TaxBlog

It seems odd to me that the very party that is seeking to raise taxes on middle America, can’t ensure their memebers pay theirs.

We reported last week about recently confirmed Treasury Secretary Timothy Geithner who failed to pay taxes he owed, even though he surely must have known he owed them. Now he runs the IRS.

This week Tom Daschle was seeking nomination to head the Department of Health and Human Services. This despite failing to pay more than $120,000 in back taxes for perks he received. Yahoo news reports”

Daschle filed amended tax returns for 2005, 2006 and 2007 to reflect additional income for consulting work, the use of a car service and reduced deductions for charitable contributions. He filed the returns after Obama announced he intended to nominate Daschle to head the Health and Human Services Department.

Most of the additional taxes resulted from unreported income from the use of a car service provided him by a close friend and business associate, Leo Hindery Jr. The unreported income for that service totaled more than $250,000 over three years.

Daschle also had unreported consulting income of $88,333, in 2007. He also had reductions to charitable contributions totaling about $15,000 over the three years covered, according to the Senate Finance Committee document. The document, marked “Confidential Draft,” is a committee statement concerning Daschle’s nomination.

News then came out that President Obama’s nominee to be chief performance officer, Nancy Killefer will withdraw her nomination following the revelation that she had a $946.69 lien on her property in 2005 for failure to pay taxes.

This makes me wonder: how did Tom Daschle get away with filing such misleading and false returns? If that happened here he would be in the IRD’s crosshairs.

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Germany’s coalition government has reached agreement on slashing business taxes from 2008, in a bid to improve the country’s competitiveness.

In future, the standard rate for firms will be cut from nearly 39% to just under 30%.

Changes to the business tax regime are seen as a test of Chancellor Angela Merkel’s ability to push through her reform agenda.

The measure was agreed by a German government working group of tax experts. A simpler tax system has long been sought in Germany.

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One of the topics I find fascinating is the EU situation.

Each EU member country has the right to tax, but is still subject to the EU’s jurisdiction.

This story shows how this applies in tax.

Europe’s highest court ruled that countries could not go after profits earned by subsidiaries in other European countries as long as the businesses were not “artificial� arrangements to avoid paying taxes.

While potentially painful for high-tax countries like Germany, France and Italy, lawyers said the landmark decision could help promote European integration by making cross-border expansion more attractive.

In a case brought by Cadbury Schweppes, the soft-drink and candy maker, the European Court of Justice in Luxembourg said that national laws restricting the ability of a company to set up a foreign subsidiary in a lower-tax country were justified only when those operations were “wholly artificial arrangements.�

The court said the burden of proof would be on the company to show that it had real operations in the low-tax country, like physical offices, employees and equipment.

Cadbury had challenged the British government’s 1996 tax bill for £8.6 million, or $16.1 million, on its subsidiaries in Ireland, which is one of the lowest-tax countries in Europe. A British court referred the case to the Luxembourg judges.

In theory, the ruling will allow companies doing business across Europe’s borders to establish foreign subsidiaries in low-tax areas. But in practice, it will be up to national courts to decide, case by case, whether companies are abusing European law, the court ruled.

“This case shows the need to coordinate better fiscal policies to avoid double taxation,� said Maria Assimakopoulou, the European Commission’s spokeswoman on taxation.

But any such move has been opposed by Britain, Denmark and others arguing that national governments’ control over taxation should be sacrosanct.

What’s interesting is that the EU is promoting tax competition between its’ member states. Where a country such as Ireland can attract the business of multinationals, they will transfer price as much of their income to that country as they can. Therefore leaving the other member states out of pocket, forcing them to reduce their tax rates. I predicted this would happen in Germany, they cannot survive with high tax rates in the current EU environment.
Therefore what this mean is that there will be a race to the bottom. This will be more so the poorer EU member countries. They will set their tax rates as low as they can to attract the business of the multinationals. These poorer countries can do this because they don’t have the left redistributionist welfare policies of high tax countries such as Germany.

So this leaves the likes of Germany no option but to cut their welfare payments, and tax rate to compete.

A final point. This isn’t just transfer pricing, but also manufacturing decisions we are talking about here. If manufacturing can be shifted to lower tax states, then this will also have the same effect, less tax for the wealthy states (wages taxes ect).

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Probably the most important tax policy story in recent decades has falling statutory tax rates on capital income. As companies and financial capital have gotten more mobile in recent years, tax competition for jobs and investment between countries has forced down statutory tax rates on capital income around the world, particularly throughout Europe.

But how far can this trend continue? Should lawmakers abandon taxes on capital income altogether, and focus on taxing consumption instead? Those are the questions addressed in a provocative new paper from CESifo, a Munich-based research group, titled “Should Capital Income Taxes Survive? And Should They?”

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I’ve been reading international tax blogs such as this one:

http://mauledagain.blogspot.com/

You find interesting tax businesses which don’t exist (or aren’t well advertised) in New Zealand or Australia.

“Tax Refund Anticipation Loans” or RAL’s is one such business.

How this works is that banks lend money through tax return preparers such as H & R Block using the tax refund as collateral for the loan. The risk of the return being wrongly prepared is low because H & R Block are a reputable firm.

Questions come to mind regarding the mechanics of this process?

How can a bank be certain that the information provided to the tax return preparer is correct?

I guess the answer is that they can’t but based on the law of averages the information is generally correct. This puts the loans into the high risk, high interest basket of lending, and as such the loans carry punative rates of interest.

Another question is how the tax return preparer makes money out of the deal? Perhaps some kind of bank hander from the lender?

It’s not uncommon for lending firms to pay large bonuses to retail staff who encourage purchasers to take out hire-purchase loans to cover the cost of their purchase. Perhaps this process works in the same way.

Maule focuses on the ethical considerations of such loans:

Two questions popped up as I read the article. First, is it appropriate for the company that is preparing the tax return and thus calculating the refund to make loans based on that refund? Second, is it appropriate to charge interest at the rates being charged?

The first question should be answered in the negative because there is a conflict of interest. The higher the loan, the more interest income is generated for H&R Block. This puts the company in the position of trying to maximize the refund, when the company should be maximizing the client’s compliance with the tax law. Every “close call” is going to be affected, subtly or not so subtly, by the impact on the lending activity. It’s best to leave the refund anticipation loan to some other lender, to whom the customer can go after he or she is handed a copy of the return by the preparer. H&R Block, after all, should stick to tax return preparation and not open up a bank.

The second question must be answered in the negative. According to the story, and I’ve read similar reports elsewhere, the annualized interest rates on these refund anticipation loans are as high as 700 percent. SEVEN HUNDRED PERCENT? Toss in the fact that roughly 80 percent of the people using refund anticipation loans are low-income, and suddenly there is a recipe for all sorts of unacceptable situations. I’m not alone in this reaction. H&R Block has been sued on account of its refund anticipation loan practices, has paid out tens of millions in damages, and still must defend charges brought by the California Attorney General. State banking commissioners have been asked to investigate.

This is not a blog on politics, however, it seems to me that if RAL’s are outlawed then people will find other methods to finance their consumption.

There is also further information on RAL’s in his posts here and here

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The Government is flagging a review of New Zealand’s international tax rules.

Revenue Minister Peter Dunne says the main focus will be on the taxation of outbound, non-portfolio investment.

He says the government is committed to taking a fresh look at whether New Zealand should continue with its current controlled foreign company tax rules.

The review will also consider whether there should be any adjustment to the long-standing policy on non-resident withholding tax rates on dividends, interest and royalties.

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The German Finance Ministry has confirmed a report in the national press that companies are escaping EUR65 billion (US$82 billion) in German taxes annually by shifting profits abroad.

The claims, published by the daily newspaper Die Welt, are based on an internal Finance Ministry report which studied the discrepancy between the overall economic balance sheet and revenues from corporate tax. They have been confirmed by a spokesman for the Ministry.

With one of the highest combined corporate tax rates in the developed world, it is perhaps no surprise that companies operating in Europe’s biggest economy are keen to cut their tax bills by shifting income to lower tax jurisdictions. Presently, large companies pay almost 40% of their income in corporate tax, based on a 25% federal corporate tax and regional corporate tax of about 13%.

The grand coalition of Chancellor Angela Merkel is seeking to remove the incentive to dodge German taxes and attract more investment in the country’s flagging economy by slashing the combined corporate tax rate to less than 30%, through a cut in the headline corporate tax rate from 25% to 12.5% from 2008.

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Something which is old news here in NZ has been making news across the Tasman.

As many as 6000 high wealth individuals, worth more than $30 million, will be targeted along with tax scheme promoters under the Australian Tax Office’s compliance program for this financial year.

People who fail to declare capital gains on the sale of homes or shares will also be in the spotlight, with 6000 under scrutiny, while the taxman will also write to 23,000 others reminding them of their obligations.

Investigations will continue in the use of tax havens, such as the multimillion dollar Project Wickenby a $300 million international credit card tax scam, allegedly involving celebrities, lawyers and business identities, will contine. The ATO has already identified 14 similar schemes which are als being examined.

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Thousands of demonstrators took to the streets of Hong Kong on Sunday to protest against the government’s proposal to introduce a Goods and Services Tax in the territory.

This march indicates that a GST would seriously impact trades and businesses and they are very anxious to tell the government that they do not wish it to implement it,” she commented.

In a statement, the Financial Services & the Treasury Bureau said that the proposals put forward in the tax reform consultation document are not meant to be conclusive, but are intended to stimulate “rational and informed discussion” on the issue.

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But such a tax could open the door to tax dodging.

As Financial Secretary Henry Tang Ying-yen rolled out the GST proposal Tuesday, the Customs and Excise Department was muted on how the proposed levy might affect smuggling in Hong Kong, a city whose early history is closely tied with piracy.

“It is inappropriate for customs and excise to comment on issues relating to GST at this moment when public consultation is still going on,” a department spokesman said.

Tang’s consultation document makes it clear exports will not be taxed in order to “preserve our overall competitiveness as a leading logistics and trading hub.”

But goods entering Hong Kong “for home consumption” will be subject to the tax. Importers who bring in goods for transshipment elsewhere – a sizeable 75 percent chunk of all imports, calculated by value – will have their GST payments refunded.

The government is also proposing a package of special arrangements to relieve cash flow issues for the import- export sector, including specially designated temporary warehouses and deferred payments schemes.

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