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Editor’s Note: John Chown is one of two tax advisers awarded Life Member status by the International Tax Specialist Group in recognition of a long and meritorious career as an international tax adviser. He was there when relatively few individuals provided expert advice to the financial services industry and governments on cross-border tax policy.
INTRODUCTION
Tax did not become my career until eight years after graduation from university1, but what happened in those years is highly relevant. My father, a successful industrialist with international interests, took me to meetings with tax advisers (including Counsel) saying ‘you need to know enough so that the accountants can’t talk down at you’. Finding it interesting, I thought it was just one of the skills needed for a general manager.
During military service (where my final job gave me excellent management experience), I attended a voluntary course of lectures on economics and, discovering it very interesting, began reading up on it and decided to switch my degree course from physics to economics. Then, after a gap year in Canada, I became a fast track corporate trainee, but the directors at the company did not like original ideas.
Researching the job market, I was introduced to Roy, who ran a boutique merchant bank in the City. He had the opposite approach of the company I left and encouraged me. Learning that I knew a little about tax, I was asked to do some research on a tax point for one of their projects. Upon discovering that I knew more than ‘a little’, I was given a central role in the project which involved exploiting the Anglo-Irish Double Tax Agreement. Their U.K. accountant was Joe Smith of Coopers, and their Irish one was Leslie Chance. Both were very encouraging, taught me a lot and we kept in touch. With Leslie, we handled an acquisition in Ireland, and later worked together advising the Irish government on their plan to make Ireland a good home for international investors.
Otherwise my role was to check out deal proposals. In two cases, the paperwork looked fine, but the clients ‘smelled wrong’. To persuade my bosses, I had to find enough dirt to abort the project. Both clients were convicted for major frauds a few years later, and I became a connoisseur of fraud.
My boss was asked by the Iraq govern ment to advise on setting up the Stock Exchange in Baghdad. Having done the background research, I was booked to go out ahead as a guide, just before the Iraqi government fell. This was disappointing, but great experience, which was useful later.
Banks could then have ‘hidden reserves’ and some stockbroker friends identified a bank which seemed seriously undervalued. We were invited to join the stockbroker’s team and quietly bought control. Our two firms then moved our activities there. It was no longer the same: it was time to return to monetary economics.
Peter Bauer, my Cambridge teacher and friend, sent me to a firm advising large companies on foreign exchange exposure. Unfortunately, the potential clients mostly believed (wrongly) in ‘Bretton Woods rules’2. Before meetings with finance directors, I studied their accounts, and the conversation sometimes went into tax matters. One kept in touch, and my tax firm later advised his company on a foreign bond issue.
One assignment was a major report on the future market for privately printed banknotes on which I was helped by Jim Leontiades, an L.S.E. PhD student, on a summer project. We remained friends, and he returns to the story later.
Tax assignments grew, and I suggested we should recruit someone to help me on this. I was told it was ‘a flash in the pan’ so I decided to go it alone. Meanwhile, the newly independent government of Zambia had asked the company for help in repatriating their London listed mining companies. Being allowed to carry over the tax work, I explained that the British government had not collected tax from the companies because of double tax relief (D.T.R.). I showed the Zambian government how to reduce their net acquisition by buying the assets rather than the companies.
INDEPENDENCE AT LAST
The first couple of years proved a hard struggle. Joining the International Fiscal Association (I.F.A.) was very helpful and gave me at least two new mentors, Ash Wheatcroft, Professor of Tax Law at L.S.E., and Alun Davies, Head of Tax at R.T.Z. and a future International Chairman of I.F.A. Alun recruited me to the Institute of Directors (IoD) Tax Committee on which I served for over 30 years. The, then tiny, London office of Arthur Andersen was also very supportive. The lawyers had not gone international yet, and the other accountants said, ‘we don't need anyone to specialise in international tax: we have offices in 80 countries’!
I.F.A. became too big and our smaller group found it difficult to talk to each other at an overcrowded conference. We considered having informal meetings. When Arnold Sherman became independent, we formalised a joint venture in Jersey. He later introduced us to I.T.S.G. – just what we needed! Another valuable friend was George Stathopoulos, but just before we joined I.T.S.G., he retired to promote young Greek artists. He would have been an excellent member.
We expected to get early work from medium-sized companies setting up their first international venture, but we found more were making a second venture, having been badly advised on the first. Very large companies (who had tax departments with a budget for going outside their regular advisers) needed specialist advice on international mergers, acquisitions, and financing transactions involving tax and other laws of different countries. The lawyers would tell us what we could or couldn’t do, and our task was to ‘optimise within constraints’ (an economist’s job) and find a solution which worked.
In our early days, we had a good small team, but later, there was a fairly large turnover as our ‘trainees’ were head-hunted by larger firms. Our method of working was perhaps incompatible with a large structured firm. We never really found a solution to retention but finished with a good, if too small, team.
Having three good tax people, we advertised for a ‘young man’ who could do the preparatory work analysing a client, thus saving professional time. The best candidate was a young woman from Jamaica. It didn’t occur to us to offer her a lower salary, and she was able to take on much more than we expected.
The London head of a Canadian broker (a good friend) had a large private portfolio and wanted to delegate the record-keeping outside his office, so she took this on. He was happy for me to see what he was doing, and we discussed investments. Discovering an advantage for some U.K. taxpayers to invest via a Channel Islands investment trust, we set one up! He had the clients and the investment expertise, while I knew Guernsey which proved very welcoming.
Investment management became a good side-line. Arthur Andersen sent us some non-Doms as, they said, none of the other advisers understood their tax requirements. This activity grew and we soon reached the stage where we advertised and found an excellent young lady from an investment trust which didn’t take her seriously as a woman. She took a lively interest in other activities as well.
Her father worked at the British Embassy in Beirut, then a financial centre which I had been planning to visit. Spending the Christmas break with her parents, she asked if she could add on a week’s unpaid leave. We did better, sending her on an expenses-paid business trip to write a report about the financial centre and its future. Cost-effective for me and tax efficient for her! With great support from the British Embassy, she wrote an excellent report concluding, correctly, that the financial centre had a limited future.
PRIVATE CLIENTS
When directors of client companies asked about their own tax problems, we did our best to help. My friend, John Staddon, Policy Head at the IoD, wanted to leave and asked my advice on which of three job offers he should take. I persuaded him to chuck them and join us. It became a major profit centre, expanding our connections with foreign broking firms in London. He looked after their key people, often American non-Doms, and this also led to more corporate work. When there was a major relevant change in tax law, we advised all the big ones – except Merrill Lynch. They only discovered there was a problem when their accounts were audited. They then came to us!
When John Staddon retired, we recruited Kevin Offer, who kept nearly all of the clients and continued building up the business. He left my old firm when I did and is now enjoying being a partner of Hardwick & Morris.
FOREIGN EXCHANGE
My best subjects at Cambridge were international monetary policy and financial markets3. This knowledge proved invaluable in analysing international tax problems. It was also useful in looking after investments4.
In 1989, while taking a very active role in the European Monetary Union (E.M.U.), Professor Geoffrey Wood and I wrote ‘The Right Road to Monetary Union’, in which the basic thesis was that a basket currency would give the economic advantages without damaging political conse quences. Brussels wanted the latter; however, I concluded that the structure of the 1995 proposals was a disaster waiting to happen. My 20015 forecast stated that the ‘pensions time bomb’ could destroy E.M.U. by 2025 if something wasn’t done and it hadn’t collapsed already.
THE FOREIGN EXCHANGE TAX TRAP
In 1962, while working with the finance director of a machinery exporter on financing deals for clients, he mentioned casually that his company was planning to make a 10-year Eurobond issue in Swiss Francs. The exchange rate then being CHF 10.3 to the pound, I asked, ‘What will you bet that the pound won’t fall below CHF 9 in the next ten years’? He said, ‘I am not a betting man’, but I explained that the loan would be betting the company! Asked to advise on the tax situation, I discovered a huge tax trap. If a U.K. company borrowed dollars to acquire an American asset and then sterling was devalued, the sterling value of the assets and the potential Capital Gains Tax (C.G.T.) liability would rise, but the C.G.T. rules did not allow for the loss on liabilities! Dramatic mismatch. They cancelled the issue and made a rights issue. In 1972, the rate was CHF 3. A huge loss was avoided!
I explained this in the Financial Times and a subsequent book, but few people took any notice. Alun Davies and our friends the tax heads of Shell and BP already knew about the issue and after the 1967 devaluation, the four of us were on a Confederation of British Industry (C.B.I.) working group. The group had seven other corporate members. Each was millions of pounds out of pocket, and none understood what had hit them! This became a key subject.
SOME INTERESTING CLIENTS
Several other are clients brought us good publicity and helped expansion.
Rothmans
McKinsey used us on the tax aspects of their assignments. The most interesting was Anton Rupert in South Africa who had bought ‘control’6 of a series of major tobacco companies. McKinsey advised that competition law required the European Economic Community (E.E.C.) ones to merge, and Rupert asked McKinsey to explore the opportunities without talking to the merchant banks. This was tremendous for us! Everyone assumed the holding company would be in the Netherlands, but I knew the key people on exchange control and tax policy at the Treasury and knew they were worried that when we abolished exchange control (it didn’t happen), British investors would be much keener to invest abroad than Continental ones. I asked them whether they would like to see a cross-border merger negotiated with a U.K. holding company even though there would be some loss of tax. They were delighted, and all the planning was really done by the three of us meeting (no juniors present) and sorting things out. We analysed costs and benefits to both the company and the government. I handled the companies while they ‘sold’ it to all the departments concerned. Hardly anyone else was involved.
When I was put up for membership of the, then new, Association of Corporate Treasurers, their first response was that I wasn’t a treasurer. Fair enough, but a week later, they invited me to become a fellow and asked me to join their Taxation and Technical Committee. This was great fun, teaching treasurers how to deal with attempts by banks to sell them dodgy and overpriced products. This brought in a lot of new business.
AT&T
As a result of an anti-trust suit, AT&T was forced to demerge by creating ‘Baby Bells’. The brokers asked if it would be a tax-free reconstruction in the U.K. and, when I said it wasn’t clear, asked us to negotiate with H.M.R.C. The company had made arrangements with a City firm, but I knew the partner concerned, and we agreed to work jointly. H.M.R.C. asked us for an opinion from an American lawyer confirming that it would not count as a ‘scheme of arrangement’ under U.S. law. They also asked us to send them the I.R.S. ruling in due course – which eventually arrived at 57 pages long. They invited us to a meeting next day, so we studied the document. We needn’t have bothered, as they simply showed us their two-page draft, which was fine by us, but we suggested we should show up the Americans by getting it on one page! They were amused by this, and we did it. The ruling was addressed to the two of us by name and was circulated to investors. Good publicity!
Some years later, Penny Prime had a call from H.M.R.C. questioning the ruling that had been given. She found the file and read it out. The caller said that H.M.R.C. could not understand how they had given such a favourable ruling and commented, ‘Surely Mr Chown would not pull the wool over the eyes of H.M.R.C.’ to which she replied, ‘Indeed not’.
Lloyd’s of London
When there had been major corporation tax reforms in Europe, I had been involved, arguing for the imputation system and dealing mostly with Alan Lord at the Revenue. We got on well. Later, he became Chief Executive of Lloyd’s of London, and they wanted the Revenue to accept their basis of calculating reserves for unsettled losses (a major issue in insurance). The Revenue did not like negotiating with someone who had been one of theirs. Alan appointed me as a tax policy adviser who had given the Revenue a hard time in the past! We took on a young French student (four languages – useful for reading reports) at the London Business School for a summer project and did a comparison showing, inter alia, how much Munich Reinsurance had benefitted by German rules. We won but, after I gave evidence to a House of Lords committee, the trade journal of the re-insurance industry headlined its report, ‘John Chown accuses Munich Reinsurance of fiddling its tax’, which is not what I said! Alan sent me, at their expense, to Munich Reinsurance to pacify them. I came back with an assignment to help Munich Reinsurance.
Canary Wharf
An American group had the job of building a ‘second city’ in Canary Wharf and had arranged to finance this by having tax efficient leases with banks. Unfortunately, in the relevant year the banks had a bad year (related to Latin America) and had no ‘taxable capacity’. Margaret Thatcher having promised to help, turned to her adviser Tim Bell, and he brought me in. The operation was successful, but the patient died, so to say. To the horror of the banks who wanted their immediate cut, I thought we could find taxable capacity among the newly privatised companies. Instead, with Bell’s help, we negotiated a change in the law, but a general election meant the implementa tion was delayed and it was too late. Canary Wharf had to call in the receivers, but the Finance Director made sure I was paid up to date. He then went on to become Finance Director of the Royal Bank of Scotland where we had further dealings.
Tioxide
Tioxide, where the Finance Director was the son of a colleague of my father, gave us several projects. Their Italian tax adviser wanted to reconstruct their Italian subsidiary to create a ‘step up of basis’, enabling the group to claim depreciation for a second time. We had to look at the U.K. tax consequences to make sure the Italian tax saving did not restrict D.T.R., so we created securities treated as loan capital at one end and preference capital at the other. Just before leaving for Milan to discuss, I happened to see the head of corporate tax at the Revenue and asked how much cooperation they gave the Italians on exchange of information. ‘As much as they give us’, he said. I said, ‘that’s fine’, and he asked how much we were taking them for. I said, ‘several million pounds’, and he wished us ‘Good luck’.
Later, they wanted to take a substantial profit on an interest rate swap. They had two offers, and we were asked to compare them in after-tax terms. I ran them through my model (which used an analysis based on the yield curve), and it seemed that one offer was actually worth £250,000 more than the real economic value. I called them and asked them to bring in their computer expert so that the analysis could be confirmed. It was and they went ahead. When we had a lunch to celebrate, they asked me how this mistake arose, and I explained that the banks seemed to be using an over-simplified model, ignoring the shape of the yield curve which normally worked in their favour but had the opposite effect if the transaction was being unwound! They asked how quickly the bank would notice they had made a mistake, but I pointed out that they would have ‘sold’ the risk on to a third party. The company’s headquarters were then in Hammersmith, and a few weeks later we heard that the Hammersmith Council had lost a lot of money in swap transactions — pure coincidence?
The Rolling Stones
Two friends of mine left Rothschilds and bought control of a small family-owned bank which had run out of family, and we did some work together. Someone brought them the Rolling Stones as a client, and when they had a tax problem, they invited me to lunch to meet their dreadful agent, Allen Klein, who was their problem. He had been collecting U.S. earnings for them and holding it back to postpone U.K. tax. He had ‘lent’ them half the retained funds, but they had spent it and wanted more! When they asked for more, he said he would pay it all as a taxable distribution at the then tax rates. Out of that he would claw back the loan! He had them over a barrel. I didn’t like his attitude and determined to deal with him.
The solution drew on my experience with stockbrokers! Under the then ‘prior year basis’ of taxation (and the ‘commencement and cessation’ rules), tax could be saved by organising a partnership and creating a tax ‘dropout’ for the year after a particularly good year. We arranged for them to sue Klein for all the outstanding funds, then wait until the funds were actually received (it took a year longer than we expected), and then emigrate. Astonishing as it may seem today, they escaped tax completely on the prior year fund when they were still resident in the U.K. but not in their new country, France.
PUBLIC POLICY
Public policy, always an interest, became a serious concern with Jim Callaghan’s disastrous 1965 budget on which the Labour Party had done no research in opposition. Will Hopper asked me to present to his American clients, and Nils Taube asked for a paper for his U.K. ones. This was then published7.
Nils, Will, and I regularly met to discuss the issues and what we could do about all this, and they brought in Bob Buist. The four of us went on to found the Institute for Fiscal Studies.
Ted Heath, Shadow Chancellor, brought me in on his team, and became Prime Minister after Wilson’s 1970 defeat. Ted was not ‘free market’ enough for me, but Enoch Powell and Keith Joseph became very supporting. They passed me on to Margaret Thatcher, and I became a major tax policy adviser to her Chancellors.
Bill Clarke (editor of The Banker) was leading a city mission to Teheran and invited me to join them. The result was an article entitled ‘Will Teheran become an International Financial Centre?’, (1975) and the conclusion implied ‘no’. While that issue was current, the Shah fell! I accepted Bill’s next invitation to Colombia, and since then, I have been on dozens of such missions.
Jim Leontiades, newly appointed Dean of the Cyprus Business School, invited me over on a small project. As I knew, the Central Bank had a tender out on how they could join the E.E.C. while remaining a financial centre. They asked me to apply and finding they had an adequate budget, I put together a team which won the project. They took most of our advice, but not the warning not to get too involved with the Russians!
When Communism collapsed, I began to help the newly independent countries on capital market friendly tax policies. Poland, Hungary, and Romania were among my clients. Estonia, Nils Taube’s birthplace, became our best ‘client’ and is still at the top of the tables for user friendly tax systems.
Visiting Russia, I found that the Embassy wanted someone to compete with the Americans who claimed a monopoly on tax matters and introduced me to the splendid unbureaucratic ‘Know How Fund’ with whom it was a joy to work — until it was abolished by Clare Short. After that, there were several major assignments in Russia, Poland, and Mongolia. We continued to work informally with most of the C.E.E. countries8 and continued to visit them, both independently and informally, with International Financial Services London.
LATER EVENTS
There is less of interest to say about the later years. Having handed over effective control to my partners (John Dewhurst, Kim Desai, and Kevin Offer), I was less involved with day-to-day advice and spent a lot of time on public policy work. When I retired (in retrospect, later than I should), I found that people still wanted to talk to me, although I was no longer regulated and insured. Working from home, with invaluable help from Penny Prime a couple of days a week, I only do what interests me (a full-time job in these chaotic days).
I had already been liaising with a group putting together investors and high-tech projects, mainly then on tax planning, but I discovered another role. When advising companies, I had made a point of looking beyond the problem and analysing their business model. On this principle, I would look at draft proposals intended for potential investors and/or users of the output, analysing and suggesting changes in the proposal and asking questions which an adviser might well ask. The danger was that they wouldn’t ask the questions but simply turn the project down. My reward was the opportunity to make early stage investments – on something I had researched myself. U.K. law gives generous incentives to those approved new enterprises, distorting the risk/reward basis in favour of the taxpayer! This strategy has proved very profitable. It is sometimes said that older people should only invest in ‘safe’ securities, but I invest for my children and grandchildren, and (in the U.K.) unquoted investments are free of inheritance tax after two years. When such companies wanted to find international agents or co-venturers, the I.T.S.G. network proved invaluable.
CONCLUSION
This article tells, I hope, an interesting story, inevitably dealing with successes — although there were a few disasters. It is also mainly about my history, which is not quite the same as the history of the firm. There is much more which could be said, but I do not want to tax the patience of the reader too much!
1 Selwyn College, Cambridge University.
2 Bretton Woods rules was the name given to a system of monetary management among the U.S., Canada, Western European countries, Australia, and Japan after the 1944 Bretton Woods Agreement. Under the Bretton Woods rules, each country was obligated to adopt a monetary policy under which external exchange rates were maintained within 1% of agreed rates by having currency linked to gold. The system lasted until 1971, when the U.S. announced that it would no longer link the U.S. dollar to gold.
3 My Adam Smith Prize was for a dissertation on fixed versus floating exchange rates.
4 This was always an interest. I served for many years as a member of my College Investment Committee.
5 ‘Tax Efficient Foreign Exchange Management’, John F Chown. Woodhead-Faulkner, Cambridge, 1990. ISBN 0 85941 595 3.
6 He had a concept of `partnership in industry’ by which he never had legal control of a company – but was usually only one vote short!
7 John Chown, ‘The Corporation Tax - a Closer Look’, Institute of Economic Affairs, 1965.
8 The Central and Eastern European, or C.E.E, countries are comprised of Albania, Bulgaria, Croatia, the Czech Republic, Hungary, Poland, Romania, the Slovak Republic, Slovenia, and the three Baltic States: Estonia, Latvia, and Lithuania.