Numbers that the Americans are debating include a levy at 0.15% for 10 years on all financial institutions with more than $50 billion in consolidated assets.

With Germany and England ready to take action and implement similar levies, and with Obama seeking to push the US to do the same, it’s unclear what kind of overall effect these levies would have on banking if they are carried out on a piecemeal, domestic basis. These financial institutions are international in character. Their activities transcend national borders, and thus any attempt at regulation will need to account for the cross-border transactions and international nature of the institutions. Will domestic regulation really solve the inherent problem of big banks making big investments without thinking about the potentially big (and devastating) consequences?  Probably not.  So then what’s the point?

Edwin M. Truman, Senior Fellow at the Peterson Institution for International Economics in Washington, proposes a different analysis. He says, “There are two dimensions — paying for the past and paying for the future.”  Instead of seeing the tax as a sure-fire way to implement reform in the banking industry, he would see it as a way for governments to recoup their bailout cash and to provide a cushion for future bailouts.

One other contentious factor in the taxing of banks is the worry that levies will create further competition for banking jurisdictions. While when it comes to corporations law, Roberta Romano has deemed this competition for jurisdiction the genius of American corporate law, it is not clear that there is a direct parallel for the banking sector. For a financial institution, its bottom line may more readily be finding the jurisdiction with the lowest tax, as opposed to a jurisdiction with great legal experience in banking affairs. Starting competition between major governments as to who could offer the lowest levy won’t address the major internal reforms sought for the entire banking system.  Banks are also usually backed by some kind of governmental guarantee (at least to a certain amount), which complicates a government’s interest in hosting a foreign bank seeking to evade that nation’s bank levies.

So what can these levies do so long as there is no unified global approach? The answer is, in short, insurance.

In the case of Sweden, the insurance role of the levy  funded by those financial institutions creating the risks is clear.  According to measures adopted late last year, the government plans to raise roughly 2.5% of the GDP in the form of bank levies over the next 15 years. The annual levies begin at 0.018% of the institution’s liabilities (equity capital and some junior debt securities excepted.) Starting in 2011, the levies will rise to 0.036%. Sweden has based these numbers on what they project a potential future banking crisis would cost. As such, money collected under these taxes is allocated into a stability fund. If a future crisis were to arise, bailouts would come from this fund and not from the public purse.

Meanwhile, the world awaits to see if there will be a global reaction to these proposed levies. All eyes will be on the G-20 meetings in Washington later this month when the IMF delivers a report on bank levies.  While it still remains a contentious matter, there may still be hope for a more unified approach in order to revolutionize responsibility undertaken by financial institutions.

In the first nine months of 2009, there were 306 incidents of piracy reported to the IMB Piracy Reporting Centre (PRC).  Of this number, 114 times pirates boarded the vessel, 34 times pirates hijacked the vessel and 88 times vessels were fired upon.  While the Gulf of Aden and the East Coast of Somalia remain the regions of highest threat, pirate activity has expanded into the southern parts of the Red Sea, the Bab el Mandab Straits and the East Coast of Oman.  This has led to the development of an entire industry of pirate negotiators and security firms who undertake to settle on ransom amounts and organize the drop shipment of the cash.

Shipowners sending their vessels through these dangerous waters have been slow to respond to these dangers, but have finally starting coming around to the inevitable: the beefing up of security for the ships.  This includes paying extra amounts to join a protected convey in high-risk waters, hiring armed helicopters to fly over the ship, and in some instances, hiring armed guards to be on board the vessel itself.  The great fear, of course, is that if a ship has its own onboard armed guard, this could provoke more violent action from the pirates.  At present, the pirates have been fairly non-violent, in most circumstances holding the crew hostage but not harming its members.  With the presence of armed guards, this tendency could change.

A conflict with pirates undoubtedly costs the shipowner money, be it damage to the vessel, operating costs (such as daily hire of the crew) for the lost time at sea and potential claims from cargo interests.  Moreover, insurance companies don’t always pay.  With the rise in piracy incidents, many shipowners have been discovering the limits of their maritime insurance.

There are two categories of damage for which an insurance company might actually pay out.  Hull & Machinery insurance and insurance on the carried cargo would cover physical loss or damage.  Arising liabilities would be covered under Protection and Indemnity (P&I) Insurance.  Practically speaking, P&I will provide sums for crew’s loss of life, personal injury or illness, substitution of crew members and/or repatriation and for loss of personal items of the crew.  Ransom payments, however, are considered to be beyond the scope of P&I.  But is that fair?

Way back in 1590, it was decided in Hicks v. Pallington that ransom payments were subject to general average contribution.  This means that the risk of having to pay ransom was spread out amongst all parties involved in the voyage.  To the surprise of many naive shippers, this includes those who have shipped the cargo, even after they have paid all of the freight and other costs billed to them.  Since P&I insurers also have an interest in seeing the vessel on its way before any harm befalls the crew or any potential pollution results from the piracy incident, there seems little justification to exclude P&I insurers from general average contributions.  Paying the ransom decreases the chances that the P&I insurers will have to pay out under their policy.

But what about Hull or War Risks insurers?  The normal standard of cover for Hull insurance is the Institute Time Clauses – Hulls (ITCH).  These clauses purport to cover piracy, but exclude expenses arising from “any terrorist or any person acting from a political motive” (the Strikes exclusion).  It almost seems like a game of semantics.  While the ITCH clearly anticipates piracy, if we were to consider pirates to be terrorists, the risk would be deflected away from the Hull insurers and onto the War Risks insurers.  Many times, this isn’t a big deal because the insurers are the same.  Practically speaking, the vast majority of ransom claims through Hull insurance are denied.

War Risks insurance, however, tends to operate differently from Hull insurance.  First, there is typically no deductible.  But there is also usually a provision requiring the insured to warrant that they will not sail within a certain distance of the Somalian coast.  Thus, having failed to claim in Hull insurance, the shipowner is unlikely to find recourse through War Risks insurance, either.

As an odd point, insured parties might not be able to enforce payment for pirate ransom in the English Courts.  The majority of these insurance policies are construed under the laws of England.  Under the English Proceeds of Crime Act, it is illegal to pay ransom to an organization if the paying parties have a reasonable belief that the organization being paid is a terrorist one.  Once again, we see the problem of conceiving of these pirates, who are indeed involved in highly organized activities funded by a large number of investors, as terrorists.  There just aren’t clear guidelines for identifying terrorists in the maritime setting.

Since it is very likely that a piracy claim could fall between the gaps of P&I , Hull and War Risks insurance, many firms now take out Marine Kidnap and Ransom (K&R) insurance which would cover ransom payments, the cost of negotiators, and other expenses which might arise due to a piracy incident.  The matter of pirate terrorists has yet to be tested by the courts.

One such effort has been the transformation of taxation for social benefits with the coming into force on January 1st, 2010 of federal law N 212-FZ “On Insurance Contributions to the Pension Fund of the Russian Federation, Social Security Fund of the Russian Federation, Federal Medical Insurance Fund of the Russian Federation and Territorial Medical Insurance Funds.”  Before 2010, there was a single tax for social benefits called “Edinnii Sotzialnii Nalog” (Unified Social Tax), which was collected by the federal tax revenue agency on behalf of the government.  Russia has now opted for a more targeted approach to this tax.  Instead of a single tax, the new legislation introduces employer payments to four separate funds: pension fund, social security fund, federal medical insurance fund and territorial medical insurance fund.

As a way of transitioning from a single tax to a series of contributions, the Russian government has set the initial tax rates:

• Insurance contribution to the Pension Fund – 20%
• Insurance contribution to the Social Security Fund – 2,9%
• Insurance contribution to the Federal Medical Insurance Fund – 1,1%
• Insurance contribution to the Territorial Medical Insurance Funds – 2%

While these new measures certainly have the effect of bringing insurance contributions into the realm of taxable income, which was not the case before the 2010 reform, the departure from a single tax approach may be more than just for bureaucratic convenience.  Whereas the government has in the past seen fit to collect tax to be poured into the general federal holdings, and then to be later allocated as per the Russian budget, payments to these four funds under the new legislation go not to a central federal revenue-collecting body, but to the funds themselves.

The direct collection of social taxes by the specific funds enables the organizers of these funds to have more immediate access to the money that has been raised, without having to jump through bureaucratic hoops in order to get the money from a central taxing authority.  Given Russia’s on-going difficulties with meeting the needs of pensioners, in addition to the stresses placed on the government purse due to the needs of the unemployed, any way to grease the wheels of these public programs is an effort worth applauding.

Also, this more direct structure fosters greater transparency in the tax collection process.  In a country still notorious for its corruption, transparency in a fragile economic state is of the utmost importance.  This should help foster more public confidence in the national economy.

Benefiting from this increased transparency, the government also is able to raise these tax figures to adjust the specific needs of the funds.  In anticipation of future needs, the government has already planned to raise the tax percentages in 2011 accordingly:

• Insurance contribution to the Pension Fund – 26%
• Insurance contribution to the Social Security Fund – 2,9%
• Insurance contribution to the Federal Medical Insurance Fund – 2,1%
• Insurance contribution to the Territorial Medical Insurance Funds – 3%

Of course, it remains to be seen how effective these changes are at improving the overall condition of social programs available to Russian citizens.

Obama is looking to implement progressive increases in capital gains tax.  The plan would initially raise the tax from 15 percent to 20 percent.  But what does this mean for the market?

Capital gains tax is traditionally viewed as a method by which the government can encourage more long-term investments.  The classic example of a capital gains investment is the purchase of property.  By offering investors a lower rate of tax, the government can effectively stimulate these supposedly more-secure, longer term investments.  The low capital gains tax was one large factor leading to the build up of the housing market boom.  But now, we are facing the aftermath of the housing market bust.  People aren’t buying and selling at pre-recession rates.  In fact, the IRS says that income from capital gains is down 40 percent since the 2008 stock market crash.

So the big question is what will the effect of the increase of capital gains tax be?  That is a matter still up to debate.

Intuitively, one would think that raising the capital gains tax would be linked with fewer capital gains investments being made.  Based on this logic, Obama is proposing to cut capital gains tax for small businesses.  He hopes this will help to stimulate their growth.  This means that the raise in the capital gains tax could be a bitter blow to the fragile market of individual investors who will now be taxed more for their capital gains investments, and may therefore discourage them from making these further investments.  Newt Gingrich has called for the US to follow the footsteps of countries like Austria, Belgium, Germany, Greece, Luxembourg, Mexico, New Zealand, Portugal and Turkey by effecting a total abolition of the capital gains tax. He writes that elimination of the capital gains tax would incent economic growth, encourage job creation, create capital and venture capital funding.  Increasing the capital gains tax would do just the opposite.

But Gingrich’s view isn’t the only one out there.  Another possible effect of raising the capital gains tax is also… nothing.  Clinton Deputy Commerce Secretary Robert Shapiro suggests, “This increase will not just have no severe effect on the economy but have almost no effect except higher revenues.” The argument is since it will have no impact, positive or negative, on the market, it’s just money ready to be collected for the government.   The government has already lost 6.2 percent of its tax revenue due to overall income losses during the recession.  It certainly has a lot of ground to recover to just break even and start paying down the national debt.

But is that a fair analysis?  Should the government make any and all tax increases to raise revenue when there is no overall immediate effect on the market?  Or should the government only make tax increases or tax cuts in an effort to affect taxpayer behaviour or to offer them a subsidy?  With a recovering economy starting to show new signs of life, is recouping taxation money a justification for the method in which they seek to generate income, or does the government have a higher duty in its taxation policy?   While this may seem like a purely political question, it concerns the fundamental underpinnings of the taxation system.

The idea was subsequently picked up by UK PM Gordon Brown and presented to the G20 at their meeting in St Andrews, Scotland on Nov 7th.  Brown presented the tax as an instrument to fund future bank bailouts.  Moreover, he sees the tax as increasing accountability in the financial sector.   However, the idea was not received as well as had been hoped.  The USA has rejected the idea, and Canadian Finance Minister Jim Flaherty also came out against the tax.

While things looked dismal for the tax proposal following the G20, it seems that at least as far as the US is concerned, the idea in principle may still be kicking around Congress.  U.S. House of Representatives Speaker Nancy Pelosi has spoken out in favor of a similar proposal, affectionately named the Wall Street tax, from which funds would be used for job-creating legislation sought to be passed in December.  The Democratic proposals are citing nearly a $150 billion per year fund to help with economic recovery. However, the US is staunch about the necessity of the tax being an international one, otherwise it stands the risk of losing financial jobs to markets overseas.

So what would these taxes practically look like? Democrat Representative John Larson proposes a 0.25 percent tax on over-the-counter (OTC) derivatives transactions.  But once again, we see the Democrats in favour of the tax being adamant about applying this potential tax internationally.  These OTC derivative transactions go on primarily between banking and financial institutions and include interest rate contracts, credit default swaps, foreign exchange contracts, commodity contracts and equity contracts among others.    To contrast, France was looking at roughly 5 cents on every 1,000 euros.

As long as the US dollar remains as a standard trading currency, there is an opportunity to achieve the goals set out by this potential tax proposed by some Democrats.  Even when money is traded in US dollars between two foreign banks, the transaction passes through New York.  However, a potential tax only on USD transactions thus would tally another minus for the already weakening use of the USD as a currency of trade.

However, it leaves one to wonder how feasible a truly solidified global financial tax really is.  While places like New York and London have been seats of financial power for ages, there’s no telling what might happen if the tax isn’t uniformly implemented.  All it takes is one or two countries with a relatively stable currency to withhold to cause a great threat to the goals of the tax.  The danger is not just in the abandoning of the US dollar as a currency of trade, but rather corporations moving operations overseas.  Like the phenomenon of ships leaving the US to be registered under Flags of Convenience, a non-uniform global tax might cause corporations to do the same.  And that certainly wouldn’t help raise funds for stability or any future bank bailouts, nor would it help create more jobs in this continued time of high unemployment.

As the text of the bill currently stands, the following serious cooperative and punitive measures would be in store for foreign financial institutions and individual investors:

• 30% withholding tax on payments to foreign financial institutions and other entities unless they acknowledge the existence of offshore accounts to the IRS and disclose relevant information including account ownership, balances and amounts moving in and out of the accounts;
• Reporting of offshore accounts with values of USD50,000 or more  by individuals and entities on their tax returns;
• Increasing the statute of limitations from 3 to 6 years specifically when offshore accounts are unreported or misreported;
• Requiring advisors who help set up offshore accounts to disclose their activities or suffer a monetary penalty;
• Requiring electronic filing of information reports about withholding on transfers to foreign accounts; these reports will be matched with IRS tax returns;
• Strengthening rules and penalties with regard to foreign trusts, including rules to expose payouts from foreign trusts to US beneficiaries as well as US transfers to foreign trusts; and
• Clarifying the definition of outgoing US dividend payments so they cannot be disguised as payouts to avoid US taxes.

The problem for the practical businessman may not be so much in continuing the use of offshore bank accounts, since oftentimes the companies who own these bank accounts are registered offshore companies themselves.  The trick is in tracing where exactly money from those bank accounts goes.  Although the details are still unclear, this piece of legislation is surely seeking to clamp down on US beneficiaries funneling their incomes through offshore bank accounts in order to evade taxes.  This bill is due to bring up the age-old question of where the line of legality falls with respect to shell companies incorporated offshore.

But to what extent can the US legally require foreign banks to adhere to these new measures?  That’s a question which is still up for debate. Representative Charles Rangel, who introduced the bill to the House, suggests that “this bill offers foreign banks a simple choice — if you wish to access our capital markets you have to report on US account holders.” But how much of a duty does that put on financial institutions to inquire as to the background of their personal and corporate clients?

From an enforceability perspective, it seems unlikely that foreign courts will be bandwagoning to levy fines on their own financial institutions for lack of cooperation with the potential new US rules.  So what does this mean for the IRS and the US government?  Could we be headed back down the route of economic sanctions as a coercion measure?  While it’s certainly too early to tell, it’s clear that Congress has a lot of thinking to do before they open this international bag of taxation worms.