The influence of banks in state legislation

 Banks play a key role in any developed country, managing money and financing operations and businesses which make the economy flourish. They are also relevant since they employ thousands of people in their countries. As a consequence, bankers are usually among the most rich and powerful people in any country.

 The banking sector, as well as any other professional sector, is concerned about how the world develops and how changes could affect its P&L account, so when a new and unwanted change -of any type- is introduced, they will use all their possible resources to keep their statu quo. Financial entities do this, as well as doctors, Bars associations or the pulp and paper industry.

                                              Spanish Central Bank Façade, Madrid

 However, the strength of the banking sector is outstanding. After all, they make things possible in a country, and without their support, most of the Governments in any determined country, would fall. So, it is easy to understand that Governments do not want to make the banks upset.

 This is known and accepted by the average taxpayer, as a generic characteristic of our society. Besides, these measures are usually taken in a very subtle way, because they are unpopular and put politicians under the shadow of doubt.

 Related operations: to sum up, the 2006 Spanish Personal Income tax Law (according to Corporate Income Tax Law) states that related operations should be assessed at market value, considering related operations, amongst others, the financing relationship between a bank and its Directors. That entails levying the banker’s money kept in his own bank as general income, whereas in normal circumstances it would be taxed as savings income, as a capital gain.

 Of course, the banking sector was not pleased with such a decision, but it did not last too long, because in 2008, the Personal Income Tax Regulation changed the Law, and made a sloppy exception for bankers in its Seventh Additional Provision.

 Financial leasing is a widely used contract by companies, since it provides some financial and tax benefits. The Corporate Income Tax clearly states that is has to be done through a financial entity, something which can alter the normal functioning of the market.

 Competition is not welcome: in September 2013, the Spanish Tax Agency issued a tax ruling which sets limits to crowdfunding, establishing a maximum of 6.000.-€ per investor and  year and a maximum of 3.000.-€ per investor for a single project. There is also a limit of 1.000.000.-€ for a single project. This measure is specially harmful for start-ups and entrepreneurs, since it is a new and innovative way to finance projects and ideas, and more importantly, with a great potential. This potential source of finance has now been hindered.

  Most of banking contracts are unregulated, i.e., they cannot be defined in any specific category of contract, and are usually regulated by general principles and the terms and conditions stipulated by the bank in an unilateral way. It is argued that they unregulated due to their special characteristics, but, as a matter of fact, that gives financial entities Public Entity-like power, since they act with a presumption of legality. In many cases, terms and conditions have been declared void, but after years of lawsuit.

 Corporate social responsibility is spreading its word, and financial entities should be caring about it, specially when their popularity has hit an all-time low due to recent scandals. Also, it is necessary a tighter control by national central banks, something that can be done by making them more independent. Trust is the main factor in the banking business, and banks have to regain it by leaving behind past mistakes.

Auditing The Simpsons

  As far as I can remember, I have always been a big fan of The Simpsons -yes, new generations of tax advisors are kicking in- and I specially enjoy watching how an American middle-class family of the 90s is depicted through the lens of satire. Of course, as the important part of life they represent, taxes are often mentioned, generally from a critical point of view.

  Obviously, due to the necessary informal tone of the show, legal terms and actual legal procedures are usually incorrectly depicted, if not ignored.

   But, how would it be a tax advisor-tailored episode? It is also a good excuse to point out some differences and similarities between the Spanish and American system.

   To sum up, Krusty the Clown, a well-known celebrity, is audited by the IRS to find he is one of the biggest tax cheats in American history, as he had secret bank accounts in the Cayman Islands.

 Even though the episode was first aired on February 11, 1996, cases are examined in the light of current legislation.

CASE ONE

 A bank clerk finds out that Krusty is storing his wealth in the Cayman Islands. He immediately communicates the IRS, and Krusty is arrested.

Comments:

  Cayman Islands are currently a tax haven in Spain, but exchange information treaties are being processed. Spanish taxpayers must declare their global income; in case their debts with the Tax Agency exceed 120.000.-€, they could face up to 4 years in prison.

  In the USA, if you talk about tax evasion and tax havens, there is one word that comes to mind straightaway: FATCA. This act, passed in 2010, requires American citizens -regardless of residency- to report their bank accounts from outside the USA. It also requires foreign financial institutions to provide the IRS with information about their US customers. Having failed to do such thing, Krusty could be heavily fined and imprisoned a maximum of 5 years.

  One more thing about this: the Whistleblower Office, that pays money to people who blow the whistle on persons who fail to pay the tax that they owe. So, by making a claim using IRS form 211, the bank clerk could be awarded with a maximum of the 30% collected.

CASE TWO

(During the IRS audit)

Krusty: I can't go to jail, I'm used to the best.

Taxman 1: Krusty, this is America.  We don't send our celebrities to

jail.  We're just going to garnish your salary.

Taxman 2: It simply means we'll be taking a small portion of your salary until your debt is repaid.  Say, 75% for 40 years.

Krusty: But I don't plan to live that long.

Taxman 1: All right.  Better make it 95%.

Krusty: Ah!  Oh!  Oy...

Comments:

  Wage garnishment is a common economic resource for Tax Agencies. Under Spanish Law, it is framed in an enforcement procedure which must be adequately notified. Previously to this, guarantees provided by the taxpayer should be executed, in most cases. Cash or bank accounts, and credits, stocks, shares and rights which can be disposed of at the time or in the short term are preferred to wage garnishment.

  Also, Spanish Law sets a different garnishment percentage. Being the minimum wage (SMI) 645,30.-€ per month (year 2014):

1º SMI: cannot be garnished

2º SMI: 30%

3º SMI: 50%

4º SMI: 60%

5º SMI: 75%

6º SMI and higher: 90%

According to what the Taxman says, Krusty the Clown earns around 25.000-€ net, monthly. Although the 95% is represented to sound exaggerated, it is not far from the 90% that would be applied to revenues that exceed 3.871,8.-€

 Although it is not very clear in which state The Simpsons live, it has been always said that they are from Oregon, so in this case we will apply the Beaver State Law.

 Federal law places limits on wage garnishment amounts. While states are free to impose stricter limits, Oregon has not done so. Oregon’s limits are almost identical to the federal wage garnishment limits. Here are the rules:

Creditors are allowed to garnish the lesser of:

·         25% of your disposable earnings (wage after deductions), or

·         the amount by which your disposable earnings exceed $218 per week, $435 per two-week period, $468 per half-month period, and $936 per month.(source: nolo.com)

   E.g., if an individual earns 2000.-$ per month (net), the garnished amount in Spain would be 554,7.-$, whereas in the US it would be 600.-$

CASE 3

  After completing the winding up of his assets, the IRS manages the fast food chain owned by Krusty and his TV show, his two main assets. They change their commercial, well-known and profitable registered trade names for new IRS-related names, and they are managed badly.

Comments:

 Concerning seized companies, Spanish Law states that if the continuity of the director/s could affect the taxpayer’s solvency, the Tax Agency may appoint a new director to monitor the company’s operations. However, in any case, they are interested in collecting, so profitability of companies is a key point. In this situation, the Tax Agency may apply some of the principles contained in the Bankruptcy Law, in terms of keeping the company running and authorizing the necessary acts for its day-to-day activity. Having said that, it would have been more adequate to keep the original trade name and know-how.

  In the USA, the Fourth Amendment protects two fundamental liberty interests: the right to privacy and the right to freedom from arbitrary invasion, drawing a red line to “search and seize” procedures. Officers must obtain a valid search warrant from a Judge, a document that describes in detail the place they will search and the items they will seize.

  Here is a link to Fiscal Year 2013 Review of Compliance With Legal Guidelines When Conducting Seizures  of Taxpayers’ Property

CASE 4

(At the Burger Restaurant)

Homer: Let me see, I'll have four tax burgers, one IRS-wich, withhold    the lettuce, four dependent-sized sodas, and a FICA-ccino.

Waiter: Fill out schedule B.  You should receive your burgers in six to eight weeks.

Comments:

  Ok, no problems here, I just found this hilarious.

CASE 5

  At the IRS auction, a leather suitcase is sold for 40 dollar cents, twelve boxes of old magazines for 12 dollar cents, and Krusty’s bed for 50 cents.

Comments:

 In the light of Spanish Law, assets and rights which bid price is under the cost of execution, will not be seized. Furthermore, it would be against the Law to seize the bed, and possibly the suitcase, since they are considered household items.

 In both jurisdictions, non-seizable assets are basically the same: the portion of salary necessary to cover family needs, furniture, clothing, dishes and goods required to exercise a profession, as long as they do not have an extraordinary value (i.e., a cutlery made of gold). Spanish Law specifically mentions sacred and cult-related items.

When the taxman gets crafty

                                                                                               

                                                                                      “Knowledge is power”

                                                                                       Sir Francis Bacon  († 1616)

I don’t know if Sir Francis Bacon was ever involved in a tax inspection, but his quote describes the situation of any Tax Agency in a developed country. Basically, all those huge (and usually quite ugly) public buildings and relentless workers are put together to gather and analyze information from citizens.

 Most of the information is provided by the citizens, and then verified by the Tax Agency: the classical image of a Tax Agency worker, going through piles of papers and documents on his desk. The most boring and unimaginative job to many.

However, it is not always like this.

 Some other times, the taxman has to hit the streets, or make up a new and unexpected way to get the precious information. This is highly feared by non-complying taxpayers, and regarded as something funny by most of the rest.

Here is a short list of some examples around the world:

-  The Spanish Tax Agency has a specific model for electric consumption. It is requested to electric companies about individuals, and aims mostly at non declared real estate rents. (link)

- The Israel Tax Agency calls a citizen who travels overseas ten times a year, but reports a minimum wage (link)

- IRS using Google Maps to spy on taxpayers (link)

- Sweden’s telecos hand over spying powers to tax authority (link)

- Campaign to raise awareness of tax compliancy for kids in Italy (link)

- Italian tax authority checking phone bills (link)

- British HMRC spying on Facebook and Twitter and also examining school soirées to find out whether children attend public or private school (link)

- Israel tax authority to request information to cabbie app, in order to obtain information about the number of customers they have (link)

- Italian Police stopping luxurious cars, and sending their owners’ data to Tax Agency to check if they had declared enough income (link)

As we can see, this kind of procedures are on the rise. In fact, if Tax Agencies had more technical and staff resources, they would be much more common. It also helps the fact that these days, penny-pinching governments won’t miss the chance to collect money no matter how, as well as the current tendency where fraudsters are badly considered by the average taxpayer (see ‘’tax shaming’’)

However, it is not going to be that easy for Tax Agencies. Eventually, most of this procedures end up in court, where the judge will decide if, for instance, any individual right has been violated, and as a consequence, many of them are dismissed. Every case is different: they range from absurd law and intimacy violation, to brilliant and effective law-abiding methods to catch infractors. Going off the beaten track of the audit procedure is tough; it is easy to make mistakes, and the taxman will have to be cautious, specially in terms of evidence. Also, it costs a lot of money and effort to carry them.

 To my mind, the key factor here is not what you collect from one or two fraudsters, but the fear and constant awareness created among the population. The idea of getting hit out of nowhere by the taxman in case you break the law. Something like a Tax Agency State, that will gently yet insistently remind you - via mass media- what will happen to you if you misbehave.

That wouldn’t be necessary to be mentioned, but sometimes, over-zealously taxmen create havoc in compliant taxpayers, something which deeply harms the idea of fairness.