Tax Arbitrage

Last evening I was talking on Skype to my good friend David Lesperance, the co-author of our up-coming book, Flight of the Golden Geese. Out of the blue he announced that a significant part of his tax business was helping Canadians transfer to the UK, while at the same time he was facilitating the move of Brits to Canada. At first this sounded crazy to me. Surely one country had to be more tax friendly than the other, and the tax-flight traffic would be all one way. Not so. He explained the phenomenon in terms of differences in tax arbitrage between the two countries.

The Brits were wealthy, and shall we say of a more advanced age. They were seeking permanent tax domicile in Canada, a country that has no Estate Tax – that’s Death Duties in the UK. As Canadian domiciles, when they died their assets and property would be handed over lock, stock and barrel to the named beneficiaries in their wills. If they had stayed in the UK the state would have taken a huge slice (40% of everything over £325,000).

Meanwhile the Canadians were seeking non-dom status in the UK, which meant they would only pay tax on income earned in the UK, but not on capital brought onshore. David once stayed in England for a while, and with no business here, he paid no income tax. Of course he still had to pay to live here, which brought a decent sum into the economy.

The likes of IMF Boss, Christine Lagarde, and others hint at ‘fair taxation’ being necessary to maintain a stable economy, and that states should not set tax rates detrimental to others. This is code for standardizing global taxation … a non-starter. In such standardization would the UK accept the end to Death Duties? Of course not. It would insist on Canada imposing 40%. As for non-dom status, the US would insist that their system of tax based on citizenship be imposed everywhere. At present only three countries use this system … three bastions of democracy: USA, Eritrea and North Korea. The result of standardization would be each tax moving to the highest rate in the world. Hey ho! It won’t happen. Haven’t these tax people heard of the prisoner’s dilemma?

Leave a Reply