Issue 87 – 9 December 2008


There’s nothing like a party to cheer us all up, and our Landmark party did just that for all who attended it.  I really want to thank not only everyone who came along, but also the literally hundreds of emails from clients and colleagues all over the world who couldn’t come but sent warm wishes to us all.  As I said in my speech, It hasn’t been an easy year for any of us, but the strength of relationships is tested when the going gets tough, and these have not proved wanting.   My thanks also go to Sweet & Maxwell, my publishers of International Tax Systems and Planning Techniques, and to Opus Group for their joint sponsorship.

This Issue, our last Newsletter for 2008, reviews the way in which the US intends to formulate its future fiscal policy under Barack Obama, which bears remarkable similarity to the way in which the UK has announced similar ideas in the November Pre-Budget Report.  It seems that discouraging entrepreneurs at a time when they are so badly needed is the misguided link between both regimes and gives further credence to the way in which the UK is seen as the US’ puppet in world affairs.  

In fact, the oldest puppet traces its roots back to the 16th century with the Punch and Judy shows travelling around England; the name Punch was derived from the Italian Pulcinello (subsequently anglicized to Punchinello) who was a manifestation of the Lord of Misrule figure of deep-rooted mythologies. Sounds like Gordon Brown and Alastair Darling combined?  Well read on…

The Lord of Misrule was known in Scotland as the Abbot of Unreason – so we certainly have the Scottish connection.  The Lord of Misrule was generally a peasant or sub-deacon appointed to be in charge of Christmas revelries, which often included drunkenness and wild partying, in the pagan tradition of Saturnalia. While mostly known as a British holiday custom, the appointment of a Lord of Misrule comes from antiquity. In ancient Rome, from the 17th to the 23rd of December, a Lord of Misrule was appointed to overturn the ordinary rules of life, so that in a topsy-turvy fashion, masters served their slaves, and the offices of state were held by slaves.

Unfortunately, our Lords of Misrule are unlikely to preside over any revelries this year, and also unfortunately, their term of office is going to extend beyond the 23rd December.  And their topsy-turvy ideas of discouraging entrepreneurialism by soaking the rich are so out-dated, and precisely what will foster the recession that everyone fears.  

By comparison, our country review each month takes us to the Middle East in this Issue, where we highlight the changes in the Israeli tax system designed to encourage immigration and provide tax incentives for a ten year period for those taking up Israeli tax residence. I can see the headlines – “Israel welcomes those pushed out by Obama and Brown”.

So now we are coming up to the end of a year which has been for many their annus horribilis, as Her Majesty The Queen coined the term in 1992, when she said:

“1992 is not a year on which I shall look back with undiluted pleasure. In the words of one of my more sympathetic correspondents, it has turned out to be an ‘Annus Horribilis’. I suspect that I am not alone in thinking it so. Indeed, I suspect that there are very few people or institutions unaffected by these last months of worldwide turmoil and uncertainty”.

Fortunately, we are not aware of major catastrophes amongst the IFS client base, although I am sure we have all suffered losses on the values of our savings and investments.  In any event, I would like to take this opportunity of thanking our clients and colleagues for their support this year, to pledge our support to them in the coming year, and to wish everyone a happy and relaxing Christmas and a successful and above all healthy New Year.

Roy Saunders

Tax Policy of the Obama Administration

“If you were more liberal in your card playing and more conservative in your politics, we’d get along much better.”  This comment by one of President-Elect Barack Obama’s former sparring partners within the Senate sums up some popular sentiment; beyond ”change”, do the fiscal cards Mr Obama  hold contain a joker in the form of a radical fiscal agenda?

The headline policy consists of the intention to reverse the Bush tax cuts of 2001 and 2003 on the top two rates of income tax, replacing the present rates of 33% and 35% with new rates of 36% and 39.6%.  Complementing this is a commitment to restore the phase-out of personal exemption (the PEP provision) for high-income taxpayers, together with enforcing stricter limitations for certain itemised deductions.  Finally, Mr Obama proposes to introduce a new Social Security payroll tax of between 2 – 4% on wages in excess of $250,000. This has the hallmark of a “headline grabber” as most people reporting adjusted gross income (AGI) in excess of $250,000 per year receive the bulk of their income in forms other than wages or salary.  The IRS further estimates that little more than $1 billion is earned in wages by persons with annual gross income exceeding $250,000; as such, the proposed additional levy of between 2 – 4% might be at least partially considered as a political exercise in smoke-and-mirrors.  

These new proposals bear striking similarity to those of the UK government.  In the UK’s 2008 Pre-Budget Report, major tax rises were proposed for high earners (to take effect from April 2011).  These measures include a new 45% tax rate and the removal of the personal allowance for individuals with an annual income of more than £150,000. In addition, the tax free personal allowance is to be halved for individuals earning between £100,000 and £140,000.   Again, it is not anticipated that such proposals will raise any significant revenues for the Treasury, but they mark a definite move, alongside the US, to target the highest earners, many of whom may feel inclined to move themselves and their wealth to more tax-friendly jurisdictions.

The US has, however, pledged to provide some measures of tax relief for entrepreneurs (notwithstanding the protests of “Joe the Plumber” during the election campaign). Mr Obama has said that he will eliminate capital gains tax for start-ups and small enterprises, although the definition of what will constitute one of these entities remains vague.  Other significant policy proposals affecting entrepreneurs include a refundable credit of $3,000 for firms that hire additional US citizen workers during 2009 and 2010.  Note that this echoes a similar scheme previously enacted with limited success by the Carter Administration in 1977.  Domestic US based entrepreneurs  should also benefit from an additional “Making Work Pay Credit” of up to $500, which, though available to all workers, will particularly help alleviate the current ‘double-tax’  suffered by self-employed small business owners who are required to pay both the employee and employer side of payroll taxes.  A small business health tax credit, providing a refundable credit of up to 50% of employer contributions made on behalf of their employees is also in the policy pipeline.

Partners and owners of flow-through businesses – sole proprietorships, partnerships and S. corps – will see their tax burden rise.  As these sources of business income are not subject to corporation tax, but instead ‘flow-through’ to the owner’s individual income tax return, so they will become subject to the proposed new top graduated rates of 36% and 39.6%.  In addition, Mr Obama’s tax agenda advocates the closure of the current loophole surrounding publicly traded partnerships (PTPs) that are presently exempt from corporation status by virtue of generating in excess of 90% of their income from passive sources.  Reclassification of these entities as C. corps raises the spectre of double-taxation, as income is taxed both at the entity level and subsequently at the individual level after distribution.  

Long Term Capital Gains and Qualified Dividend tax rates are also set to rise.  These are likely to rise from 15% to 20% for those earning in excess of $200,000 from 2011.  Similarly, the top rate on qualified dividend income is set to lose its current special status, and become taxable at marginal rates.  There are also proposals to change the tax treatment of “carried interests” received by private equity fund managers to ordinary income as opposed to capital gains.  Although this policy shift is likely to cause problems for fund managers, the net gain to the US Treasury is likely to be small in terms of the economy at large.

Mr Obama has in the recent past shown support for specific legislation targeting perceived abuses using non-US “offshore” tax havens and entities.  The evocatively named “Stop Tax Havens Abuse Act” sponsored by Mr Obama with Senators Levin and Coleman perhaps gives some insight into the current thinking of the President Elect.  Here, the proposed legislation introduces a rebuttable presumption that a US person who transfers property to a foreign entity incorporated or operating in one of 34 listed countries (including Switzerland, a fellow OECD member and full Treaty Partner) controls that foreign entity and would therefore be taxable on all income associated with the transfer.  It would also require that the IRS be informed of any financial account opened by a US financial institution on behalf of a US person in any one of the 34 countries.  How much of this will be given political impetus by the recent UBS undisclosed accounts case as well as the Lichtenstein LTG Bank case remains to be seen, but based on prior performance, there is every likelihood of tightening up of the reporting regulations and of enforcement activity by the IRS under the new administration.

Mr Obama will have a lot of work to do to convince both Houses of Congress, and the election has produced increased Democratic majorities in both Houses, albeit without the 60 seats required for a “filibuster proof” majority in the Senate. The new administration will inherit a budget deficit of approximately $450 billion, together with the potential exposure to additional financial liabilities under the provisions of the EESA.  This will no doubt limit his ability to borrow so heavily compared to the practices of the outgoing Administration.  

Time will tell if, in the words of Mr Obama, this is “change we need”.

Summary of the Obama major tax policy proposals:

– Increase the top two rates of income tax to 36% and 39.6%.

– New Social security payroll tax between 2 – 4% on wages over $250,000.

– Refundable $3,000 credit for firms hiring additional workers in 2009/10.

– “Making work pay” and small business health tax refundable credits.

– Increase long-term capital-gains rate to 20%.

– Qualified dividends to become taxable at marginal rates.

– Treatment of publicly-traded partnerships (PTPs) as C.corps.

– Tax “carried interest” as ordinary income rather than as capital gains.

IFS would like to thank Paul Hocking of Frank Hirth for the above article.  Should you require any further information, please go to

Israel: Increased Tax Benefits for new Immigrants and Returning Residents

On 9 September 2008, the Israeli Parliament (the “Knesset”) adopted an important amendment of the Income Tax Ordinance (“the Amendment”) regarding the taxation of New Residents and Returning Residents. The Amendment will be in force upon publication in the Official Gazette (“Rashumot”), and includes the following benefits:

– New Residents will enjoy tax and reporting exemptions on every type of income, both ordinary and capital gains, which is not sourced in Israel, for a period of 10 years.

– In their first year as residents, New Residents will be entitled to a tax-free “adaption year”.

– A non-resident company, which is controlled by a New Resident, will not be deemed resident even if its business is managed and controlled by the New Resident from Israel, and consequently any income derived from such company by the New Resident, during his first 10 years of residence in Israel, will be tax exempt.

– Returning Residents, who have lived out of Israel for over 10 years, will be entitled to the same benefits as New Residents above. Transitionally, Returning Residents who have returned to Israel after January 2007 or will return until 31 December 2009 will be eligible for the same benefits even if they were non-residents for only 5 years prior to their return.

– Returning Residents who returned before 1 Janaury 2007, after having been non-residents for at least 3 years, will continue to enjoy the current 5-year exemption from certain passive income and the current 10-year exemption from capital gains. Returning Residents who will return from 1 January 2010 onwards, after having been non-residents for at least 6 years, but less than 10, will be eligible for the same benefits as those who returned before 1 January 2007.

Finally, in order to avoid the inherent uncertainty in the definition of “non-resident” (foreign resident), the definition has been eased so that any Israeli resident who has resided abroad for 4 consecutive years, will be deemed non-resident from the first day that he resided abroad, even if he is able to satisfy the test of having shifted the centre of his life abroad only for the third and fourth year.

IFS would like to thank George Rosenberg and Inbal Faibish of Rosenberg, Keren-Polak & Co., Advocates for the above article. Should you require any futher information, please go to