstock which would stick in the craw of any tax person – but she got on with it and made sure it was done properly.
In 2014 following a stint in Adelaide and having moved to Massey where she teaches incipient CAs tax (bless you) she stood for Labour in the safe National seat of Rangitikei. Again an unglamorous job but a necessary one for the Labour Party.
In the last year or two she has become the media’s go to person when they want sensible comment on tax. Impressively even though she is a Labour Party activist she has always been able to explain the issues in clear politically neutral way. Just like she did in that first meeting in 2005. So it is no surprise that these qualities have also make her a regular commentator on Q&A and National Radio.
If she becomes the Labour nominee she and her family will move to New Lynn. And like increasing numbers of Aucklanders they will face the full horror of the Auckland housing market. A horror not faced by those lucky enough to have always lived in Auckland.
This will make her at one with the majority of her constituents. And combined with Deborah’s unfailing ability to do the work that is necessary – not just the high profile glamorous work – will make her a tireless advocate for the people of New Lynn. Plus she now has a national profile and can foot it effortlessly with the likes of Michelle Boag. So front bench material too.
Intelligence; clarity of thought; and good humour. As well as generosity of spirit and sheer dogged hard work.
And now the good people of New Lynn also have the opportunity to get that same blissed out look her manager did in 2005 – when they find she belongs to them. Look forward to seeing this.
Go well Deborah. New Lynn – and New Zealand generally – needs you in Parliament.