Conspiracy theories

 

Conspiracy theories I am not one for conspiracy theories surrounding Covid, but sometimes you come across passages when reading various books and you can't help but wonder if there is something more going on than meets the eye. I have been revisiting a book called the 'Sovereign Individual' written in 1997 (24 years ago!) by James Dale Davidson and Lord William Rees-Mogg (yes, he is the father of that rather cringe worthy politician Jacob Rees-Mogg and ex-editor of The Times newspaper).   The book is about the rise of the Information Age, the internet and the effect it would have on all our lives, the politics and the actions that individuals and governments will need to take as a result of its impact on our lives. For the record, I don't agree with the general conclusion that one should seek out tax havens and move ourselves and our money until we find the lowest tax jurisdiction that will host us (that's the general theme of the book). But the book itself reads like a prophecy for the future. Its conclusions are eerily accurate. To put this into context, a few things about the internet in 1997:  Google.com did not exist In January 1996 there were only 100,000 websites globally. In 2008 there were more than 160 million. The web browser of choice was Netscape Navigator, followed by Microsoft Internet Explorer as a distant second. Do you remember dial-up internet connections, when it took about 5 minutes to load an internet page? Well, highly modern 56Kbps modems arrived in 1997. In 1997 Steve Jobs returned to Apple to take it over after being ousted by the directors years earlier. So, I think we can agree that the internet was in its infancy in 1997!!  In the book, they talk about how the internet will allow individuals and money to become globally mobile and neither will be bound by state borders as they previously had (that sounds about right). This would result in governments needing to find ways to restrict capital and labour flows across national borders.  One hypothesis that they come up with to deal with this does make you wonder if they had a crystal ball for the future. Read the text below:  The wealthy OECD countries impose heavy tax and regulatory burdens upon individuals doing business within their borders. These costs may have been tolerable when the OECD nation-states were the only jurisdictions in which one could do business and reside at a reasonable level of comfort. That day has passed. The premium paid to be taxed and regulated as a resident of the richest nation-states no longer repays its cost. It will be ever less tolerable as competition between jurisdictions intensifies. Those with the earnings ability and capital to meet the competitive challenges of the Information Age will be able to locate anywhere and do business anywhere. With a choice of domiciles, only the most patriotic or stupid will continue to reside in high-tax countries. For this reason, it is expected that one or more nation-states will undertake covert action to subvert the appeal of transience. Travel could be effectively discouraged by biological warfare, such as the outbreak of a deadly epidemic. This could not only discourage the desire to travel, it could also give jurisdictions throughout the globe an excuse to seal their borders and limit immigration.  It does make me wonder if someone read this book and then decided to run with it as an idea! Quite eerie in its accuracy.

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Non-EUR based cash deposits: the 7 day tax rule

 Non-EUR based cash deposits: the 7 day tax rule

Inspiration for this blog came from a client (they often do) who fell into one of those sneaky little finance laws in Italy that not many know about, nor really pay much attention to, including the Agenzia delle Entrate (AdE) so it would seem. However, laws are laws and as I have written many times before, the rollout of the Common Reporting Standard in 2016: the international accord to share financial and tax information between different countries is appearing more and more on my radar. I now get a steady stream of people who say they have received a letter from the AdE asking them to declare their financial position regarding assets/monies held abroad. 

In the case of the subject of this blog, this is not a law which has, as yet, been specifically identified by the AdE, but one might argue it is only a matter of time. 

 

 

€51645,69
or
1 million lira
 

The figure quoted above is important in relation to how much money you hold in deposits in foreign currencies (cumulatively) at any one time.     

There is a part of the Italian tax law (L’art.67, comma 1-ter del Tuir) relating to the application of capital gains taxes and capital losses, which would appear to be little understood by most. 

The law states that where you hold over €51645,69, (1million lira equivalent) cumulatively, in foreign currency accounts (non EUR) for a 'period of over 7 days', then when you transfer any of that money into EUR (or another currency), the amount exchanged is automatically subject to the calculation of capital gains tax (or losses) in Italy, because the transaction of changing money from one currency to another itself, is assumed, after 7 days of the money being held in deposit, to be a speculative transaction as the result of a 'trading operation' instead of merely a conversion of currency for any other means. 
 

How do I calculate my gains?
This is where it gets a bit complicated as you might imagine and is not quite as simple as the image above would make you believe.   

Without wishing to go into too much detail in this E-zine, you take the amount of euros (or other currency) that you end up with in your account 'after exchange', but then need to refer to a EUR cost of those monies at the time at which you originally received that foreign currency. You convert that sum into EUR using the Banca D'Italia exchange rate on the specific date or dates when they landed in your account, depending on whether you received the funds in one go or if they were accumulated over time.   

As you might imagine this could be hellishly complicated if you have been receiving monies in from various sources over a period of time. However, reference would have to be made to each deposit in non-EUR currency, and a EUR equivalent calculated on the day when it was deposited in the account. In the case where deposits are not documented, for whatever reason, then the Agenzia delle Entrate will refer to the worst monthly conversion rate to EUR for that said currency, in the tax period in which the liability arises (i.e. calendar year). This could work in your favour in some cases, and create additional tax liabilities in others, so care needs to be taken.  

Finally, if you do not convert all the funds in your foreign currency account into EUR then the 'last in first out' principle applies. This means you must refer to the latest deposit/s in any of your foreign currency accounts, which equate to the sum which you have exchanged to EUR or other currency, and use the Euro conversion value on the date that those funds arrived in your account.   

Sound complicated?  

It is!
 

The client I referred to at the start of this email was pulled up by her bank because the bank itself, Fineco, is Italian, and therefore where they see or suspect a specific activity they must warn the client that they need to take remedial action (in this specific tax case it is the declaration on the Modello 770).

In truth, a lot of you are using various currency exchange services, the most recent being Wise (ex-Transferwise). They are not an Italian institution and therefore are not obligated to tell you about this law, should it apply to you. The onus is on you to ensure that you make your tax declarations correctly and timely. However, without working knowledge of laws such as this one, then it is unlikely that you are going to do what you are supposed to do unless advised by someone like myself, or your commercialista highlights the fact to you.  

I hold more than €51645,69 in non-Euro deposits - what do I do now?

Before we start worrying about any capital gains tax or losses, there is the usual requirement to ensure that any foreign currency accounts are declared in your tax return every year and you pay the €34.20 'bollo' per account. 

In addition, we have this extra requirement that if you do hold 'more than' €51645,69 in foreign currency deposits in any one calendar year, you are a resident in Italy, and have held the funds on cash deposit for more than 7 days, and exchange some of that deposited money into another currency (euro or any other) then you have an obligation to calculate any potential profit/loss as a result of the exchange. 

To avoid this law the simple answer is to bring the euro value of your foreign currency deposits under this €51645,69 and ensure they stay under every year.  

If you are potentially in this situation then it might simply mean looking at your overall financial planning and whether you a) need to keep high deposits and b) seeing if you can find alternatives, such as money market accounts or low risk investments, whilst meeting any shorter term cash requirements that you may have.  

If you are unsure of your options or the way forward as a result of this law, then you can contact me to discuss your options on gareth.horsfall@spectrum-ifa.com or on cell +39 333 649 2356