Difficult situations often call for simple solutions. Richard Nixon, a famous recluse, abhored having to host White House dinners as the President of the United States. Having become agitated after hosting his first banquet he instructed the White House chef to skip the soup course so that every dinner could be served within an hour. Whilst this simple measure seemed designed to ensure the timely conclusion to each banquet, the real motive behind the 'soup policy' was known to only a handful of people. More on this later, now I want to discuss another area of life where real motive for doing something is not readily apparent: tax planning.
Often, a tax scheme is given commercial substance to disguise the real motive behind a transaction - to save tax. This issue is well known to tax authorities worldwide and a new OECD report (Tackling Aggressive Tax Planning Through Improved Transparency and Disclosure) concludes that countries need to improve how they identify and respond to agressive tax planning to protect their tax base. A common difficulty identified in the report is how to get timely, targeted and comprehensive information. Quite often, countries are in the position of trying to close off tax loopholes after they have been exploited.
In an attempt to address agressive tax planning many countries, such as Australia, Canada, France, Italy, Netherlands, New Zealand, Portugal, Spain, UK, the US and most recently Ireland, have disclosure initiatives aimed at improving their ability to identify and respond to aggressive tax planning. In the UK alone, it is estimate that disclosure rules have allowed the UK treasury to cut off £12 billion in avoidance opportunities.
Often, even the threat of significant financial and other penalties is not enough to incentivise tax payers to disclose instances of aggressive tax planning before it happens. For instance, opportunties to legally avoid tax are common in transactions involving individuals and companies across international boundaries where classifications vary.
Ireland is in the process of implementing a scheme for the mandatory disclosure of tax avoidance schemes similar to that operated in Canada, the UK, the US and Portugal. However, given our perilous financial state, should the new Government consider further measure to protect the tax base. Already, a sensible idea to bring forward the tax filing deadline has been shelved. This simple measure which required self-employed businesses to pay and file tax returns in September would better enable the Department for Finance to manage the State's finances.
Other measures that the new Governement might consider include a requirement to inform Revenue of an intention to claim a deduction for certain expenses. A model for this type of scheme exists in the Netherlands where companies must give advance notice on capital losses. The US and Italian tax codes impose a requirement to reconcile differences between tax and financial accounting.
If you are interested you can download a copy of the report here
http://www.oecd.org/dataoecd/7/29/47020506.pdf
Back to Richard Nixon. It is true that he timed a number of banquets and was pleased when his staff were able to seat his guests, serve the meal, dispense with speeches and clear the room in less than 58 minutes. However, the real reason for skipping the soup course lay in his awkwardness and his lack of co-ordination. At his premier banquet, he spilt soup down his tie and then felt embarrassed when he had to address his guests. The solution to avoid being embarrassed in future - don't order the soup.
