Commercial Law International

By: Ainsley Brown

Cash or no cash, exchange equals tax

In a previous post, As companies battle the recession, bartering comes in handy, Carsten Lexa a contributor here at Commercial Law International, gave us an introduction to bartering schemes and their advantages for cash strapped businesses battling the global recession.  This piece is an attempt to build on his fine work by expanding the discussion into the realm of taxation.

Bartering in the simplest of terms is a market transaction where the medium of exchange is goods and services rather than legal tender; in effect exchange in kind. Bartering in fact is the oldest form of market transaction. However, despite its historic lineage and a lack of legal tender, bartering is none the less an exchange of value and will attract the attention of tax authorities. It is therefore prudent before individuals or companies enter such transactions that they inform themselves as much they can – ignorance of the law will supply little or no refuge when the tax-man cometh.

Bartering, as aforementioned involves an exchange of value and it must be understood that in kind transactions are treated by tax authorities in the same way cash transitions are treated; that is as being generally taxable. However, before a transaction can be taxed it needs to be valued, with cash transitions that’s relatively easy – tax the named cash price. Barter transactions, however, raise special valuation issues for tax authorities, that is to say how will the in kind transaction be valued; will it be valued on the basis of value in use to the recipient or value in exchange for the goods or services from the giver?

The following will illustration what I mean: let us say an accountant renders his/her services to an architect in exchange for the architect designing their dream home. The accountant provides $1,000 worth of services – the value in use – however he/she receives $1,800 worth of services – value in exchange – from the architect. For the purposes of income tax what value ought the accountant to use, the value rendered or received?

In Canada the approach is to us the value in exchange, that is the price normally charged for the goods or services rendered. In the above example the accountant would include the $1,000 he/she would have charged and not the $1,800 value of the architect’s services received on his/her income tax. While this is the normal approach, Canadian tax authorities will use the value in use – the value to the recipient – where the price normally charged for the goods or services given cannot be readily ascertained.

By: Carsten Lexa

In 2009 there were about 30 million credit card holders in the UK, holding about 58 million credit cards, down from 66 million credit cards in 2008. Beyond that, total household debt in the UK has reached a level of 1400 billion pounds sterling, of which 55 billion pounds sterling is on credit cards. When loooking at these numbers, one can easily figure out that the credit card business is “big business” in Britain.

And the credit card lenders are making big money. This is partly due to the general interest on the money borrowed to credit card holders and also due to various fees for using the credit cards. But it is also partly due to a lot of practices that are – carefully spoken – very favorable for the credit card companies. One specific industry practice is for example that repayments go towards credit card debt at the lowest interest rate, not towards debt with the highest rate.

The UK Government and several credit card companies and related associations have now announced a “new deal” that will change a lot of the industry practices unfavorable for credit card users. Most of the contents of the “new deal” will come into effect in January 2011. UK Government estimates that the changes based on the “new deal” will save customers about 300 million pounds sterling a year.

Here is what´s new for credit card owners:

1. Under the “right to repayment”, credit card issuers will use customers´ monthly repayments to pay their most expensive debt first. For customers opening new accounts, the minimum payment will always cover at least interest, fees and charges, plus 1% of the principal. Formerly, the minimum repayment often covered only interest and not repayment of the principal.

2. With the “right to control”, consumers will have the right to choose not to receive credit limit increases in future and the right to reduce their limit at any time. Additionally, if certain consumers are at risk of financial difficulty, credit card companies may be banned from extending the existing credit limit.

3. The “right to reject” will give consumers more time to reject increases in their interest rates or their credit card limit.

4. The customers will receive a “right to information”. This means that customers at risk of financial difficulties will be given guidance on the consequences of paying back too little and that all consumers will be given clear information on increases in interrest rates or credit card limit including the right to reject.

5. Finally, the “right to compare” will provide consumers with an annual statement that allows for easy cost comparison with other providers of credit cards.

These changes should allow credit card users (and store card users, because the changes will also effect these type of cards) to manage their finances and their debt more easily. It will also save them money, because repayments will now go towards debt with the highest interest rate, meaning interest payments will be reduced. However, the changes are only part of an agreement between the UK Government and the credit card industry. They are not elements of new legislation. But the UK Government promised to place the agreement on a statutory footing if credit card companies do not stick to the agreement. Hopefully, this will not be the case.

For inquiries please contact the author: kontakt@kanzlei-lexa.de

By: Ainsley Brown

Art meets Financial Instrument, a new from of investment

The use of art as an investment is not a new concept, whether it is commissioning a piece for your self or buying existing works, art as an investment is centuries old. But what about investing in the right to buy an artist’s future works; that is as yet to be conceptualized future works?

Don’t think it can happen? Well welcome to the future – art as a financial instrument; a derivative or futures contract.

The emerging artist derivative contract, the brainchild of Tom Saunders, a UK conceptual artist, has the potential to change the art world forever. The contract, drafted by Ferguson Solicitors, according to the parties involved is itself a work of art and allows an art investor to spend £2,000 now for the option of buying any piece of Mr. Saunders’ work for £1 in ten years. And just in case Mr. Saunders does not fulfill his end of the bargain there are contact provisions that cover premature death or non-production.

But what exactly are derivatives?

In the most basic of terms a derivative is a financial instrument that ‘derives’ its values from something else. That is to say a derivative is a contact between two or more parties that acquires (derives) its value from the future price fluctuations in one or more underlying assets. In the case of Mr. Saunders the underlying assets are his future works.

While there are many types of derivatives (futures, forwards, options, swaps) they are generally used for one of two purposes, either to hedge against risk or to acquire risk through speculation. The emerging artist derivative contract is an example of the former and not the latter. To be more specific the emerging artist derivative contract is an option.

Options are financial instruments that give the holder the right (the option) but not the obligation to buy or sell the asset or assets that underlay the option contract on or before an expiration date at an agreed price. Because the emerging artist derivative contract is a contact that allows the option holder to buy the underlying asset it is what is known as a call option.

By: Ainsley Brown

In a pervious post – Litigation … A New Investment Vehicle – I introduced you to the Therium, a third party litigation fund in England that was using litigation as an investment vehicle. At the time I thought Therium was a brilliant idea and this is position I still maintain.

Its times for a serious rethink of the Champerty Act

Despite my praise, maybe because of it, I wondered what would be the feasibility of such a scheme in Canada, more particularly Ontario?

If such a scheme didn’t already exist it ought to. Yes, why not? A third party investment fund willing to back meretricious claims that otherwise would never be pursued due to the lack of funding in exchange for a percentage of any funds recovered. What could be better? After all in Canada entrepreneurship in litigation is not an alien concept, we have “no win, no fee” schemes and Class Action legislation country wide basically allowing lawyers to underwrite Class litigation.

With these facts it should therefore be a simple matter of bringing together all the right commercial elements, right?

Well, not so fast, things are not as simple as that. There is still the matter of – the archaic and anachronistic – prohibitions of maintenance and champerty.

As will be argued later it is not that I believe that these prohibitions make a third party litigation fund impossible – not at all- however I do believe that until its repeal the Champerty Act, which prohibits both maintenance and champerty, such a fund would be severely hampered. In fact the fund itself could potentially be mired in litigation to defend its own existence.

So what are maintenance and champerty?

In the simplest of terms maintenance is the funding of litigation by a third party who is a stranger to the dispute. And champerty is the funding of a litigation by a stranger third party in exchange for a percentage of the win. However, I think Lord Justice Steyn in Giles v. Thompson put it best: “In modern idiom maintenance is the support of litigation by a stranger without just cause. Champerty is an aggravated form of maintenance. The distinguishing feature of champerty is the support of litigation by a stranger in return for a share of the proceeds.”

The main policy consideration that underlies the Champerty Act has a long vintage, dating back to an English statue of 1305 – yes that’s 705 years.

Stay tuned for Part II for details on the policy history of the Champerty Act and why its repeal is long over due.

By: Ainsley Brown

Be careful what you say, always sound advice

Solicitors be aware of the advice you give a client or even potential clients about their chances of success, it may come back to haunt you

: Levicom vs. Linklaters is as much a lesson in professional responsibility as it is in professional liability.

In pervious post, ‘World’s Second Largest law Firm, Linklaters, Sees Off €50 Million Negligence Claim,’ I wrote about the slap on the wrist – a £5 nominal damages judgment –  that Linklaters received in the High Court for giving negligent advice; however the story did not end there. The High Court decision was appealed to the Court of Appeal and this time the ‘Magic Circle’ firm did not escape with a slap on the wrist, becoming potentially liable for a claim of £37 million.

So what is the story here?

In a nutshell, Linklaters was sued by its former client Levicom International Holdings BV (Levicom), a Baltic telecommunications company, after what Levicom claimed was negligent advise. Linklaters was retained to represent Levicom after a joint venture with the Swedish company Tele2 went awry. Based on the advice it received, one that overstated its chances of success – ‘a 70% chance of success’ – Levicom took a hostile position, even refusing several settlement offers from Tele 2 to its later detriment. It was this over estimation – negligent over estimation – of its chances of success according to Levicom that caused it to take such a harsh line which eventually resulting in the case being settled on less favorable terms than the pervious settlement offers.    

Solicitor's advice on chance of success: more an art than a science

Mr. Justice Andrew Smith, sitting in the High Court however was only partly convinced. Justice Smith agreed that Linklaters was in fact negligent in its advice, however it could not be said that such negligence caused Levicom to settle on less favorable terms. Linklaters was however in breach of contact for its negligence however with the lack of causation it only got a slap on the wrist – a £5 nominal damages judgment.

The Court of Appeal agreed with Mr. Justice Smith also finding Linklaters to be negligent, however it disagreed with his causation analysis. In the court’s judgment as was explained by Lord Justice Jacob: “when a solicitor gives advice that his client has a strong case to start litigation rather than settle and the client does just that, the normal inference is that the advice is causative.” He later went on to say: of course the inference is rebuttable – it may be possible to show that the client would have gone ahead willy-nilly. But that was certainly not shown on the evidence here.”

In effect what the court was saying is that once a solicitor gives advice as to the strength of a client case and acting on that advice the client follows the recommended course of action it can be said that the solicitor caused the client to take said action. However, this is only an inference and simply shifts the burden of proof from the client to the solicitor to prove otherwise. This is the approach endorsed by the Lord Justice Jacob: “the judge [Justice Smith] should have approached the case on the basis that the evidential burden had shifted to Linklaters to prove that its advice was not causative. Such an approach would surely have led him to a different result.”

There is no word on if Linklaters is going to appeal the decision to the Supreme Court.

By: Ainsley Brown

In a move to boost its faltering economy, the Japanese government is considering a radical alteration of its inheritance tax regime. The policy, if implemented and if it has the desired effect, could see trillions of yen being transferred from elderly savings conscious Japanese to their more free-spending children or grandchildren.

Japan: will the elder cash flow?

The policy basically boils down to having people pass on their money now rather than bequeath it in a will. The government then in turn believes that with this new ‘glut’ of cash, younger Japanese being less saving conscious than their elders will open their wallets giving the economy a much needed boost.

According to the Times, the governing Democratic Party of Japan led by Yukio Hatoyama will announce the new policy in its manifesto to be published next month. The policy change would see a significant rise in the inheritance tax being accompanied by the slashing of the gift tax by about half. In making it much cheaper for people to gift inheritances rather than by bequeath, the government hopes this will be sufficient enticement for the elders to give up their cash now. And secondly, with their new found wealth the younger Japanese will give domestic consumer spending and thus the economy a well needed boost.

Will it work? We shall see.

Congratulations to David Cameron, the UK’s new Prime Minister.

By: Ainsley Brown

A bright idea?

With a 50% fall in prices over the past 18 months, coupled with lower subsidies coming from Europe, the global photo-voltaic (PV) sector is poised for dramatic change.

Look for a wave of mergers and acquisitions lead by either large US or Chinese firms. Most of the targets, consisting of smaller companies who can no longer produce economically at scale, will be from Europe. I also anticipate that some of the smaller European players will attempt to consolidate their operations with varying degrees of success.

One firm to watch in this sector is the UK’s Solar Press, whom if their technology pans out could, according to their own claims, further cut the cost of PV by up to 80%. Solar Press claims to have invented an “ink” technique where by quite literally the electronic materials are pressed on to panels. The ink consists of three electronic components dissolved in a solvent which after being applied to panels can be run through an oven where the solvent evaporates leaving the electronic components impressed on the panel. This creates a PV cell that according to Solar Press is more durable and cheaper than convention PV cells.

By: Ainsley Brown

It seems like there is more bad news for US exporters of Chicken to China – get ready for a whole new round of tariffs.

China has over the years become the largest export market for US chicken with sales of over US$722 million in 2008. The Chinese market for US exporters is a win/win; representing a dynamic market with tremendous growth potential, much of which consisting of chicken feet sales. The chicken feet market in the US is so small that chicken feet are often considered waste and therefore a cost; in China the reverse is true.

These new countervailing duties, of up to 31.4%, are on top of the anti-dumping duties China has already imposed earlier this year. The anti-dumping duties, as covered in a pervious post, range from 43.1% to 105.4% were imposed after a Chinese anti-dumping investigation  which found that the Chinese domestic market had suffered material injury from the cheaper US imports. Unlike anti-dumping duties, countervailing duties are not imposed because of dumping – selling goods cheaper than the cost of production – but because of unfair subsidization – state support. In this case the Chinese are complaining about the subsidies on corn and soybeans that go into making chicken feed.

These new tariffs represent a first for China; it has never before imposed countervailing duties on an agricultural import. The move by the Chinese Commerce Ministry comes as a bit of a surprised considering the recent warming of relations between the two nations.

By: Ainsley Brown

When an industry approaches being worth close to a trillion dollars it can no longer be considered a passing fancy or fad – Islamic banking and finance (IBF) is real and is as much a part of the global financial system as “conventional” finance.

It is this realization that has prompted Australia to conduct a review of its tax laws and their impact on IBF. The aim of the review, to be conducted by the Australian Board of Taxation, is to strategically position Australia to take advantage of the growing IBF market. As much was acknowledged by Australia’s Assistant Treasurer Senator Nick Sherry, “Islamic finance is a rapidly growing part of the global financial system and Australia is in an excellent position to capitalize on that growth, but we have to ensure our tax system doesn’t unnecessarily prevent that from happening.” Moreover, according to Sherry, “if Australia continues down the path of accommodating this type of finance it will serve Australia in terms of capital attraction, jobs and growth.”

The review is less about giving IBF special treatment under the law and more about finding and then removing barriers that unnecessarily and unfairly burden IBF. In ordering the Board of Taxation to conduct this review the Assistant Treasurer made it clear that “this is not about special treatment or concessions for Islamic finance or its providers, but about securing that our system doesn’t unfairly disadvantage or preclude such instruments and, in doing so, deprive Australia of capital, jobs and growth.”

The review will be among the first to be conducted by an Organization of Economic Co-operation and Development (OECD) country.

When will it be Canada’s turn?