One of my last blogs was on Adam Smith's Canons of Taxation. I am still pondering on the virtues of a flat tax rate and a Single Income Tax. Meanwhile, I came across a rather interesting piece on the website of Canadians For a Fairer Tax System
http://www.taxfairness.ca/page/10-big-reasons-feel-good-about-taxes
Since today is UK Tax Freedom Day , it might just make us a feel a bit better about why we are paying taxes and what we are paying for . Although the list refers specifically to Canada, I think if you take away the words Canada or Canadian- it is fairly universal. Not everybody will agree with all ten points , but its a fairly good start to a debate.
1. Oliver Wendell Holmes, Jr. said it best: “Taxes are the price we pay for civilization.” More specifically, taxes are the price we pay for the Canada we love.
2. Taxes put out fires, keep our streets safe, provide our children with education, provide our families with health care, ensure our food and water are safe, create legal safeguards for businesses and employees, provide parks – in other words, provide us benefits every hour of the day, every day of the year.
3. The average Canadian household receives about $41,000 in public services each year (with no mark-up for private profit), a tremendous bargain for the vast majority of Canadians.
4. Past generations paid taxes for what we have today - schools, hospitals, courts of law, roads, public transit, parks. Our taxes today allow us to pass along those benefits to future generations - our children, grandchildren and great grandchildren.
5. If we ignore, shortchange or postpone funding for social, economic and environmental problems today, the solutions become more expensive in the future.
6. Public sector employees work hard, often in difficult circumstances, to keep government running and provide the public services we need. We need to attract and retain hard-working public employees and pay them fair compensation.
7. Money begets power, which begets more money, and more power. Taxes provide a counter-balance, by softening extreme disparities in wealth, power and benefits.
8. Taxes ensure that Canada can build and maintain the necessary infrastructure – education, health care and transportation systems - to attract investment and businesses, and thrive in a competitive global economy.
9. Taxes make the marketplace work – by maintaining a regulated business environment to protect property rights, enforce fair practices and protect consumers and investors.
10. Taxes allow citizens, residents and businesses to do things together that we could never do on our own. In other words, taxes allow us to be Canadian in the way we live, work and play.
Incidentally , if anybody is interested they list another 96 reasons
http://www.taxfairness.ca/page/here-are-another-96-everyday-reasons-feel-good-about-taxes%E2%80%A6
Just goes to show what a civilized place Canada is.
Tuesday, 29 May 2012
Saturday, 26 May 2012
The background to Cooper (Surveyor of Taxes) v Cadwalader.
With the looming introduction of a Statutory Residence Test in the UK, a number of the oldest and best known cases on UK tax residence may fall into disuse. As set down in the Volumes of Tax Cases, some of these cases are obscure even for the tax practitioner. I set out to find out whether there was a human interest element to make the cases more interesting.
In Cooper (Surveyor of Taxes) v Cadwalader, the bare facts are a dispute between an American barrister and the Surveyor of Taxes over whether he was resident at a Scottish shooting lodge and therefore liable to UK income tax. In fact, the background to the participants and the case is rather more interesting.
The tax case
An American ordinarily resident in New York, with no place of business in the United Kingdom, rents a house and shooting rights in Scotland, where he spends about two months continuously in each year. The owner of the house keeps it wind and water tight, besides bearing the expense of keeping the ground in order, and paying the wages of the gamekeeper, watcher, housekeeper, and housemaid. The shootings are under the entire management of the keeper.
Held, that the Appellant was a person "residing in the United Kingdom" within the meaning of Schedule D of the Act of 1853, Section 2, and liable to assessment to Income Tax accordingly.
At a meeting of the General Commissioners of Income Tax for the District of Brechin. in the County of Forfar, held at Brechin the 15th day of December 1903, John Lambert Cadwalader appealed against an assessment of £3000 made upon him under Schedule D of the Income Tax Acts for the year ending the 5th day of April 1904. The assessment was made under authority of the Finance Act of 1903 (3 Edward VII., cap. 8, sec. 5), 16 and 17 Vict., cap. 34, sec. 2, and 5 and 6 Vict., cap. 35, sec. 100, cases fourth and fifth.
The following facts were found or admitted:-
1. The appellant is an American citizen, and has his ordinary residence at No. 13 Thirty-fifth Street, New York, where he practises his profession as a barrister.
2. By minute of lease entered into between the factors and commissioners for the Right Honourable The Earl of Dalhousie of the first part, and the appellant of the second part, dated 16th March and 2nd and 3rd April 1900, there was let to the appellant for the period of three years from 1st February 1900, at the yearly rental of £1500, payable in advance on 1st February yearly, All and Whole the sole and exclusive right of shooting and sporting over the grouse shootings of Millden, together with Millden Lodge and the furniture therein, and also with a right of fishing in the rivers and streams within the bounds of the territory let, upon inter alia the conditions following:- (a) The furniture and other effects in the lodge and out-buildings were to be delivered over per inventory to the second party, who bound himself to keep and maintain them in good order during the currency of the said lease, and on the expiry thereof to deliver the same in an equally good state, ordinary wear and tear excepted. (b) The first parties undertook to maintain the whole buildings wind and water tight, and to bear the expense of keeping in order the grounds attached to the lodge, to pay all rates and taxes imposed in respect of said tenancy, and also to pay the wages of a housekeeper and housemaid and one gamekeeper and a watcher, all of whose service should be at the disposal of the second party. (c) The shootings were to be under the entire management of the present keeper, or any other keeper to be appointed by the first parties, but the services of said keeper and under-keeper to be at the service of and under the control of the second party during the shooting season. Upon grounds reasonable and satisfactory to the first parties, the second party might require the removal of any of the servants mentioned in fact 2 (b) and the substitution of others.
3. The said lease,* a copy of which was put in and forms part of this Case, was continued by agreement for one year, to 1st February 1904, and by subsequent agreement, dated 3rd and 6th October 1903, the lease was renewed for a period of two years from 1st February 1904. These agreements also form part of the Case.
4. The appellant is a bachelor. He and his valet, whom he brings with him from America, reside at Millden continuously for a period of two months each year during the grouse shooting season. He employs a caterer from London, who supplies all food and servants. The guests at his house are mostly from America. When the appellant takes possession of Millden, the housekeeper and housemaid remove from the lodge and do not return until he goes away. The female servants are paid board wages by the first parties.
5. In the valuation roll of the County of Forfar the appellant is entered as tenant and occupier of the Millden shooting lodge and shootings, and he is charged to all the local and imperial rates and taxes applicable to such occupancy, though the proprietor relieves him of these taxes under the provisions of the lease. The appellant is an alien, and is not entitled to vote, though his name appears in the register of persons entitled to vote in the election of a member to serve in Parliament for the County of Forfar.
6. When the appellant or his friends are not living at Millden, the lodge is under the care of the female servants referred to in fact 2 (b), and is available for the appellant's return at any time. 7. The appellant has no place of business in the United Kingdom.
8. During the appellant's stay in the United Kingdom he maintains and keeps open for his return his residence in New York, to which he could have returned at any time. He also pays all taxes due by him in New York in respect of his dwelling- house or his profession.
The appellant, who was represented by his agent, Mr. David G. Shiell, solicitor, Brechin, contended that he was not a person residing in the United Kingdom" within the meaning of the income Tax Acts, and quoted in support of his contention sec. 39 of 5 and 6 Vict., cap. 35, Lloyd v Sulley, Court of Exchequer, Scotland, 12th March 1884, 11 R., p. 687; and Colquhoun v Brooks, House of Lords, 9th August 1889.
The Surveyor of Taxes, on the other hand, contended that Lloyd v Sulley proved the appellant's liability, and in support of his contention that section 39 of 5 and 6 Vict., cap. 35, did not exempt the appellant, he quoted The Attorney-General v Coote (1817), 4 Price 183, a decision given on section 51, 46 Geo. III., cap. 65, which was a provision: similar to that contained in section 39 of 5 and 6 Vict., cap. 35.
The Commissioners being of opinion that the appellant was not liable, sustained the appeal and discharged the assessment, and the Surveyor of Taxes having immediately expressed his dissatisfaction with the determination of the Commissioners as being erroneous in point of law, and having duly required in writing & Case to be stated for the opinion of the Court of Exchequer in accordance with 43 and 44 Vict., cap. 19, see. 59, his Case has been stated and signed accordingly.
The Judgement of the Lord President
It was maintained on behalf of the Appellant that his case fell within section 39 of the Income Tax Act, 1842, by which it is provided no person who shall on and after the passing of the Act actually be in Great Britain for some temporary purpose only, and not with any view or intent of establishing his residence therein, and who shall not actually have resided in Great Britain (now the United Kingdom see the Act of 1853, sec. 5) at one time, or several times, for a period equal in the whole to six months in any one year, shall be charged with the duties mentioned in Schedule D. as a person residing in Great Britain, in respect of the profits or gains received from or out of any possessions in (Ireland or) any other of Her Majesty's dominions, or any foreign possessions, or from securities in (Ireland or) any other of Her Majesty's dominions, or foreign securities, but nevertheless every such person shall, after such residence in Great Britain for such space of time as aforesaid, be chargeable to the said duties for the year commencing on the sixth day of April preceding. This provision appears to be directed to prevent temporary residents for less than six months in one year from being charged in respect of profits received from abroad, but it does not appear to me to apply to a case like the present. I do not think that the Appellant can reasonably maintain that he is in the United Kingdom "for some temporary purpose only, and not with any view or intent of establishing his residence therein", in the sense of the section, as he took Millden with the view of establishing his residence there during a material part of each year and maintaining his connection with it as tenant during the rest of the years, and he has a residence always ready for him if he should choose to come to it. It is not necessary in order to a person being chargeable that he shall have his sole residence in the United Kingdom. A man can have residences in more countries than one, although he can only have one domicile.
For these reasons I am of opinion that the decision of the Commissioners was erroneous, and that the Appellant is liable to the assessment in question, the amount of the assessment being, as is conceded, open to adjustment.
HMSO Tax Cases 5 TC 101
John Lambert Cadwalader
This bland description of John Cadwalader as a barrister is a rather considerable under estimate of his talents. He was in fact a very eminent man. Born in Trenton New Jersey on 17th November 1837, John Lambert Cadwalader traced his origins back to antecedents who had gone to America soon after the founding of William Penn's colony, and became a member of the provincial assembly. His grandfather, Col. Lambert Cadwalader, represented New Jersey in the Continental Congress from 1784 to 1787; was a member of the Constitutional Convention, and a member of Congress from New Jersey from 1789 to 1795. His father, Thomas Cadwalader, was a Major-General in the U. S. army, and his mother, Maria C. Gouverneur, was the daughter of Nicholas Gouverneur, of New York.
Cadwalader was educated at Princeton University and in 1860 he entered the Harvard Law School, and, after completing the course there, was admitted to the bar, and began practice in New York City. He became a member of the law firm of Bliss and Cadwalader, which, later, became Eaton and Cadwalader, then Strong and Cadwalader, and finally, in 1914, shortly before his death, Cadwalader, Wickersham and Taft.
“Mr. Cadwalader not only discharged his regular duties in the State Department so as to deserve and receive the commendation of his superior officer, but he distinguished himself in a manner not very common among officials of the government by the preparation of a valuable digest of decisions upon international law, treaties, and kindred subjects.
When he left the State Department, Mr. Cadwalader, after a journey round the world, including a visit to some remote parts of China (much less accessible thirty-seven years ago than now), returned to New York and formed a partnership with the late Charles E. Strong the surviving member of a highly respected firm of lawyers whose business had been established in this City for generations.”
The history of Cadwalader, Wickersham & Taft says of him:
“That he bought to the firm experience in litigation on behalf of major railroads and manufacturing companies. He had also been involved in large bankruptcy proceedings and had defended insurance companies and trade associations against suits by public authorities. Cadwalader was known as Henry W Taft later recalled for his ‘ability to summarise and state to the court in a terse and incisive phrase the substance of a controversy’”
Cadwalader was at one time president of the Bar Association of the City of New York; he was also president of the New York Public Library. For many years before his election to this office he had been a member of the board of trustees and of the executive committee of the library. He probably did more, in the form of personal activities, for the library service of New York City than any other man. He worked out the plans for combining the Astor, Lenox, and Tilden foundations into one great, central library, and was instrumental in the material carrying out of this conception. He also devoted a great deal of thought to the planning out of the present magnificent building which still stands at Fifth Avenue and Forty-Second Street. He was also a trustee of Princeton University, to which institution he made several large gifts; one, made the year before his death, amounting to $30,000; a trustee of the Metropolitan Museum of Art, to which he devoted almost as much of his time and energy as to the Public Library, and was on the boards of the New York Zoological Society and the Carnegie Institution of Washington. He was a member of the Society of the Cincinnati, the Sons of the Revolution, the American Fine Arts Society, and the American Museum of Natural History. His clubs included the Union League, Lawyers', Union, Metropolitan, Knickerbocker, University, Princeton, and New York Yacht, all of New York City.
His swift and comprehensive mind, impatient of forms and details, was at its best in dealing with the larger aspects of a complicated situation, and especially in dealing with what may be called the human side of a legal problem
“for many years he maintained a house in this City where he received an exceptionally large circle of agreeable and distinguished people. With his discriminating taste for art, he had collected mezzotints, old porcelain, and old furniture, which lent the house a special charm; and his collection of old and warm friends was no less remarkable.”
In his obituary published in the New York Times in 1914, it mentions that:“Mr Cadwalader was also fond of outdoor sports, and he was in his day a noted shot. He was also an enthusiastic sportsman and fisherman.”
So already the case becomes more interesting. JL Cadwalader was not just a barrister, but one of the most noted New York barristers ,a former member of the US Government and philanthropist. His keen interest in outdoor sports must have led him to take the lease on Millden Lodge.
Millden Lodge
Again, the rather bland descriptions do not do justice to either Millden Estate or Millden Lodge. According to the 1882 edition of the Highland Sportsman
“The Lodge is situated amid very fine scenery and commands extremely lovely views. It contains entrance-hall, drawing-room, dining-room , business room, butler’s pantry, with hot and cold water, housekeeper’s room , store-room, kitchen and scullery with hot and cold water, larder, and 14 bed-rooms ( counting servants) dressing-rooms with baths etc.
There are also a five-stall stable , coach-house , dairy , laundry, wash-house , 3 stall pony stable, kennels fit for 25 to 30 dogs, 4 outside rooms for men-servants and kitchen garden.
The shootings extend to about 18,000 acres and should yield 1000 brace of game, 10 to 30 brace of game, 10 to 20 brace of black-game and 50 brace partridges, besides snipe, woodcocks, roe deer, hares and rabbits and 2 or 3 stags.
There is very fair tout fishing in the River Esk which when in ply occasionally yields some sport with Salmon”
In September 2011, it was reported that Millden Estate had been put up for sale for £17 million. It was apparently withdrawn from the market. A modern brochure on the Estate speaks to the attractions it must have offered to a keen sportsman such as Cadwalader.It is simply one of the best , if not the best shooting estate in Scotland. The marketing material describes the estate as follows:
“Millden Estate is a classic Scottish sporting estate offering driven grouse, pheasant and partridge shooting as well as salmon and sea-trout fishing on the River North Esk and the River Dee” It goes on to say The estate is recognised historically as one of the great Scottish Grouse Moors , where a record brace of 8,159 brace was achieved in 1931…. Millden was once described as the ‘the Holy Grail of grouse moors, capable of shooting over ten consecutive days.”
Millden Lodge itself is a 19th Century Granite building in Scottish Baronial style, it would be nice to reproduce the photos of the inside, but I am unsure of the copyright, so I direct the interested observer the following Link:
The gardens of the lodge extended down to the North River Esk. “This offers some wonderful salmon, sea trout and brown trout fishing. The Millden beat is eight miles long and with over 40 named pools, you will be spoiled for choice that will challenge all level of fishermen.”
I imagine the estate has not changed hugely in the last century and looking at the photographs of lowland and upland grouse shoots, interspersed with idyllic looking river settings, it is quite easy to see why John Lambert Cadwalader , a noted sportsmen was a keen to take a lease on Millden Lodge and cross the Atlantic to spend a couple of months there. I doubt that he would have estimated that his love of field sports would have left him with a very large British tax bill and a place in history in one of the UK’s leading tax residence cases.
Cadwalader continued to entertain a select band of his New York circle at Millden lodge, including Henry James, the author, and his cousin Beatrice Farrand the noted American Landscape gardener. In 1909 it was reported that Mrs John Jacob Astor had consulted Cadwalader at his Scottish shooting lodge about commencing divorce proceedings against her husband.
References
Background material on JL Cadwalader
IN MEMORIAM JOHN L CADWALADER MARCH THE ELEVENTH
MCMXIV
http://archive.org/stream/inmemoriamjohnl00unkngoog/inmemoriamjohnl00unkngoog_djvu.txt
http://www.cadwalader.com/assets/HistoryBrochure.pdf
Historical Background to Cesena Sulphur
Introduction
Cesena Sulphur is one of the leading UK tax cases on the residence of Corporations for tax purposes, but behind the scenes is a rather more fascinating story of the struggle for Hungarian independence, and a brave and fearless mine manager who won over a group of murderous Italian Miners.
The Tax Case
Mr. Robert Larchin, Secretary to the Cesena Sulphur Company, Limited, appealed against an assessment of £5,834 under Schedule D. of the Income Tax Acts in respect of the profits of the said Company for the year 1874, and realised by the Company in their business of sulphur miners and manufacturers, at Cesena, in the Province of Forli, in the Kingdom of Italy.
It was contended, on the part of the Company, that the assessment should be restricted to that portion of the profits which is distributed amongst the shareholders of the United Kingdom.
THE Cesena Sulphur Co, LTD.
1, 2. The Cesena Sulphur Co, Ltd, hereinafter called the company, was formed to carry on the trade or business of sulphur miners, manufacturers, or merchants, at Cesena, in the province of Firli, in Italy. It was incorporated under the Companies Acts, 1862 and 1867, on October 27. 1871, with a capital of 350,000 pounds, divided into 35,000 shares of 10 pounds each, and was subsequently registered in Italy, for all purposes, in the following year, viz, on 1 November 1872.
3. By the articles of association (forming part of the Case) the company, so far as its affairs in the United Kingdom are concerned, is managed by a board of eight directors, holding their meetings at the registered office of the company in England. There is an Italian delegation, consisting of two or three members of the board, resident in Italy, by whom all the practical management of the company's properties and affairs is carried on. One of the Italian directors is managing director of the company, and resides at Cesena.
4. All the operations connected with the manufacture and sale of sulphur are wholly and exclusively carried on at Cesena, where the profits of the company (if any) are earned, but the Italian members of the board are in constant correspondence with their co-directors resident in France and England, who meet at the English registered office, No 84, King William Street, in the City of London.
5. Transcripts and copies of the company's books of accounts are sent to London, where the register of the shareholders, prescribed by the English law, is kept, but all the original books of accounts of the company, and all its moneys, are kept in Italy, the dividends required for the English shareholders being the only part of its profits which are sent to this country. The principal banking accounts of the company are kept at Turin and at Paris; the London banking accounts being kept for the payment of offices and administrative expenses and of dividends here.
6. The shares of the company are divided between the English and foreign shareholders in the proportion of 8,924 held in England to 26,076 held abroad.
7. The tax is leviable under Sched D of the Income Tax Acts, 1842 and 1853; under the former of those Acts (see s 1, Sched D) certain duties are granted to Her Majesty on the annual profits or gains arising or accruing to any person residing in Great Britain from any kind of property whatever, whether situate in Great Britain or elsewhere … and on the annual profits or gains arising or accruing to any person residing in Great Britain from any profession, trade, employment. or occupation, whether the same shall be respectively carried on in Great Britain or elsewhere.
8. By s 40 of the Act of 1842 it is enacted that all bodies politic, corporate, or collegiate, companies, fraternities, etc, whether corporate or not corporate, shall be chargeable with such and the like duties, as any person would, under and by virtue of the said Act, be chargeable with.
9. By the Act of 1853, the like duties as are referred to in para 7, are granted to Her Majesty on profits arising from property, profession, trade, and offices (inter alia) s 2.
The question for the opinion of the Court therefore is, whether the Company is liable to make a return in respect of all the annual profits wholly made by its business in Italy, and is chargeable to income tax thereon, or whether, as is contended on the part of the Company, the London directors are only to make a return and to pay income tax in respect of so much of the profits made abroad as is remitted to this country for distribution among the shareholders residing in the United Kingdom.
The Judgement of B Huddleston
“Sir Henry James said at this, "I am not going through the different clauses of the case but in substance, they amount to this; in this case of the Cesena Sulphur Company the trading is in Italy; the unrealised property is in Italy; everything is sold in Italy, the fixed property is in Italy; the case states that no goods are ever sent to England; the majority of the shareholders are either in Italy or France, and a small minority only, about one-third, are in England; the original books are kept in Italy, the managing director is in Italy; he is residing in Italy; he is at Cesena; and therefore (said Sir Henry James) you have almost everything in Italy - books, profits, manufactures - altogether." At first I began to think that it appeared that the centre of business was in Italy; but when we came to look at the articles and the memorandum of association, and when we find that the object of the memorandum of association is, no doubt, to purchase sulphur from a company or firm established at Cesena, but that they contemplate "taking concessions of any lands wherever sulphur is likely to be obtained," and that it is not confined to Italy, and when we find that the general powers of the Company are for "selling, leasing, letting, and disposing of any of the lands, mines, and property acquired by the Company," we see by the memorandum, at all events, that the operations of the Company are not to be confined to Italy; and when we take the articles of association, the very first article of association is that "the Company is formed for the purpose of developing and working the mines of sulphur at Cesena aforesaid, and carrying on the business mentioned or included in the memorandum of association;" that is, carrying on the business of a Sulphur Company wherever sulphur may be found. When we look to see what the power is which is to be exercised by the directors, by the office in London, we find what the "board" is; it is "a meeting of the directors duly called and constituted." what is the business? "The working of the Company's mines, the mode of the disposal thereof, and the general business of the Company shall be wholly under the order, direction, and management of the directors, subject only to such control of general meetings as is hereafter provided for." Then the directors have power to register the Company, which they exercised; they registered it in Italy; they have power to accept promissory notes, and so on. "The office shall be at such place in London as the board shall from time to time appoint." A London bank is to be their "first and present bankers." It is true that they had a banker at Turin and a banker at Paris. They may invest their money in a reserve fund. General meetings are to be held; and those meetings which are described as ordinary or extraordinary are to be held in London, some of them by some particular means, but all certainly in London. There is the power of adjourning from place to place, no doubt, given to them. But when we come to consider what the board may do, we find that they may do everything with reference to the Company, and that their minutes recorded in their books are to be evidence. Now it is quite true that it is not said anywhere that the directors must hold their board meetings in London; but is quite obvious from the facts which are found in the case, and from all the requirements of the articles of association, that the books must be kept at the office and the office, according to the articles of association, must be in London; and inferentially, you arrive at the conclusion from the facts stated, and from the case that the directors are to meet in London.
Without going through the other different clauses of the articles of association, it seems that almost every act of the Cesena Company connected with the administrative part of its business is to be done in London. No doubt the manufacturing part may be done and was done in Italy; so supposing that in another part of the world they found sulphur and carried on their business there, the manufacturing part of the business would be carried on there, no doubt; but the administrative part of the business would be carried on at the place from which all the orders came, from which all the directions flowed, and where the appointments were made, where the appointments of the officers were revoked, where the agents were nominated, where their powers were recalled, where the money was received (whatever may have been sent), where the dividends were payable, and where the dividends were declared. We find that all those Acts are performed in London. I cannot help thinking that the main place of business of the Company is in England, and that Cesena is merely an agency, as it were, of the principal house; that agency being confined to the manufacture and sale of sulphur, but under the direction of the principal house.”
Cesena Sulphur was held to be liable to UK tax on all its profits on the basis that management and control were exercised in the UK.
The historical background to Cesena Sulphur
The background to the rather dry proceedings of the Cesena Sulphur Case make it far more interesting read, involving as they do the heroic son of a sometime Hungarian Prime Minister, an attempted murder by rebellious miners and an going struggle to make the sulphur mines a successful going concern against a background of sabotage and industrial strife.
The Cesena Sulphur Company was incorporated on 28th October 1871 , with a capital of £350,000 divided into 35,000 £10 shares, with the scope of acquiring various sulphur mines in the area of Cesena, in Emilia Romagna in Italy. On 28th April 1872, the company acquired as a going concern, the mines at Boratella 1 ( in the Comune of Mercato Saraceno) and 18th Ju;ly 1872, it was allowed by a Royal Decree to start business in Italy.
Sulphur was greatly in demand at the time for gunpowder, bleaching, the manufacture of sulphuric acid and in medicines.
Between 1874 and 1880, there was boom in sulphur production and Boratella 1 produced an average of 10,000 tons of raw sulphur a year; however from 1880 onwards , the sulphur industry went into a period of crisis, caused by a fall in price of about 45% and increasing competition from Sicilian sulphur. Cesena sulphur tried to keep prices up, by restricting supply but was increasingly forced to borrow fro, the Geisser Bank in Turin at sky high rates of interest. By 1887, the inevitable could not be postponed and Cesena Sulphur filed for bankruptcy in the Court at Forli.
Behind the operations of the Cesena Sulphur Company at Boratella was a very remarkable man indeed. The Managing Director in Italy referred to in the tax case was Francesco (Ferenc) Kossuth. He was the son of Lajos Kossuth, the great Hungarian Patriot, a journalist and member of the Hungarian Diet who had long been an advocate of Hungarian national identity within the Austro-Hungarian Empire. Lajos Kossuth was arrested for High Treason in 1837and on his release from prison he married Teresa Meszleny. Ferenc was born in 1841. In 1848, following an uprising in France, revolutions spread all across Europe including Hungary and in 1848 Kossuth demanded parliamentary government for Hungary. In April 1849 he issued the Hungarian Declaration of Independence and was appointed Regent-President of Hungary. After the intervention of the Russians, the Hungarian Revolution was crushed and Ferenc headed across the Ottoman Frontier into exile. Eight year old Ferenc and his younger siblings were detained by the Hungarian authorities in the fortress of Pressburg (Bratislava) After widespread protests Ferenc and his siblings were released and put on a Danube steamer by the Hungarian Police to be sent to join their father in Asia Minor, they were later joined by their mother who had a price put on her head by the Hungarian authorities.
In 1851, the whole family were evacuated from Smyrna (Izmir) on the USS Mississippi, having been granted asylum in the USA. While Lajos toured the US and gradually fell out with the American Government, Ferenc quietly got on with his studies in London and Paris. Ferenc graduated in engineering and commenced his career a railway engineer in Devon. By this time, Lajos had fallen out with the Americans, contributed to the downfall of Lord Palmerston and ended up in Italy. The Kossuths were a close knit family and Ferenc followed his father to Italy, where he resumed his career as a railway engineer on the La Spezia- Genova- Nervi route.
After some time, Ferenc married an English heiress Emily Hoggins and moved to Cesena. He was ambitious and determined to make his own way in life, without using his father’s Italian political connections, and came to the notice of the English entrepreneurs who were trying to develop the Cesena Sulphur industry. In 1873, they asked Ferenc to become the Managing Director of Cesena Sulphur. Ferenc’s unusual background and his training in industrialised England, coupled with his strong personality allowed him to set about trying to make a success of the sulphur mines. It was literally a job made in hell. According to a contemporary description:
“The miners were stubborn and savage men who fought with both the mine-owners and local authorities. Although there were some 2,000 miners in the sulphur mines at Boratella, the Italian |Government was unable to maintain a barracks for the Carabinieri, because the miners had threatened to kill them. Many times a whole battalion of Carabinieri had to be sent into Boratella to confront the restless miners. When Kossuth first went to visit the mine, the miners decided to eliminate him
Ferenc had to go on an inspection of the mine, which involved descending an 80 metre shaft in a cage with the Chief Engineer. When the two men arrived at the bottom, they found that two out of three of the cables supporting the cage had been cut. With no choice, they went back to the surface supported by one cable only and mercifully survived. Back on the surface, Kossuth confronted the miner’s ringleader, out his arm on his shoulder and said ‘You wanted to cut the cable, you wanted to kill me. From now on, when I go into the mine, it will always be with a miner- but you will not know in advance which one.’
Kossuth started to win over the hard-bitten miners but his problems were by no means over. He continued to have persistent problems with Natale Dellamore , a local landowner who controlled the horse railway which was the only means of exit for the mine and who demanded extortionate tolls. That dispute rumbled through the Court in Forli for years.
Having one the respect of the miners, they continued to be personally loyally to Ferenc. On one occasion they stayed below ground in considerable peril to fight a fire which was at risk of destroying a large part of the mine. Notwithstanding, their personal respect for Kossuth, the miners continued to behave in murderous fashion towards their supervisors. After the murder of another supervisor, when the Carabinieri were unable to catch the killer, Ferenc followed him into the mountains, fought with him hand-to -hand and delivered him to the chief of the Carabinieri.
However, even Kossuth could not win his last struggle to sustain the profitability of the mine and on 27th May 1887, after a turbulent 14 years he was forced to take to books to the Court in Forli and declare the mine was bankrupt. Soon after, his beloved Emily became very ill and they moved way for health reasons, but she died in October 1887. Ferenc continued to work in Italy as the managing director of a company which constructed iron and steel bridges in Naples. In 1894 his father died and Ferenc returned to Hungary where he became Head of the Independence Party and later Minister of Foreign Trade. Ferenc Lajos Kossuth died on 25th May 1914, a few months before the war which finally led to an independent Hungary
The story of Ferenc Kossuth is largely adapted from material on the excellent Italian website
http://www.miniereromagna.it/pag_kossut3a.html
Wednesday, 23 May 2012
Hear the one about the Englishman, the Scotsman and …
Hear the one about the Englishman, the Scotsman and …
Still waiting for the Treasury to issue the draft legislation on the Statutory Residence Test, we got another interesting diversion, the definition of a Scottish Taxpayer.
HMRC have issued a technical note “Clarifying the Scope of the Scottish Rate of Income Tax”
The Scotland Bill received Royal Assent on 1st May 2012 and became the Scotland Act. http://www.scotlandoffice.gov.uk/scotlandoffice/16981.html
The Act allows a Scottish rate of income tax to be charged on the non-savings income of those defined as Scottish taxpayers. The rate will be determined by reducing the UK basic, higher and additional rates by 10 pence in the pound and then adding a new Scottish rate set by the Scottish Parliament.
Although the Scottish Parliament sets only one rate (the Scottish rate), this effectively gives rise to three rates: the Scottish basic rate; the Scottish higher rate; and the Scottish additional rate.
So the UK rates would be reduced to 10%, 30% and 35%. A Scottish rate of 7% would mean a Scottish Basic rate of 17%, a higher rate of 37% and an additional rate of 42%. Alternatively, a Scottish rate of 11% would lead to a Scottish Basic rate of 21%, a higher rate of 41% and an additional rate of 46%.
The non-savings income of a Scottish taxpayer (as defined by Part 3 of the Scotland Act 2012) will generally be liable to the Scottish rate of income tax.
Savings income and dividend income will still be taxed at the UK rate.
Of course, the key to all this is to define a Scottish taxpayer. The legislation defines a Scottish taxpayer as
80D Scottish taxpayers
(1)In any tax year, a Scottish taxpayer is an individual (T)—
(a) who is resident in the UK for income tax purposes, and
(b) who, for that year, meets condition A, B or C.
(2)T meets condition A if T has a close connection with Scotland (see section 80E).
(3)T meets condition B if—
(a)T does not have a close connection with any part of the UK other than Scotland (see section 80E), and
(b)T spends more days of that year in Scotland than in any other part of the UK (see section 80F).
(4)T meets condition C if, for the whole or any part of the year, T is—
(a)a member of Parliament for a constituency in Scotland,
(b)a member of the European Parliament for Scotland, or
(c)a member of the Scottish Parliament.
(5)In this Chapter “the UK” means the United Kingdom.
80EClose connection with Scotland or another part of the UK
(1)To find whether, for any year, T has a close connection with any part of the UK see—
(a)subsection (2) (where T has only one place of residence in the UK), or
(b)subsection (3) (where T has 2 or more places of residence in the UK).
(2)T has a close connection with a part of the UK if in that year—
(a)T has only one place of residence in the UK,
(b)that place of residence is in that part of the UK, and
(c)for at least part of the year, T lives at that place.
(3)T has a close connection with a part of the UK if in that year—
(a)T has 2 or more places of residence in the UK,
(b)for at least part of the year, T’s main place of residence in the UK is in that part of the UK,
(c)the times in the year when T’s main place of residence is in that part of the UK comprise (in aggregate) at least as much of the year as the times when T’s main place of residence is in any one other part of the UK, and
(d)for at least part of the year, T lives at a place of residence in that part of the UK.
(4)In this section “place” includes a place on board a vessel or other means of transport.
80FDays spent in Scotland or another part of the UK
(1)T spends more days of a year in Scotland than in any other part of the UK if (and only if)—
(a)the number of days in the year on which T is in Scotland at the end of the day
equals or exceeds
(b)the number of days in the year on which T is in any other part of the UK at the end of the day.
(2)But T is not to be treated as being in the UK at the end of a day if—
(a)on that day T arrives in the UK as a passenger,
(b)T departs from the UK on the next day, and
(c)during the time between arrival and departure T does not engage in activities which are to a substantial extent unrelated to T’s passage through the UK.
So as a first step at ( a) the individual has to be a UK tax resident. This will be as defined under the new Statutory Residence Test to be introduced from 6th April 2013. If you are not a UK tax resident, you cannot be a Scottish Taxpayer.
Once UK tax residence is established an individual will then need to go through the steps to discover whether they are a Scottish taxpayer. If according to the Test at Section 80E, the individual has only one main residence in the UK and that residence is in that part of the UK (not Scotland) , they would not be in a Scottish taxpayer. In other words if an individual only has one main residence and that residence is in Scotland, they are not a Scottish Taxpayer.
If an individual has two main residences one another part of the UK and one in Scotland, then if they spend a longer period at the Scottish main residence, they will be a Scottish Taxpayer.
For individual who cannot decide their main residence based on that test, then we start counting midnights in Scotland.
Anybody who is defined as a Scottish taxpayer will be a Scottish taxpayer for the whole year.
For the avoidance of doubt, HMRC’s FAQs, establish that Scottish people living outside Scotland are not Scottish Taxpayers. English, Welsh or even French people living in Scotland, who are UK tax residents will be Scottish taxpayers.
Personal allowances will be the same throughout the United Kingdom.
The Scottish tax rate is bound to cause some anomalies. A and B both work side by side for the same employer in Berwick in England and both earn £30,000 a year. A lives in England and B lives in Scotland. B is, therefore, a Scottish taxpayer. So despite having the same income, they could end up paying a different rate of tax and having a different net income, based on their residence.
As employees, both are subject to PAYE. In order that the employer knows that B is a Scottish taxpayer and subject to a different tax rate, there will be a Scottish tax code beginning with an “S”. So under the current system, A would have a code of 810L and B would have a code of S810L to identify him as a Scottish taxpayer. For the self-employed, HMRC will kindly be writing to them to advise them if they appear to be a Scottish taxpayer.
Pensioners will also pay the Scottish tax rate on their pension income (since it is defined as non-savings income).
Some further tweaks will also be necessary to allow for the effect of differing basic rates on pension and charitable contributions.
Fortunately, all MPs, MEPs and MSPs for Scottish Constituencies will be Scottish taxpayers even if they live elsewhere in the UK.
Since it is not a discrete tax, but rather a separate tax rate, the United Kingdom’s Double Tax Treaties will continue to apply.
I am sure we will return to this subject in the future as more anomalies or special cases are revealed.
Tuesday, 22 May 2012
Adam Smith's Canons of Taxation
Often quoted, paraphrased and argued about, Adam Smith's Canons of Taxation were published in the "Wealth of Nations". The actual Canons are reproduced below:
Before I enter upon the examination of particular taxes, it is necessary to premise the four following maxims with regard to taxes in general.
1. The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state. The expense of government to the individuals of a great nation, is like the expense of management to the joint tenants of a great estate, who are all obliged to contribute in proportion to their respective interests in the estate. In the observation or neglect of this maxim, consists what is called the equality or inequality of taxation. Every tax, it must be observed once for all, which falls finally upon one only of the three sorts of revenue above mentioned, is necessarily unequal, in so far as it does not affect the other two. In the following examination of different taxes, I shall seldom take much farther notice of this sort of inequality; but shall, in most cases, confine my observations to that inequality which is occasioned by a particular tax falling unequally upon that particular sort of private revenue which is affected by it.
2. The tax which each individual is bound to pay, ought to be certain and not arbitrary. The time of payment, the manner of payment, the quantity to be paid, ought all to be clear and plain to the contributor, and to every other person. Where it is otherwise, every person subject to the tax is put more or less in the power of the tax-gatherer, who can either aggravate the tax upon any obnoxious contributor, or extort, by the terror of such aggravation, some present or perquisite to himself. The uncertainty of taxation encourages the insolence, and favours the corruption, of an order of men who are naturally unpopular, even where they are neither insolent nor corrupt. The certainty of what each individual ought to pay is, in taxation, a matter of so great importance, that a very considerable degree of inequality, it appears, I believe, from the experience of all nations, is not near so great an evil as a very small degree of uncertainty.
3. Every tax ought to be levied at the time, or in the manner, in which it is most likely to be convenient for the contributor to pay it. A tax upon the rent of land or of houses, payable at the same term at which such rents are usually paid, is levied at the time when it is most likely to be convenient for the contributor to pay; or when he is most likely to have wherewithall to pay. Taxes upon such consumable goods as are articles of luxury, are all finally paid by the consumer, and generally in a manner that is very convenient for him. He pays them by little and little, as he has occasion to buy the goods. As he is at liberty too, either to buy or not to buy, as he pleases, it must be his own fault if he ever suffers any considerable inconveniency from such taxes.
4. Every tax ought to be so contrived, as both to take out and to keep out of the pockets of the people as little as possible, over and above what it brings into the public treasury of the state. A tax may either take out or keep out of the pockets of the people a great deal more than it brings into the public treasury, in the four following ways. First, the levying of it may require a great number of officers, whose salaries may eat up the greater part of the produce of the tax, and whose perquisites may impose another additional tax upon the people. Secondly, it may obstruct the industry of the people, and discourage them from applying to certain branches of business which might give maintenance and employment to great multitudes. While it obliges the people to pay, it may thus diminish, or perhaps destroy, some of the funds which might enable them more easily to do so. Thirdly, by the forfeitures and other penalties which those unfortunate individuals incur, who attempt unsuccessfully to evade the tax, it may frequently ruin them, and thereby put an end to the benefit which the community might have received from the employment of their capitals. An injudicious tax offers a great temptation to smuggling. But the penalties of smuggling must arise in proportion to the temptation. The law, contrary to all the ordinary principles of justice, first creates the temptation, and then punishes those who yield to it; and it commonly enhances the punishment, too, in proportion to the very circumstance which ought certainly to alleviate it, the temptation to commit the crime. {See Sketches of the History of Man page 474, and Seq.} Fourthly, by subjecting the people to the frequent visits and the odious examination of the tax-gatherers, it may expose them to much unnecessary trouble, vexation, and oppression; and though vexation is not, strictly speaking, expense, it is certainly equivalent to the expense at which every man would be willing to redeem himself from it. It is in some one or other of these four different ways, that taxes are frequently so much more burdensome to the people than they are beneficial to the sovereign.
The evident justice and utility of the foregoing maxims have recommended them, more or less, to the attention of all nations. All nations have endeavoured, to the best of their judgment, to render their taxes as equal as they could contrive; as certain, as convenient to the contributor, both the time and the mode of payment, and in proportion to the revenue which they brought to the prince, as little burdensome to the people. The following short review of some of the principal taxes which have taken place in different ages and countries, will show, that the endeavours of all nations have not in this respect been equally successful.
Before I enter upon the examination of particular taxes, it is necessary to premise the four following maxims with regard to taxes in general.
1. The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state. The expense of government to the individuals of a great nation, is like the expense of management to the joint tenants of a great estate, who are all obliged to contribute in proportion to their respective interests in the estate. In the observation or neglect of this maxim, consists what is called the equality or inequality of taxation. Every tax, it must be observed once for all, which falls finally upon one only of the three sorts of revenue above mentioned, is necessarily unequal, in so far as it does not affect the other two. In the following examination of different taxes, I shall seldom take much farther notice of this sort of inequality; but shall, in most cases, confine my observations to that inequality which is occasioned by a particular tax falling unequally upon that particular sort of private revenue which is affected by it.
2. The tax which each individual is bound to pay, ought to be certain and not arbitrary. The time of payment, the manner of payment, the quantity to be paid, ought all to be clear and plain to the contributor, and to every other person. Where it is otherwise, every person subject to the tax is put more or less in the power of the tax-gatherer, who can either aggravate the tax upon any obnoxious contributor, or extort, by the terror of such aggravation, some present or perquisite to himself. The uncertainty of taxation encourages the insolence, and favours the corruption, of an order of men who are naturally unpopular, even where they are neither insolent nor corrupt. The certainty of what each individual ought to pay is, in taxation, a matter of so great importance, that a very considerable degree of inequality, it appears, I believe, from the experience of all nations, is not near so great an evil as a very small degree of uncertainty.
3. Every tax ought to be levied at the time, or in the manner, in which it is most likely to be convenient for the contributor to pay it. A tax upon the rent of land or of houses, payable at the same term at which such rents are usually paid, is levied at the time when it is most likely to be convenient for the contributor to pay; or when he is most likely to have wherewithall to pay. Taxes upon such consumable goods as are articles of luxury, are all finally paid by the consumer, and generally in a manner that is very convenient for him. He pays them by little and little, as he has occasion to buy the goods. As he is at liberty too, either to buy or not to buy, as he pleases, it must be his own fault if he ever suffers any considerable inconveniency from such taxes.
4. Every tax ought to be so contrived, as both to take out and to keep out of the pockets of the people as little as possible, over and above what it brings into the public treasury of the state. A tax may either take out or keep out of the pockets of the people a great deal more than it brings into the public treasury, in the four following ways. First, the levying of it may require a great number of officers, whose salaries may eat up the greater part of the produce of the tax, and whose perquisites may impose another additional tax upon the people. Secondly, it may obstruct the industry of the people, and discourage them from applying to certain branches of business which might give maintenance and employment to great multitudes. While it obliges the people to pay, it may thus diminish, or perhaps destroy, some of the funds which might enable them more easily to do so. Thirdly, by the forfeitures and other penalties which those unfortunate individuals incur, who attempt unsuccessfully to evade the tax, it may frequently ruin them, and thereby put an end to the benefit which the community might have received from the employment of their capitals. An injudicious tax offers a great temptation to smuggling. But the penalties of smuggling must arise in proportion to the temptation. The law, contrary to all the ordinary principles of justice, first creates the temptation, and then punishes those who yield to it; and it commonly enhances the punishment, too, in proportion to the very circumstance which ought certainly to alleviate it, the temptation to commit the crime. {See Sketches of the History of Man page 474, and Seq.} Fourthly, by subjecting the people to the frequent visits and the odious examination of the tax-gatherers, it may expose them to much unnecessary trouble, vexation, and oppression; and though vexation is not, strictly speaking, expense, it is certainly equivalent to the expense at which every man would be willing to redeem himself from it. It is in some one or other of these four different ways, that taxes are frequently so much more burdensome to the people than they are beneficial to the sovereign.
The evident justice and utility of the foregoing maxims have recommended them, more or less, to the attention of all nations. All nations have endeavoured, to the best of their judgment, to render their taxes as equal as they could contrive; as certain, as convenient to the contributor, both the time and the mode of payment, and in proportion to the revenue which they brought to the prince, as little burdensome to the people. The following short review of some of the principal taxes which have taken place in different ages and countries, will show, that the endeavours of all nations have not in this respect been equally successful.
Friday, 4 May 2012
Double taxation ; exemption vs foreign credit method.
As part of researching an upcoming training course on Double Taxation, I came across a 2002 Article in the IBFD Bulletin[i] by the famous German commentator on taxation, Professor Vogel, which gave some useful insights on why, in preventing double taxation, some countries operate a policy of tax exemption while others give a foreign tax credit. I summarise the Article , which repays a thorough reading below.
As a sometime historian I always find the historical background quite interesting in understanding the present. Apparently, the first double tax treaty came into force over a hundred years ago between Austria and Prussia , the two states distributed the rights to tax goods and events between themselves, so they were taxed only in the one state and exempt in the other. This might be called the “continental” system.
The United Kingdom, instead, used a credit method for taxes levied by other states of the British Empire on goods and events. The United States introduced a unilateral credit for foreign taxes in 1918.
In the late 1920s, The League of Nations (forerunner to the United Nations) was in the process of producing a model Double Tax Treaty; however, the USA was not a member of the League of Nations and in the pre-war period both the United Kingdom and British Empire states were reluctant to conclude Double tax treaties. Therefore, earlier Continental Double tax treaties used the exemption method. In the post- war period as the United States, United Kingdom and Commonwealth states started to conclude double tax treaties these provided for foreign tax credits. So ,two “rival” systems existed. This is recognised by the OECD Model Treaty which allows for the relief of Double Taxation through either exemption or foreign tax credit, or where states use different methods provide for on state to use exemption and the other to use credit. So we have essentially coasted along with each state using the methods favoured by them.
Professor Vogel was commenting on which of the two systems- credit or exemption was superior. In doing so, he referred to some earlier theories.
Richard Musgrave – distinguished between two types of tax neutrality:
Capital-export neutrality – meaning the investor pays the same total ( domestic plus foreign) tax whether he receives investment income from foreign or dometic sources.
Capital-import neutrality –meaning that capital funds originating in various countries should compete at equal terms in the capital market of any country
Musgrave assumed that only capital – export neutrality comports with the goal of economic efficiency – and the way to achieve this was to tax the worldwide income of foreigners while granting them a credit for foreign taxes paid.. Their theories justified the United States system of giving foreign tax credits,.
Vogel argues that to a certain extent “capital –export neutrality” discriminated against investment in low tax states and promoted fiscal imperialism
Vogel quotes another article by Michael J Graetz and Michael O’Hear which appeared in the Duke Law Journal of 1997 . This article credited Thomas Sewall Adams , a Professor of Economics at Yale university and tax adviser to the US Treasury department with the introduction of the foreign tax credit in the United States. In 1918, the then very low US income tax rates were raised to pay for the costs of the First World War and double taxation became a potentially serious burden. As a result Adams proposed that Americans should get a credit against their US taxes for taxes paid in a foreign country. The Revenue Act 1921 limited the foreign tax credit to a proportion of the taxpayer’ s overall US tax liability equal to the proportion of his global income derived from foreign sources. Adam’s basic goal was to establish equity for both the taxpayer and the state of source. He chose credit rather than exemption as a method, since he considered residence as the most important backstop to source- based taxation.
According to Vogel, the foreign tax credit was not introduced to preserve residence state taxation, nor to attain capital-export neutrality, rather the idea was to give primacy to taxation in the state of source and to prevent double non-taxation. However, Vogel regards these aims as being better achieved by exemption with progression and that “At any rate , the foreign tax credit was not and never was , a method superior to exemption.”
Having considered the above arguments, Vogel then goes on to consider whether the law of the European Community (now European Union) requires a certain method to be used in treaties between EU Member States. As long as direct taxes are not harmonised within the European Union, Member States are free to choose their own system and rates of direct taxation ( to the extent they do not grant non-residents exceptionally low rates of tax or other favourable circumstances which might constitute an illicit subsidy). Residents of member states are entitled to exploit the differences resulting from this diversity of tax systems and striving for capital-export neutrality would, therefore, interfere with their freedom to do so. Vogel points out that establishing that there is interference or restriction of market activities does not necessarily mean that there has been a violation of the EU Treaty.
In the end Vogel concluded that , even though the credit method might in theory violate EU law, there was little chance that that the ECJ would in the near future declare the credit method a violation of the rights of EU citizens. However, he then concludes the article;
“.. it is very well possible that the conflict between the credit method and the EC’s market freedoms will one day lead to a verdict of the Court against the credit method to avoid double taxation among the EU Member states”
[i] Which Method Should the European Community Adopt for the Avoidance of Double Taxation? Prof Dr Klaus Vogel – IBFD Bulletin – Tax Treaty Monitor
Introduction
I work in the area of UK personal and expatriate taxation. There is a lot going on in tax at the moment and barely a day is now going by without some new development . I am blogging on any areas of day to day interest which I come across which hopefully may be of interest to others in the field. Any views expressed are entirely my own and not of an employer or organisation. I am not seeking to give advice and you should not rely on any of the views expressed as a basis for either action or inaction.
Subscribe to:
Comments (Atom)