European court upholds human rights in tax case

PUBLICATIONS / Newsletters / 2012 / Newsletter April
European Court upholds human rights in tax case
Virtually every constitution in every country attaches certain inalienable rights to their citizens, such as the right to a fair trial, innocent until proven guilty, the right to remain silent (not to incriminate oneself). While these principles are certainly not honoured everywhere, most Western countries pride themselves that they do. It makes it all the more interesting that Switzerland, commonly regarded as one of the most civilised countries in the world, has been called to order by the European Court of Human Rights for violating the right not to incriminate oneself and the right of access to evidence held by the prosecuting parties (equality of arms).
In the case of Chambiz v. Switzerland, a Swiss citizen was being prosecuted by his government for tax evasion. In 1991 the tax inspector of the Aubonne district found a discrepancy between the income reported by a Mr. Yves Chambiz and the growth of his assets for the tax year of ’89 – ’90. The authorities launched an inquiry and requested Mr. Chambiz to provide certain documents. When Chambiz refused to hand over this information, it prompted the authorities to fine him twice for the amounts of respectively CHF2000 and CHF3000 (€1.664 and €2.496). Chambiz appealed to the Swiss Administrative Court and eventually the Federal Court.
At the same time, federal tax authorities launched a separate investigation against Chambiz. When the defendant requested to see their files in order to prepare his appeal, the federal authorities refused on account of Mr. Chambiz’ “attitude”.
Chambiz was convicted in 2006 on the charge of tax evasion and ordered to pay back-taxes of CHF2.3 million (€1.9 million) and a fine of CHF1.3 million (€1 million). However, Chambiz redeemed himself on certain aspects of his case through his application to the European Court of Human Rights (ECHR).
After reviewing his case, the ECHR concluded that the Swiss government had indeed violated the right of Mr. Chambiz not to incriminate himself by fining him for not disclosing certain information.
The second charge, violating the equality of arms, also stood in court. Restricting evidence is only allowed to protect national security interests or when disclosing it could cause serious risk to other citizens. Neither was the case. The Swiss government was ordered to pay Chambiz €3.599 in damages and €7.198 in costs and expenses.
The decision of the ECHR has no influence on the charge whether Chambiz was guilty of tax evasion or not. Perhaps it will give him ammunition to get that judgement overturned, perhaps not. What is important is that the ECHR places restriction on overreaching powers of tax inspectors and administrative courts.
Switzerland is far from the only European country that believes that defendants in tax cases have less rights than defendants in criminal cases. In many countries suspected tax-offenders are ordered to self-incriminate and failure to do so results in fines. It is often argued that the right not to self-incriminate only applies to criminal law. However imposing a fine is not much different from jailing a suspect: a person that is fined also looses precious time. While masters of law may distinguish between criminal law and tax law, both suspected criminals and suspected tax evaders should have the right to remain silent.
Similarly, refusing evidence to a suspected tax evader or worse, reversal of the burden of proof, should not be admissible in any court case. The ECHR can be a valuable tool to rectify these human rights violations.


Dutch government falls over budget proposal
The Dutch ruling conservative Christian coalition fell last week as it could not come to terms with the Party for Freedom on a new government budget. The Netherlands are faced with a 4.7% budget deficit in 2012 if they fail to reign in spending.
The parties needed an agreement on budget cuts totalling 14 billion Euro out of a total budget of approximately 340 billion Euro. However, after almost 7 weeks of intense negotiations in secret the Party for Freedom walked away citing unacceptable differences.
While the blame game has started, let’s have a look at the proposals that were on the table:
  • Increase of main VAT-rate with 2% and a 1% increase on VAT for essential goods & services. (gain: €4.7 billion)
  • Introduction of a €9 fee/bracket on government subsidised medicines. (€600 million)
  • Replacing student entitlements with a student loan system.
  • Abolishing income tax deductions for interest-only mortgages
  • Lowering of the tax-free commuters compensation (€2.1 billion)
  • Freezing all wages (€4 billion)
  • Temporary reduction in development aid of €500 million.
  • Minor cuts elsewhere
Total gain: 14.2 billion Euro, which would only reduce the budget deficit to 2.8% in 2013.
Basically what we have is a VAT tax increase, two income tax increases, some minor cuts in government subsidised healthcare and education (both very hard to sell to the electorate) and the preposterous leftist measure of freezing wages. If this is the best a so called ‘right leaning’ government can come up with, there is no hope of ever returning to frugal common sense spending policy.
The irony is only highlighted by the fact that the Dutch have been amongst the hardest critics of the ‘garlic countries’ of Greece, Portugal, Spain and Italy. Credit rating agencies have already warned The Netherlands that it might loose its triple-A status should it fail to reduce its deficit.
Yet there are many ways in which the Dutch government can cut spending, and it can be done without feeling any pain. A popular Dutch blog wrote that ”Any man on the street can easily cut 15 billion Euro out of this bloated budget.” And to prove this point we have come up with a list of just a handful of possibilities available to politicians:
  • Sell the national railways system and give the potential buyers the full freedom to do with it as they please. This would earn the government tens of billions and save many billions every year. Sell any government asset that is not strictly necessary (airports, harbors, office buildings, land). It will buy the government time to initiate much needed reforms. Example of a country that did this: Estonia after the fall of the Soviet Union, now one of the richest countries of Eastern Europe.
  • Gradually abolish income tax deduction for mortgage payments as well as housing benefits; instead lower income tax across the line to compensate. The UK abolished mortgage interest deductions without much fuss in the year 2000.
  • Reduce the number of tax payments and the number of tax deductions. Drastically simplify the tax code to a flat tax. It would save billions in administrative costs for the public and private sector.
  • Abolish development aid; funding foreign dictators does more harm than good.
  • Allow young people to opt out of the social security system. Chile has a system where contributing to social security is mandatory, but funds are managed privately and in competition with each other. It does not cost the government a penny to maintain.
  • Replace government run schools with a voucher system where money is attached to the child instead. Belgium has such a system and scores very high on international education charters. Belgium proves the point that education is too important to leave it to the government.
  • Allow private healthcare to co-exist with government run healthcare to reduce the burden placed on the public sector. An example of this can be found in Cyprus and many other places in the world.
  • Let all social security be handled on a municipal level, this way there are more checks and balances on abuse and it will allow municipalities to reduce red tape.
  • Simplify immigration procedures. Either fully legalise or deport immigrants within a year of arrival.
  • Replace the army with a national reserve modelled after Switzerland. Likewise maintain strict neutrality thereby avoiding entanglement in far away conflicts.
The above list could be a blueprint for pretty much any government in Europe: sell all assets and reform wasteful bureaucracies just like a business would do. Keep the government lean and mean and allow the private sector to do what is does best.
Well, we can always dream.


Tax competition
Countless times we have argued in this newsletter the superiority of low tax nations like the UAE. If you take for example two competing businesses that are both highly efficient, but one is located in a low tax jurisdiction and the other is not, it is pretty obvious who draws the short end of the stick.
The benefits of low or no taxation extent much beyond the absence of a tax bill. Office rent, skilled labor, gasoline and supermarket prices; everything in Dubai is cheaper than in comparable business hubs such as London, New York or Frankfurt.
Foot loose and web based businesses are the first to take advantage of low tax jurisdictions such as the UAE. A recent example we stumbled upon is the Global Currency Exchange Network (GCEN) operating from Dubai. They are not necessarily better than other currency exchange services, but simply by operating out of Dubai they are able to offer superior rates, much lower than most banks.
We use the GCEN for our own internal currency transactions, and highly recommend them to all our clients big and small. You can visit their website here.


Ron Paul wins
Meanwhile in the United States the strategy of Ron Paul, on which we reported in February, is starting to bear fruit. While media is still reporting incorrect numbers on who’s winning the race for the Republican presidential candidate, the real numbers are coming in. Ron Paul just won a majority of delegates in Iowa and Minnesota. Overall he now has 82 delegates versus 93 delegates for Romney. A candidate needs to secure at least 1144 delegates to claim victory. While most states have initiated the primaries or caucuses, it will still take a few months more before anyone can declare victory.
After Rick Santorum has dropped out, the only remaining candidates are Mitt Romney, Ron Paul and Newt Gingrich, while the latter is facing campaign financing problems and is considering stepping out of the race. As predicted, it is now between Ron Paul and Mitt Romney. Two candidates, and only one remaining option for true conservatives.
However, Mitt Romney reportedly has travelled back in time to kill his former liberal self:

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