2007 January » Tax Research UK

Developments in Guernsey

Corruption, Guernsey Comments Off

Jan 312007

The government in Guernsey has resigned. This is not unexpected. As the BBC have reported:

The Welsh Audit Office (WAO) was asked to carry out an investigation following concerns the Policy Council had used its influence to encourage RG Falla to withdraw.

The bid was £2.4m lower than the one accepted, and was the preferred tender.

The WAO’s findings said the States’ reputation had been damaged, citing procedures for managing capital projects as inadequate, incomplete and unclear.

The report also said Mr Morgan was a poor leader and Treasury Minister Lyndon Trott had made inaccurate and inconsistent statements.

What is extraordinary is that it has come to my attention that some in Guernsey are saying that the furore about the issue has been created by the Tax Justice Network because some of the politicians who have lead complaints are the same politicians who are seeking to create tax policies in Guernsey that would bring it into line with international expectations as expressed, for example, by the EU.

I support the efforts of those politicians to create a viable, fair and internationally acceptable tax system in Guernsey. But it should be noted that unlike Jersey, where many politicians do talk to us, that is not the case in Guernsey and we have had no involvement in discussion of either of these issues with any of the politicians involved, or their advisers.

It would seem that some people in the offshore world have over developed imaginations about just what we get up to. Perhaps they would be better exercised asking questions about just why so many people in Guernsey appear upset about what has happened. If they did they might realise that a lack of transparency is at the heart of this issue. And maybe it’s that lack of transparency that those who promote this paranoid speculation want to defend.

Let’s get the defintion of fraud right

Corruption, KPMG, Tax Justice Network Comments Off

Jan 302007

KPMG are reporting that:

Fraud cases involving sums of more than £100,000 rose to 277 in 2006, from 222 in the previous year, according to KPMG Forensics Fraud Barometer – an increase of almost 25%.

For once I will make no comment on the messenger. What I do want to make clear is that I think this a wholly inadequate definition of fraud. That’s in no small part because it focuses on the perpetrator. That’s akin to the corruption debate, which does likewise because corruption is defined:

as the misuse of entrusted power for private gain

That’s inadequate because there are substantial problems with this definition:

1. It focuses on the symptoms and not the cause of this problem;
2. It emphasises corruption within government, or against government;
3. It ignores illicit corporate activity perpetrated by those entities themselves;
4. It specifically ignores the issue of tax evasion as corruption.

Those criticisms can be translated to the definition of fraud used by KPMG. Tax misrepresentation is, for example, fraud but doesn’t appear on their radar. A radical rethink is needed on these issues. You could start here.

What about the shareholders?

Accounting, Economics, KPMG Comments Off

Jan 292007

I’m always bemused by those who claim that companies are run in the interests of their shareholders. They always appear to be optimists who went on a one year undergraduate sub-option in economics and were naiive enough to think they were taught something approximating to the truth.

Take this story in Accountancy Age for example:

FTSE 350 companies may become the target for private equity buyouts by 2008, according to a report by KPMG. The firm said companies in the FTSE 350 index will generate £198bn of surplus cash by 2008, an amount that is ‘sure to lure private equity firms unless it is deployed wisely’.

KPMG are clearly keen to sell their wares. They’re reported as saying that balance sheet structuring has never been as important as now (and I wonder who on earth could do that for them?). What is never mentioned is the simple, and logical option that a cash surplus of this size could be returned to the shareholders. Silly me. What a daft idea. Surely, that would take the shareholders into consideration? Why do that?

Ken Galbraith was right. That’s the last thing that management do. Anything said to the contrary has to be taken with a large pinch of salt.

Bono – back in the news – and way off track

Ethics, Tax compliance, Tax Justice Network Comments Off

Jan 292007

Bono is back in the news. He’s been at Davos telling the great and good what to do, but Bloomberg’s have decided to draw attention to his tax arrangements again.

Rightly too. As I mention in their piece in the Chicago Tribune:

Bono’s own dealings haven’t always followed the altruistic ideals he espouses, says Richard Murphy, a Downham Market, U.K.-based adviser to the Tax Justice Network, an international lobbying group.

Murphy points to the band’s decision to move its music publishing company to the Netherlands from Ireland in June 2006 in order to minimize taxes. The move came six months before Ireland ended an exemption on musicians’ royalty income, which is generally untaxed in the Netherlands.

“This is somebody who’s exceptionally rich taking the opportunity to shift his tax burden to somebody else, but then asking governments around the world to spend that tax take in the way that he would like,” Murphy says.

I did rather like the headline in the Sydney Morning Herald version of the same story:

Bono likes to preach but hates tax

Bono has missed the boat here. Tax is now a big issue in development. Not paying it is off the agenda for those with an interest. It’s time he smelt the coffee. Alternatively he should read this report from the Global Policy Forum or the one we’re putting out next week from TJN. The world’s changing. Bono needs to catch up.

KPMG plead guilty

Accounting, KPMG, Tax avoidance 2 Responses »

Jan 292007

Forbes and others have reported on KPMG’s latest tax misfortunes, this time in Texas. KPMG have pleaded guilty to 96 tax offences, accepted the maximum fine and are on probation (in effect) for three years if they still want to be allowed to practice in that State.

KPMG say that these matters all relate to partners that have now left, but what is significant is that WebCPA say:

KPMG admitted that through the actions of former partners and employees it prepared fraudulent tax returns for clients; drafted false statements to support the tax shelters; issued opinions that were false; concealed the tax shelters and the facts regarding them from the Internal Revenue Service; failed to locate and produce documents sought by the IRS, and misrepresented to the IRS KPMG’s role in creating the tax shelters.

This is serious stuff, and shows that the offences continued after the original shelters were created. I have to say I agree with Dennis Howlrett on this when he says:

I know there is a large majority of professionals who see tax avoidance as a business cost. But when set out in these stark terms, it is hard to understand how advisors can justify that position when they must know they’re attempting to manipulate the law for advantage. I can’t understand that logic.

I’m sure KPMG have tried to get rid of those involved. Hat’s the good news. But the question that remains is as important. Has the profession got rid of them, or are they now in what Dave Hartnett at our Revenue calls the ‘spivvy boutiques’ that are selling tax planning they are refusing to report even though required to do so by UK law?

Until the profession as a whole takes action to clean up its act, KPMG’s period of remorse is not enough. But I’m not seeing either the Big 4 or the professional bodies taking the lead on this. That worries me.

KPMG call for tax transparency

Ethics, KPMG, Tax management 2 Responses »

Jan 262007

Loughlin Hickey at KPMG has been out on the stump in Sweden and has called for greater transparency in taxation:

I want to highlight signs that tax and corporate governance is an emerging issue, it is a global issue, and it is likely to set new standards for transparency in tax across the whole world.

I could have said it myself. What I would not have said as a preamble was:

“In a competitive world, tax is a lever that governments have used to attract or retain investment,” he said. “But they still need to fund increasingly expensive social spending. This means that any shortfall in budgeted tax revenues has to be made up by a shift towards indirect taxes and greater vigilance on the amount of tax paid by corporate taxpayers operating in the country – often through more aggressive tax policing, particularly in relation to transfer pricing.”

The implicit suggestion that corporations are somehow subsidising others is inappropriate. They’re not. They’re paying because they have the means to do so, and democratically elected governments have spending obligations to deal with the issues that markets cannot address, or which those markets create. In that context the tax paid is simply dealing with the issues of market failure which KPMG are wont to ignore.

But, this obvious lack of understanding apart, Hickey seems to be recognising a reality of life when he says:

This drive for greater transparency is reflected in greater media interest in tax governance issues, and a renewed interest in tax among analysts.

Tax policy now encompasses far more than headline corporate tax. It includes indirect and employment taxes, and it is not enough just to get things right in the country of the head office. Global tax management needs to work, and to be seen to be working.

That’s true. But I’d have so much more confidence in what he said if KPMG wasn’t a massive tax haven operator, where transparency is the last thing on anyone’s mind. I asked him how he reconcile this well over a year ago. he’s still not replied.

The US Tax Gap

Accounting, Tax avoidance, Tax management 1 Response »

Jan 262007

The US Senate held a hearing on the Tax Gap earlier this week. Three organisations submitted evidence, of which one was Citizens for Tax Justice, with whom the Tax Justice Network has a close working relationship in the USA.

Bob McIntyre’s presentation was masterful. It does three things:

1) It shows that Bush really is making the tax problem in the USA worse and social injustice is rising as a result;

2) It shows that the Tax Gap can be tackled;

3) Presents cogent argument in favour of Bob’s conclusion, which is:

The stakes in tax evasion are very high, and the forces in favor of maintaining the status quo are well-financed and very politically connected. But it’s our money the tax cheats are stealing. On behalf of honest taxpayers, CTJ calls on federal lawmakers do something about it.

There’s one other point of interest. All three presentations to the Senate hearing had one thing in common. Simplifying the tax code will help. We agree with that, although the UK problem is not nearly as bad as that in the US. But, simplifying the tax code is not the same as having a flat tax. that’s something from another planet.

Tax justice at Davos

Economics Comments Off

Jan 262007

A backlash against the economic insecurity caused by globalisation is looming in the west unless governments tackle growing inequality by raising taxes on the rich, economists said in Davos yesterday.

So began a story from Larry Elliot in the Guardian yesterday.

I’m convinced that those who say this are right. The article’s well worth reading.

Don’t shoot the messenger

Jersey Comments Off

Jan 252007

Some interesting feedback on yesterday’s Jersey story. One person thought I was being unfair about the JEP’s website until he looked at it. Then he saw just why I needed to reproduce the story in full.

The JEP have complained that I did so. I made clear that if they, as the sole supplier of printed news in Jersey deny access to stories to a wider audience I can use the reasonable defence of fair information. I am aware they do not agree, and I respect their right to differ whilst believing it important that this information be available, the alternative being effective censorship by the JEP on what was, anyway, without doubt a news release by a politician.

And an anonymous comment was posted here which said (to save you looking):

So you welcome Jersey going down the pan? Thousands out of work, out of their homes, massive social upheaval (a number of suicides, inevitably)..? Good for you for having your so called morals and conscience.. but what is worse, Jersey doing what it does (which will always be done by SOMEONE, SOMEWHERE, no matter what) or destroying an island economy? Thanks a bunch for devoting so much of your life to trying to make mine so much worse!

Which just shows how wrong people can be. This will happen because of the actions of Senators Walker and Le Sueur. I don’t want that stress for Jersey. I wish it were not, as I see it, inevitable. But it is. They are creating a failed economy. If ever there was a case of shooting the messenger, this is it. The commentator should, I suggest turn his fire on the Jersey hierarchy who have created this mess.

There are alternatives, of course. One would be joining the UK. Another would be joining the EU. Both might then give the aid that Jersey will need to get out of this situation. No one will whilst it remains a pariah on the world stage. All options will involve upheaval and stress. That though is what happens when you back a failed business model. John Christensen told Jersey that in the 1990s. They haven’t forgiven him yet. But he was right then, and we are now.