The Road to Ruin

J. Rickards, 2016

Tax Avoidance

The solution in the works for G7 nations is world taxation. This starts with a centralized tax information database shared by developed nations. [..] The new world tax system being planned is quite sophisticated. The problem tax authorities have today is they can see the side of a transaction conducted in their country, yet cannot see the other side because the counterparty is in another country. Tax authorities can submit information-sharing requests to other jurisdictions. Still, case-by-case inquiries are cumbersome and slow. The new world tax system is designed to decrease opacity and ease processing. World taxation is an automated digital auditor.

Each taxpayer and its affiliates are assigned a unique identification number. Each transaction type—royalties, interest, dividends, et cetera—is assigned an identifier. The counterparty to each transaction is identified using its unique code.

All corporate transactions are tagged with these digital identifiers and submitted to a shared database. This is like a tag-and-release marine mission aimed at great white sharks. The shark may look fearsome after release, yet authorities always know where to find it.

The world tax database will be available to all participants in the system including the G20 nations. The database would be housed on high-capacity computers using sophisticated algorithms and predictive analytics. Like the shark, companies could run, but no longer hide...

The Double-Dip

For a decade at the start of my career, I was international tax counsel to Citibank, then the world’s most powerful private bank. Citibank had branches in more countries than the U.S. Foreign Service had embassies. The bank, under the direction of legendary CEO Walter Wriston, was a bigger platform than the Department of State.

In the early 1980s, my colleagues and I prepared a U.S. income tax return that showed zero liability at a time when Citibank was highly profitable. Wriston objected. He said it was unseemly for the largest bank in the United States to pay no U.S. tax. He instructed us to pay a small amount. “You don’t need to pay a lot; just two or three percent. It looks bad if we pay nothing.”

We mastered the art of paying no taxes, but paying some tax was a challenge. There were many levers at our disposal. We used foreign tax credits, investment tax credits, or depreciation on Boeing 747s and the Alaska pipeline, which we legally owned and leased to users. We also used tax-free municipal bonds and discretionary loan loss reserves to dial down tax liability. [..] The Cayman Islands and Netherlands Antilles also came in handy.

Our challenge was that Citibank’s tax return was a finely tuned machine. Once you moved one lever, another lever might move on its own due to the complex interaction of credits, deductions, and elections in the Internal Revenue Code. We spent an entire year tuning the machine; now we needed to dismantle one small part without ruining the works. We had time and talent to pay the tax. Yet the lesson was not lost on me. For large, complex companies, paying taxes is not a requirement; it’s optional [..]

Tax leasing is [..also ..] an effective tool. Countries have different rules for deciding when a financing transaction is a loan or a lease. Equipment deals can be structured as a loan in one country (to deduct interest) and a lease in another country (to deduct depreciation). The parties double-dip on deductions with one piece of equipment.

The loan-lease double-dip is combined with tax treaty back-to-back structures to obliterate taxes in multiple jurisdictions. As tax counsel to Citibank, I saw triple-dip leases, where a single Boeing 747 was written off in South Africa, the United Kingdom, and Australia at the same time.