2006 November » Tax Research UK

IFRS 8 – Segment reporting and the ongoing need for country-by-country reporting

Accounting, Tax management 4 Responses »

Nov 302006

The International Accounting Standards Board has issued IFRS 8 today on segment reporting. In their press release they did however add the following comment:

The Board will continue to examine the merits for a requirement of country-by-country disclosure as suggested by supporters of the Publish What You Pay campaign. A group of Board members will discuss this issue with other interested organisations.

This is good news. Those of us with concern on this issue are keen to work with the IASB to extend the parameters of reporting and transparency in the interests of many stakeholder groups, including shareholders. We look forward to the discussions.

Tax minimisation is not ethical

Ethics 5 Responses »

Nov 302006

It’s been put to me that tax minimisation is required by professional ethics. I don’t agree. There are two reasons:

1. Firstly, reasonable code of professional ethics would require tax minimisation by the profession. firstly because this projects an objective onto the client which they might not share, and that would be unethical; secondly because it is so obviously inappropriate for many people for whom the actions it requires would impose impossible burdens upon them and thirdly because it is an unattainable goal because proving the alternative hypothesis is in most cases impossible.

2. Secondly, despite all their massive limitations no current ethical code for the profession that I know of actually makes reference to this requirement.

So, why is an argument promoted that is wrong? Or is it that this is actually politics?

Tax compliance

Accounting, Tax compliance 13 Responses »

Nov 292006

Several people have challenged me about what tax compliance might be in comments in other postings on this blog. So I thought I’d better tackle the issue again.

Tax compliance means complying with the law. The spirit of the law. Not seeking to get round the law. In which case of course incorporation is allowed. I dispute that it’s always worthwhile for small business though. I think many would be much better off as LLPs, but since it is allowed it cannot be avoidance, in principle.

I’d add that I think the government were wrong to castigate those who incorporated as avoiding tax. It seemed to me that they were planning to give a tax break to small business when they offered the nil rate band. If that was not their intent they should not have done it. People who incorporated complied with the law, subject to one condition. They did not comply if they then spun the benefits around the whole family when there was only one real earner in the business. The economic rate of return on a nominal £1 invested is not up to 50% of the profits which clearly come from labour. The settlements legislation has been appropriately used to attack this – and any practitioners who did not know this was possible had, in my view only themselves to blame. I took it into account in the 80s and nothing changed my opinion since.

Why is this avoidance when incorporation with the benefit (even if as dividend) being paid to the person who does the work compliance? That’s simple to explain. The economic substance of an incorporated company paying a return to a person who undertakes the work for the company that generates its profit is aligned in his case with the tax burden. This is within the spirit of the law. If the government in that case does not want them to enjoy the income as a dividend they have to change the law, as Norway, for example, has. But spreading the income to family members who did not work for it does not reflect the economic substance. So that is avoidance.

The thinking is simple. It’s a threefold process:

1) Is the economic substance / benefit of the transaction being considered aligned with the person who picks up the taxation liability or tax relief?
2) Did the government clearly intend this option to be available (even if it appears daft that they did)? I stree, a choice between options at this stage is perfectly acceptable tax planning. It is rare that there is only one option available. Tax planning does not go away when one is tax compliant.
3) When all cards are face up on the table could you defend the allocation of income or the claim for a tax deduction as reflecting the economic substance of the transaction, tax legislation and the clear intent of Parliament and the Treasury (the latter being necessary since I accept that Parliament’s review of legislation is too cursory t ensure this a sufficient test, whatever i might desire).

If you can be sure of these things there’s a good chance you’re tax compliant. Which means you can sleep at night, and so can the taxpayer you’re representing if you’re an agent. That’s the economic benefit of this. And I reckon the value if a good night’s sleep pretty much incalculable.

Of course judgement is still required. But the management thinking process is different if one is tax compliant rather than being a tax avoider. That is the key change it reflects. There will be a change in tax liabilities on occasion as a result, although frequently it may be immaterial. But let’s also count the benefits:

1) Much reduced risk of tax investigation
2) Reduced risk of unforeseen liabilities, which can be crippling
3) Enhanced ability on the part of the adviser and client to concentrate on entrepreneurial activity, where money is really made
4) Ability to hold one’s head up high (I’m serious – paying the right amount of tax can make you feel good – I’ve advised people who have paid millions who have felt relieved to have an adviser who gave them permission to do so)
5) Peace of mind

It’s a winner.

Revealing tax researh from KPMG

Ethics, KPMG, Tax management Comments Off

Nov 292006

Dennis Howlett gets it spot on with this one.

Go to his place to read it.

If evidence is needed that advisers are out of step with the realities of life this provides it.

Tax and society

Accounting, CBI, Tax avoidance, Tax management 2 Responses »

Nov 282006

It’s OK to quote Polly Toynbee now. David Cameron does. I’m on side, apparently. So take this from her column in the Guardian today:

Yesterday, promoting their latest survey of 87 top executives, the CBI said two-thirds complain about tax. Only two-thirds? Who are the one-third who are happy with their taxes? The CBI claims the UK’s “burdensome and expensive” tax system is a major factor for the 20% of firms that shifted some operations abroad and the 30% considering it. Again, what’s surprising is that they could drum up only a third of executives willing even to “consider” moving bits of their business abroad. It easy to see why: the World Bank finds UK firms have the lowest tax rate in the G7. Last year Britain had the highest foreign investment of any country in the world.

You can see why Cameron has to agree, can’t you?

As for the survey itself, I have a feeling it looked like this:

Please tick all of the following you’d like:

A tax cut

A cut in red tape

A free all expenses paid holiday in Barbados, care of the NHS (you know you’re worth it)

Come on now, you can have all three! Don’t be shy.

And still they couldn’t get some to sign. That’s because some, I am sure, in the CBI know that the claims embodied in the CBI survey are not just unattainable, but actually undesirable. Which is why I don’t buy the arguments of those who say I am out of step with the reality of life. I back Toynbee on this one. It’s some in business, and their advisers, who are acting in pursuit of profit, who are out of line. And there are some in business who seem to agree.

In society as a whole that agreement is bigger. Dave Hartnett, Director General of HM Revenue & Customs, suggested in June 2006 that research undertaken in Canada showed that 50% of taxpayers would be compliant irrespective of the circumstances, and 10% would be non-compliant. The remaining 40% were capable of being influenced into compliance. I think I’m addressing the 40% with the arguments I present. The 10% aren’t ever going to agree. That may include many accountants. If they don’t then the law will eventually bring them into line. And please let’s have no argument about this not working. 10% did not agree with the abolition of child chimney sweeps, or giving holidays with pay, or maternity rights or the minimum wage. The environment is still available for abuse according to some. I accept that some people think that way. But the world did not and does not agree with them. And it’s embraced all these issues, and the world is a better place as a result.

The world will be a better place when business sees it is utterly dependent upon government for its success, and vice versa. Then we might have a constructive partnership based on compliance, on both sides. This is possible because I think most people already believe that to be true. If accountants don’t, that will be their problem at the end of the day.

It is high time that the CBI raised its game.

Ethics, Tax management 5 Responses »

Nov 282006

As anyone who has read the UK press in the last couple of days knows, they’ve been issuing their usual bleat in advance of their conference . As Reuters reported it:

“Our survey shows that business leaders believe the UK’s corporate tax regime is more burdensome than it was five years ago, and that this is making the UK less attractive as an international business location,” said CBI Director General Richard Lambert.

They do, of course, want lower taxes, including a cut in the headline rate even though my own work on the Tax Gap shows that most large UK companies pay tax at less than 75% of that headline rate.

What I am pleased to see is that I no longer have to write letters to the press to ensure that the opposing view is available. Take this from today’s Guardian:

The CBI still seems stuck in a comfortable old groove, fighting the battles and mouthing the slogans of the 1980s – about cutting the tax burden, getting government off their backs and breaking the power of the trade unions. If there is a cultural gap between politicians and business in Britain today, it is business – not politics – that is out of step with the public mood.

I can’t resist adding the next paragraph a well:

Listening to the CBI, you might get the impression that UK corporate taxes are crippling initiative and profits. Not so. Business taxes in this country are not high; UK corporate tax rates are the lowest in the G7. And even if taxes were high, there is no necessary link between the tax burden and poor competitiveness; this year, says the World Economic Forum, the four most competitive economies are Switzerland, Finland, Sweden and Denmark, none of which is an exponent of the slash-and-burn model. Contrary to CBI claims, British companies are not taking to the boats and heading overseas because of UK tax and regulatory regimes. In fact, the reverse is happening – foreign companies are queuing up to invest here.

The simple fact is that this is right and the CBI is wrong. Read the rest if what the Guardian ha to say and it’s hard not to agree with their conclusion that:

it is high time that the CBI raised its game.

The Tax Gap hurts shareholders

Accounting, Tax avoidance, Tax management 1 Response »

Nov 282006

The Wall Street Journal reported yesterday that:

Publicly traded companies reduced their U.S. taxable income by at least $34.8 billion in 2004 through potentially abusive tax transactions without taking a similar hit on profits reported to shareholders, new Internal Revenue Service data show.

The vagaries of accounting rules and tax laws allow public companies to keep two sets of books: one for shareholders and another for the Internal Revenue Service. Not surprisingly, companies tend to report higher profits to investors than to the tax man.

As Jesse Drucker, the WSJ journalist who I know and who has done good work in this area before notes:

For 2004, the IRS started requiring companies to give it more detail about the reasons behind that gap. Companies that year reported roughly 40% higher profits to Wall Street — known as book income — than to tax authorities. The IRS also asked companies to reveal what portion of the difference between taxable income and profits reported to shareholders was attributed to deals the IRS defines as having some hallmarks of questionable tax shelters, known as “reportable transactions.”

As the report notes:

All told, U.S. public companies included in the data reported about $554 billion in pretax profits to Wall Street in 2004, but only about $394 billion to the IRS

Jesse is right to note that the public need to know who has big gaps. The reason is simple. He reports:

Companies being audited by the IRS with book income that was much higher than their taxable income were more likely to be ordered to pay bigger back-tax bills, according to a 1998 paper by Lillian F. Mills, now a University of Texas accounting professor. The bigger the gap, she found, the higher the adjustment.

Other studies have concluded that companies with big gaps are more likely to be aggressive with their accounting, which can result in restatements and legal problems that can hurt share prices. A 2005 study by Michelle Hanlon, a University of Michigan accounting professor, found that big-gap companies had less-consistent earnings than those with smaller gaps.

But this is perhaps the most telling comment:

“Transparency is an important underpinning of our financial markets, [but] transparency is quite limited in the area of tax, which remains largely a black box,”

I couldn’t agree more. And I should add that I am working on a new tax gap report for the UK, right now.

Accountants DO encourage tax abuse

Accounting, Tax avoidance 12 Responses »

Nov 272006

Stuart Jones posted a comment on my piece called ‘Do small businesses evade tax?’. He said:

I’m sorry Richard but there are limits:

” ‚Ä¶‚Ä¶the profession is a key supplier of services that at least assist taxation abuse and that greed is the motivator ‚Ä¶”.

I assume by “the profession” you mean qualified accountants ie the majority will be ACCA & ICAEW.

Most of that group are decent law-abiding people. If anything they don’t do enough to minimse their clients’ liabilities! It is the businesses which commit the crime by not declaring the income not the accountants.

Your views are becoming less and less objective by the day.

I could have posted the reply in the comments section, but I’m aware that these are less well read, so offer it here instead:

Stuart

I simply disagree with you. I wholly stand by my assertion, because it is objective.

I could of course mention the words Enron, Andersen, KPMG and so on. I don’t need to though. The argument is based on much more widespread evidence, and in this case you supply some yourself.

First of all I am not accusing ‘professional’ accountants (and it does not really matter to me of which institute they are a member) of breaking the law. What I am saying is that whilst these people think that it is their duty to minimise their client’s tax liabilities by whatever means possible they will remain dedicated to tax avoidance, which I consider abusive. The reason is simple. You cannot ethically seek to avoid an obligation imposed by law. This is where we disagree. There are several reasons:

1) By encouraging avoidance accountants expose their clients to the risk that they will evade tax. This is inevitable because no one knows where the dividing line between avoidance and evasion is.

2) By concentrating on the question of avoidance accountants are ignoring the bigger picture which their ethical guidelines do impose upon them. This is to ensure that their client’s tax return is as far as they can determine correct. But you, I note pass the responsibility for this to the client. I accept that legally this is so. But ethically the accountant has a duty not to be associated with such returns. That buck passing is not therefore allowed under the ethical rules of the professional institutes.

3) The accounting profession is wrong to think that (and here I quote Dennis Howlett) ‘The hard fact is professional accountants are not in business to dispense, arbitrate or take decisions based upon social conscience.’ Sorry, but that’s exactly what they are required to do. They get their professional status under a charter granted by society which allows them to effectively charge a premium to operate. That charter requires them to operate ethically. Abusing the society which gives them the charter by promoting tax avoidance is not ethical conduct. I’d go further. I call it unethical. I call it tax abuse. And I suggest that the accountants that do it are motivated by greed.

I know what accountants will say. It is that tax avoidance is legal. And my answer is ‘So what?’ So are a lot of things that people take ethical exception to. The law and ethics are not the same. Accountants have a duty to be ethical which requires them to operate at a level higher than that imposed by law. Only when accountants promote tax compliance and seek in doing their work to ensure that clients pay the right amount of tax (and no more) at the right time in the right place will they reclaim the right to be considered both ethical and a profession. We might then see a significant fall in the number of returns which do include evasion, because right now the prevailing attitude of accountants simply does not encourage them to look for this. That is wrong. They should.

So, sorry Stuart. I’m not losing my objectivity. I just refuse to accept that the perversion called tax avoidance should dominate my thinking as an accountant. I genuinely think the time will come when this will no longer be the case generally. But it looks like there’s a long way to go.

Richard

Murphy v Walker – coming to a venue in Jersey

Jersey 12 Responses »

Nov 272006

On yesterday’s Sunday Talkback show on BBC Radio Jersey Senator Frank Walker, the First Minister of the island (equivalent to prime minister was asked if Would face me in a head to head debate. When this opportunity almost arose in June 2005 in the States of Jersey (their parliament) he simply refused to attend, despite a request to do so from the States committee that arranged the meeting that he do so.

I wouldn’t be surprised if this time he somewhat shocked his advisers by saying (near enough):

Any time he likes at any time of their choosing.

He then added:

Richard Murphy and the Tax Justice Network are dedicated to bringing the Jersey finance industry down.

TJN is concentrating not on London, Guernsey, the Isle of Man, the VI, Cayman or Switzerland but on Jersey. They want to destroy Jersey’s finance industry. They want to destroy the tax receipts from that industry that pay for education and health and want to destroy all the local jobs that come from our finance industry.

So, any time of their choosing.

Well, let’s hope that this time you don’t chicken out Frank. But let me give you a little warning. We don’t pick only on you. We’re not happy with any of them. And when the time comes you’ll have to do a little better than saying ‘it’s not fair’ and ‘don’t pick on me – pick on him’ when you know you’re guilty as charged.