FATCA, GATCA … GOT’CHA – Now West Will Have To Help Fund & Spy For Putin. Well Done Statists.

In my post FATCA – The New Zealand Official’s Report: A Crime that Deserves a Revolution - my sixth most read post - I explained how under FATCA (Foreign Account Tax Compliance Account) an imperialist America has been able to bully by threat of penalty all countries of that bloc referred to as the West, Russia – we’ll come back to the importance of that shortly – and many other jurisdictions into annually having to send information on the financial assets, including bank accounts - with every transaction therein - of all American passport holders living outside the US, back to the IRS to police their totalitarian citizenship tax. I noted this allows American government officials to track every one of its citizens, world-wide, as well as locate their property for search and seizure. Worse, given one’s financial transactions, unlike anonymous metadata, describe an individual life down to the minutia, this allows their government to know, thus invade, the private lives of not just Americans living domestically through the tax legislation all western nations employ, but those whom don’t live in America, many of whom will never live there, and in many instances, have never lived there. For the first time in America’s history, there are Americans renouncing citizenship and handing back their passports in order to live free, unbound, private lives, just as under Obama huge American corporates are inverting out of America to lower tax jurisdictions to run profitably and survive.

My last post warned on how New Zealand is signing up to GATCA - voluntarily now, compulsorily from 2019 - putatively a Global Account Tax Compliance Act - not an actual legal act so much as a massive information sharing agreement between all OECD countries. Ostensibly this is so governments of the West can tax and destroy the big corporates of Google, Amazon et al - whose only crime is innovatively supplying all of us with cheap, good products that raise our standard of living - but as Minister McClay said, designed specifically on FATCA: meaning it will compel foreign governments to snitch on all foreign nationals, including individuals, and report back on their financial assets - their lives in other words - to their home governments via the various taxing authorities.

And the Progressives, fresh from protesting against security agencies collecting aggregated, anonymous metadata to keep us safe from terrorists, are clapping like the useful idiots they are at seeing the big state they actually love, being able to whack business with the iron fist of tax and regulation, while the state continues to give itself carte blanche powers through the tax surveillance state, to collect our individual life histories, with our names attached, and return them to domestic bureaucracies, or on the strength of GATCA - that agreement shoring up every previous double tax agreement - sending the information offshore to grass up dual passport citizens.

I said in my FATCA piece, that was the end of the Free World. Once our private lives were traded away in this unseemly, repugnant fashion, without so much as a skirmish, let alone a justified war, our private lives were lost, and there’s no way back: no politician requiring your money for their imprudent spending and state-building is ever going to give you the details of your life back and say that’s no business of government. This single point is the rationale of my blog. And once our democracies voted our states these huge powers, that through history were assumed only by tyrants at the cost of hundreds of millions of lives, so the West now has no moral argument not to snitch on Russian nationals, including dissidents, to that tyrant Putin, so one of the richest most powerful men in the world, can fund his nationalistic ambitions in the Baltic and Scandinavia. How stupid we look, because like most evil men, Putin is not stupid. He saw the opportunity of FATCA and signed up to it knowing the USA would then have to sign up to his own intelligence and funding citizenship based tax, as reported in today’s Press (3 November, 2014):

The Kremlin has launched a campaign to rein in Russia’s wealthy elite …

[Snip.]

The government has proposed new tax laws that will seriously limit the ability of the country’s moneyed classes to hide their wealth [or themselves] abroad.

The legislation will seek to clamp down on companies and individuals using offshore  tax havens and make Russian citizens liable for tax at home regardless which country they earn income in.

The measures are aimed at the wealthiest Russians, who systematically seek to move their assets and often their families abroad because they lack confidence in a system that can trample over private property rights when individuals fall out of favour with the authorities.

[Snip.]

[The wealthy] are already worried about a law passed last month requiring Russians to declare whether they possess a foreign passport. The law is widely expected to be used to impose restrictions on citizens with dual nationality.

Listen, hear that? It’s the useful idiots saying that’s okay, the victims are only the rich pricks; their private lives, and in this case possibly their lives, don’t count when we all are forced to worship at the bloodied altar of the Common Good, and when philosophically the individual human being has long ago been executed in the tax statutes of government.

So next time a terrorist group shoots down a passenger liner with Putin supplied arms, our government, and by extension ourselves, were complicit in it. Indeed let me predict another bloodbath: Russia. With FATCA, GATCA and the totalitarian powers being grafted onto every Western tax state, every public economic good and every freedom fought for with blood, is rendered non-existent. We have just lost everything important, without a shot fired. It’s a disgrace. Does any politician in our National Government understand what they are doing to us through tax policy: hint, it’s what Marx was never capable of: killing the Free in Free West, philosophically, economically, and politically, and bending our knees, then our necks, to tyrants.

Ukraine Redux: Why Classical Liberals Are Not Tories.

So the authoritarian, cult of leader conservatives are starting to figure I'm not one of them: http://t.co/H1OSnkGeGX
— Mark Hubbard (@MarkHubbard33) February 22, 2014

 

I’m a classical liberal/libertarian, that is: a laissez faire capitalist, (small, as in tiny, state) minarchist, social liberal who believes in free markets and drug legalisation, euthanasia, a woman’s right to abortion, (wait for it) open immigration; who believes, thus, in individualism over identity politics, because individualism is the opposite of rascism, of sexism, and of bigotry; who believes in freedom over statism, and who believes I should be able do whatever I like, left completely alone by the state, so long as I do no harm. In these views, as my previous post on the Ukraine usefully demonstrated, I’m as far removed from Tory conservatives, as I am from Left collectivists.
 

Against the clip I posted of a Ukrainian woman explaining that what the protestors wanted was freedom from dictatorship, and freedom from politicians only interested in their own ends, a state of affairs well explained by the accompanying video of unarmed protestors being ruthlessly murdered by Ukrainian government snipers, Tories came out to attack my view in comments, saying:

 

From Andrei:

 

In truth Ukraine is bankrupt and the IMF came up with a plan that would reduce Ukraine's sovereignty and Putin gave the Ukrainian Government a way out of having to be subservient to the IMF and western bankers and that is when these current troubles actually started. … Ukraine is on the brink, it may end up Balkanized the way Yugoslavia was in the 90s - it may end up being even more serious given the utter mediocrity of current Western leadership but let me tell you this some of the opposition "are not fighting for freedom" they are literally facists and these factions have zero interest in peaceful resolutions.

 

From Angry Tory:

 

Get a grip. They aren't protestors, they're communists. Communists don't believe in individual "rights" so certainly don't deserve any. … The fact is the country is choosing between self-determination, economic sovereignty, and yes lower taxes, individual rights, and a much less regulated, more flexible economic system under Putin --- or the open communism of the last communist mega-state, the European Union. … If you want to own a gun; drive a (petrol) car;, burn coal, oil, or gas; smoke, eat, drink, whatever you want; and live free from massive intrusive surveillance you are objectively more free in Russia than in NZ or especially the EU! … Here's a simple test: Ask yourself - who do Russel Norman, Jane Fonda & George Clooney support? then pick the other side.

 

While Andrei and Angry Tory try to sort out amongst themselves whether the protestors are fascists or communists, I’ll posture an alternative position they were largely neither: rather, like the woman in the clip, of whom not one of her words or ideas I disagree with, the protestors are a collection of disparate individuals who understand, like no one born and living in New Zealand can, what the true thug state, and dictatorship, is like. Albeit there will be elements amongst them that are unsavoury, especially thinking of that regions history of a null-headed nationalism and anti-semitism, that changes nothing in what the young Ukrainian said in the clip. Also, if this rabble were communists, why did they celebrate former President Viktor Yanukovych doing a runner today – oh yeah, the rabble won – by toppling Lenin statues all over the Ukraine?
 

 

To Angry Tory who asked me to look at which side Russel Norman was on, then choose sides from that, my rebuttal to him stands: he is thinking only in the straight lines of group-think, just as he (and I) would largely accuse the Left. As a matter of fact, though I believe Green economics would destroy us economically, while tragically growing the Big Brother state, as a social liberal I am yet closer to Norman than National and certainly Colin Craig on legalisation of cannabis, on euthanasia – two issues important to me – on abortion, etc. Classical liberals are ‘liberals’, very definitely not Tories.

So, my spleen vented, this is my slant on the situation in the Ukraine, which works toward my view most of the protestors simply want the same freedoms that I do; and that this issue, therefore, revolves around individual rights versus the authoritarian state.

 

Philosophy cannot be separated from economics. There can be no laissez faire capitalism, where individuals are not left alone by the state. So despite Andrei and Angry Tory’s opinion that Putin and Yanukovych are the path to free economies for Russians and Ukrainians, and the socialist EU is the enemy, as much as I hate the socialist monster of the EU, I have to call bullshit on that. Many of the mixed economies of the EU, as with US and New Zealand, are well down the socialist road to serfdom, but the gains made by the light shining out from the humanism of the Enlightenment as regards human rights and the sanctity of an individual life, are not all lost. A human life still has a value under the rule of law as operating in the West; not so in Russia, plus the clip of the snipers in my last post shows it most definitely is not so in the Ukraine. An individual’s life in those countries is cheap, and for those poor sods who are ‘different’, such as the homosexual community, or many ethnic minorities, as the reportage leading up to Sochi has shown us, life is at best miserable, at worst, lethal. And that comes from the top, from homophobe, KGB indoctrinated, medieval Putin.

 

Given this, the Russian and Ukrainian states are not capitalist, as in laissez faire. Indeed, they are so far down the road of the corrupt, crony state that their economies more closely resemble gangster and mafia stand over societies, with governments ruthlessly exercising their power to fleece populations. Whether you’re the richest of oligarchs, or a Pussy Rioter, if Putin wants you in one of his labour camps, then in a labour camp you’ll soon find yourself. Perhaps one of the Tories could explain to me where labour camps for political dissenters fit into a free society based on free markets? As far as I know there are no political labour camps in EU countries. In Russia, Putin has slaughtered thousands, if not more, in the name of his war on terror, many of them just happening to be ethnic minorities.  

 

Ukraine’s crony state is every bit as bad as Putin’s. Over the three years of his Daddy’s corrupt reign, Oleksandr Yankovych, son, trained as a dentist, availed himself of a massive change infortune:

 

 

While in 2010, the year before Viktor became president, Oleksandr was worth $7 million US dollars, by the end of 2013 he was worth $510 million: that’s an increase in wealth of 7,285% in three years. Please don’t take it personally, dentists, but ‘yeah right’. On one of the CNN clips I saw today, the protestors upon entering the presidential palace, hastily vacated by Viktor, were stunned at the opulence their taxes had paid for while they were living brutal and hard lives. I'm on their side.

 

To sum up, I don’t think the protestors who were murdered in the Euromaiden were all fascists, communists, or rabble. I reckon it’s far more likely they were me. Though quite apart from all that, the Tories seem to think the crime we all witnessed in that sniper clip was justified by the hope of self-determination and free markets under Putin, rather than falling into the perfumed clutch of the EU. I made a comment to the NBR thread on the events taking place in the Ukraine, and it’s all I need to say on that:

 

All that aside, a government that commands professional snipers to clinically murder unarmed protestors, on that alone, loses any mandate it has to rule, and those who made the command, with those who carried it out, should be tried and judged under the rule of law. I would even call, from the video clip, that particular action a war crime.

 

Evil means, and evil bastards such as Yanukovych, Putin, and those snipers, never justify ends, especially when those ends are societies as far removed from liassez faire markets and the free society, as communist ones are.

 

Finally, here's a question for you: where do you want to live, Russia or Ukraine, alternatively, France, Italy or Germany? Yeah right. You can't separate philosophy from economics.

 

LTC Submission to IRD’s Policy and Advice Division.

IRD Policy and Advice Division

PO Box 2198

Wellington

To Whom it May Concern

Re: LTC Regime Flaw: General mumblings and a specific gripe and query.

Sub-Re: (L)ost (T)he (C)ompany Regime: Where ‘you’ went wrong.

The Complaint and Query Bit.

I would like PAD’s response to the below flaw I see with the Look Through Company (LTC) legislation, which, for the record, in every way is awful legislation, especially because it has taken the  usefulness of QC’s away from the planning kit. Ring fencing of domestic rental losses, no matter the entity, would have achieved all of the Government’s stated aims without yet further layers of complexity in our tax system, and these dreadful Lost The Companies that business is now stuck with. Note I write the below without having had a single LAQC on my client base with a domestic rental property in it.

The flaw with LTC’s - apart from the whole overriding idea of doublespeaking a company into a partnership - pertains to how policy makers have over-analysed the notion of 'economic loss' that informs the ‘Owner’s Basis’ component of the calculations on which the mathematics of the regime are constructed; and over-analysed to the point of an absurdity in the manner it has been implemented on smaller, closely held companies. Note that I have already corresponded with IRD Technical and Legal to establish your thinking behind the way the offending section of this legislation is worked out - quote:

The intention is to measure an individual’s ‘economic amount of risk’ over the lifetime of a business; so overall an individual will be able to claim in deductions only what they have personally funded by taking on an economic risk … I note your comments that the rules are not truly ‘loss limitation’ because in certain circumstances they can lead to taxable income for a shareholder even if the company overall … has made a tax loss … This is the intended outcome of the loss limitation rule. This is in keeping with the policy rationale discussed above, because it indicates that the company’s losses are not being ‘funded’ by that particular owner. In this example, the current rule is operating with the intended policy that their tax deductions should be restricted to their economic loss.’

I would have hoped both the Minister and IRD’s Policy and Advice Division might have got to ‘in certain circumstances they can lead to taxable income for a shareholder even if the company overall … has made a tax loss … This is the intended outcome of the loss limitation rule’ …and realised, they had overshot the mark, and bypassed sense here.

I can demonstrate the problem from your over-thinking in no better way than by using IRD’s own example given in the guide to the 2012 Partnership (including LTC) tax return, IR 7G, 2012. That example can be fleshed out, and in one respect, simplified, by deleting a layer of shareholders as follows (worksheet attached at end of this correspondence with the Owner’s Basis calculation). Take a hypothetical company with share capital of $1,000, that has a single shareholder ; the shareholder had a nil balance in his current account with the company at the start of the year, but over the year drew out $6,000 to live on. Over the year’s trading the company made total sales of $6,000, and incurred legitimate expenses/deductions of $10,000, meaning it made a bone fide loss of $4,000. Let’s assume no non-cash depreciation, nor debtors or creditors at year end, thus the company’s bank account, on nil at the start of the year, is now $10,000 overdrawn (being the $4,000 loss, plus the owners drawings of $6,000). From this the problem then becomes, per the attached worksheet, the Owner’s Basis calculation gives a result of only $1,000, meaning that by the time these figures flow through to the single shareholder, that shareholder can claim just $1,000 of the $10,000 total deductions, in this instance, with the balance of $9,000 having to be carried through to the next year. This then means that though the company earned a loss of $4,000, the shareholder, in the year of the loss, has to pay tax on $6,000 income - $1,000 only allowed deductions = $5,000 profit.

Yikes. Who said bureaucrats aren’t entrepreneurial: but this is wealth wrecking innovation that destroys economies, rather than builds them, which should have alarmed the Minister.

The problem, clearly stated, is, yes, the shareholders literal economic interest in the deductions may be only that amount, $1,000, but who financed the rest in this small, closely held LTC? In this case, it was the bank, hence the perilous overdrawn cash position. Some might say that can’t happen, no bank would finance that: but, actually, this does happen ­ (more on this below). Where this has thus gone wrong is that to limit the shareholders’s deductions to that lesser amount, IRD are assuming that shareholder has access to the whole gross income that was used to physically pay the non-allowed deductions, for them to pay the tax from: which is a nonsense, in the case of a close company such as shall comprise the majority of the companies elected into this regime, as with the one in this example. That income is not sitting in an account, it, and an overdraft, were used to pay the non-allowed expenditure. Assuming, realistically, this company was the shareholder’s sole source of income, ‘their entire living’, then there is no cash this shareholder has access to pay tax on what is an artifact that can (and will) result sometimes from these calculations: effectively, an artificial income amount, that breaks all the laws of accounting profit or loss. This unjust outcome of the LTC policy drafting, has resulted from tracing through the notion of economic loss to deductions, while disregarding the nature of income and the structuring of balance sheets, especially in small and close, struggling firms, in a manner that pays no regard to the commercial realities of operating business. The shame of this is it will particularly affect firms that have negative retained earnings, and problematic shareholder current accounts because in some years shareholders will need to draw more for their living than they are making, and with no recourse property held by them because they are operating ‘on the edge’, even, technically insolvent: and believe me they do exist.

Note, I can tell from the resultant legislation that during policy formulation you were only looking at property (domestic rental) investment companies, which are being operated as a side-line to a taxpayer’s main activity, thus the Recourse Property component of the Owner's Basis is likely to always save them, and make this regime manageable for such investors. However this simply highlights how the government’s intentions should have been enacted via means of a simple ring fencing of rental losses, regardless of the structure incurred in, for, as already stated, I had LAQC’s on my books, but not one of them was a domestic rental property investor: that structure was useful across industries, and particularly this country’s lifeblood, rural industries, and not just the ‘rich prick’ – to use a phrase coined by a former finance minister who didn’t believe in knighthoods, then took one - landowners, but rural contractors who have their money invested in expensive, depreciating machinery, plus share and lower order milkers, and so forth. Which brings me to my final point.

I have been debating, online, with one accountant who believes this aspect of the regime is manageable, and would only affect a minute number of LTC’s. I have two replies to that: firstly, even one taxpayer caught out by this would be unacceptable, and secondly, the accountant concerned belongs to a CA firm that specialises in rental and property investment (I’ve just heard their ad on the radio as I’m typing this), so, as I’ve already intimated, I suspect he was only thinking the issues through from that angle. Whereas there will be a lot of LTC’s transitioning from LAQC’s which will not be property investors. Indeed, I have had a phone conversation to another accountant in a large rural firm, and I know that firm has elected some number of their dairy equity partnership LAQC’s into the regime. I reckon they, particularly, will be in for a shock, in some future year, given that type of investor, farmer, tends to have all of their asset, including the farm house, in their company, so there will be no recourse property for such shareholders to use in their Owner’s Basis, which is a problem in the way that calculation works: I would not want to be delivering the tax returns for some of them if the milk pay-out should happen to drop much further … ‘um, here you go, you made a $400,000 loss, but you’ve all got tax to pay. You have no cash? Oh dear …’ Furthermore, ‘managing’ this aspect of the Owner’s Basis will in some cases involve costly restructuring out of the regime, which, in tax terms given this will be the dissolution of a partnership, and even just in terms of the professional fees involved, should not need to be borne if the legislation was designed sensibly (especially, again, as this cost is likely to be forced on the very firms that have not the wherewithal to afford it).

However, I believe there is a relatively easy solution to this which would put back into LTC’s none of the sense required, but at least in this respect, a very little of that word the Minister seems to have fallen in love with, despite evidently having little idea what it means: fairness.

The Solution Bit:

This is not good legislation, and there needs to be an amendment that ensures enough deductions are allowed, to at the least mean a shareholder need return no more than their share of the profit made by the underlying LTC, and no less of a loss, than a nil result in their own tax return. This ensures the cash is available to cover the tax liability, while still ring fencing losses from being claimed against other sources of income. To state this in another way: we need an actual loss limitation, not a deduction limitation. That would not be hard to enact.

Or, in the example I’ve given, and my solution, can you please tell me how I’m wrong?

The Postscript, Philosophical Bit – Why? Because it’s Cup of Tea Time:

Author, George Orwell, a socialist who was ironically the most significant writer on demonstrating how socialism always fails, unfortunately seems to have foretold ‘your’ LTC legislation as long ago as 1946.  In his novel, 1984, about a nightmare police-state society - which this legislation raises misgivings that you may be converting into a manual - the protagonist, Winston Smith, is tortured into submission to the Big Brother state: this torture was not by being made to read our taxation legislation, attend your yearly compliance update, TEO courses, or even becoming a victim of the Department’s increasing use of retrospective enforcement: no, the process was rather to take away his sense of reality, of self, by the torturer holding his fingers up and asking Winston how many there were. Whenever he gives the correct answer - the answer of a free, blameless man - he has pain inflicted on him, until, a crying wreck by the end, such as some unfortunates will be with their LTC returns in hand, he states he’ll say any number of fingers Big Brother wants him to see, yet he is still never able to get the answer right by his antagonist, which gave the ultimate chilling reality of that society: 'If you want a picture of the future, imagine a boot stamping on a human face — forever.’

The passage concerned from the novel is well worth reading, and is as follows:

'Do you remember,' he went on, 'writing in your diary, "Freedom is the freedom to say that two plus two make four"?'

'Yes,' said Winston.

O'Brien held up his left hand, its back towards Winston, with the thumb hidden and the four fingers extended.

'How many fingers am I holding up, Winston?'

'Four.'

'And if the party says that it is not four but five -- then how many?'

'Four.'

The word ended in a gasp of pain. The needle of the dial had shot up to fifty-five. The sweat had sprung out all over Winston's body. The air tore into his lungs and issued again in deep groans which even by clenching his teeth he could not stop. O'Brien watched him, the four fingers still extended. He drew back the lever. This time the pain was only slightly eased.

'How many fingers, Winston?'

'Four.'

The needle went up to sixty.

'How many fingers, Winston?'

'Four! Four! What else can I say? Four!'

The needle must have risen again, but he did not look at it. The heavy, stern face and the four fingers filled his vision. The fingers stood up before his eyes like pillars, enormous, blurry, and seeming to vibrate, but unmistakably four.

'How many fingers, Winston?'

'Four! Stop it, stop it! How can you go on? Four! Four!'

'How many fingers, Winston?'

'Five! Five! Five!'

'No, Winston, that is no use. You are lying. You still think there are four. How many fingers, please?'

Until finally, reality is defeated:

In the end the Party would announce that two and two made five, and you would have to believe it. It was inevitable that they should make that claim sooner or later: the logic of their position demanded it. Not merely the validity of experience, but the very existence of external reality, was tacitly denied by their philosophy. The heresy of heresies was common sense. And what was terrifying was not that they would kill you for thinking otherwise, but that they might be right. For, after all, how do we know that two and two make four? Or that the force of gravity works? Or that the past is unchangeable? If both the past and the external world exist only in the mind, and if the mind itself is controllable—what then?

Well, it appears you’ve finally answered ‘what then’: New Zealand tax law, apparently.

Translating this to the issue at hand; the reality that New Zealand businesses must operate under to survive has to be expressed under the real world mathematics of:

2 + 2 = 4

This can never change, otherwise business death has to be the result. Thus needless to say, when reality is turned on its head, as with morality, no business can survive for long when real world mathematics is replaced by the police-statematics of:

2 + 2 = 5

Well, and I hope you’re putting the pieces together here, you’ve just similarly taken the footing out from real world accounting profit of:

$6,000 income - $10,000 deductions = ($4,000) loss

And subverted into the police-statematics of:

 $6,000 income - $10,000 deductions = $5,000 profit.

I ask you to step back from the statematics you’ve magic’ed up from the totalitarian hive-mind, and please think on that real world financial mathematics businesspeople have to trade under. I know you’ll see sense: look at me, I sometimes sit here hating politicians for binding and destroying the West’s birth-right since 1776, the free, prosperous classical liberal society, but sometimes I’m prepared to give the odd one their dues, such as Maryan Street’s Euthanasia Bill, (given euthanasia may well be an option after dealing with tax policy from the Fortress of Legislation for a lifetime).

And returning, finally, to fingers held in the air, it’s hard not to get the impression the State has got only two held up in this legislation, and they’re not giving the taxpayer that proud classical liberal, Winston Churchill’s, ‘V’ for victory sign. A fair fix to the Owner’s Basis please, or tell me why not.

Yours faithfully

Update 1:

Darn. My plan had always been to add the below second example to the one given above, but I got busy and forgot it. Too late now, I’ve posted the submission, but for the record, and to make the point.

Again, the problem with the deduction limitation is, ‘IRD are assuming (a) shareholder has access to the whole gross income that was used to physically pay the non-allowed deductions, for them to pay the tax from …’

The first example was of a single shareholder LTC where the bank had financed the operation. Consider now the even more likely scenario that two third parties invest via a LTC. The operation (whatever it is) goes through a bumpy patch, and only one of the investors has the wherewithal to put more money in to get them through, putting the cash in as a loan (good for his Owner’s Basis), the shareholdings don’t change. Let’s assume the other shareholder now has problems with the Owner’s Basis, so that he can’t claim all of his deductions, and as with the above example, though the LTC generated a loss, this shareholder has to return a profit in his tax return.

Same problem: where’s the cash for him to pay the tax from? There is none, unless he now borrows from bank or the other shareholder (but he’s just put the last of his money into the LTC). That cash was used to pay the non-allowed deductions, so is not available.

The only 'fair' solution to this is to legislate for LTC’s an actual loss limitation, not this Orwellian deduction limitation.