2007 March » Tax Research UK

IFRS 8 – toolate to object?

Accounting Comments Off

Mar 302007

Accountancy Age has covered the objection by the Investment Management Association, whose members manage £3 billion in the UK, to IFRS 8 – the new accounting standard that allows companies to segment report on any basis they like (to be candid). They also cover my comments on the same issue.

The IMA has said that it thinks IFRS 8 may not result in meaningful disclosure. As interestingly, they argue that the simple desire to converge with FASB was not enough to justify adoption of the ‘management approach’ IFRS 8 adopts.

Or as I put it in Accountancy Age:

‘According to the standard, the [segment] data doesn’t have to reconcile with the audited accounts, which is staggering. And they don’t have to use the same process of accounting for segments as they do for the rest of the accounts. Therefore the accounts are totally and utterly open to manipulation,’

Ken Wild of Deloittes is noted as saying of the IMA objection to the EU about adoption of IFRS 8 simply to converge with the US:

‘I wouldn’t have gone down this route without more research and argument. But having gone the route, the European rejection is too much of a blunt tool for the purpose of stopping it. And it would be very unfortunate to use a blunt tool which will prevent the standard being used in Europe when it has been agreed in the rest of the world‚Ä¶ it could produce a chasm between Europe and the rest of the world again.’

I have to disagree with Ken. The simple fact is that no research would have changed the adoption of IFRS 8. This was done for political reasons. As was noted at the IASB meeting last September by one member, not one change to the exposure draft was possible as it had to accord exactly with SFAS 131. That’s the issue here. I’m actually not saying IFRS 8 is wrong, but I am saying the process by which it was adopted does need to be revisited and the process should begin again, on a more objective basis with proper consultation being undertaken, including with those who want country-by-country reporting.

Reform of the EU Savings Directive?

Jersey, Tax avoidance, Tax Havens, Tax management 3 Responses »

Mar 302007

I hear rumour that the EU is looking seriously at revisions to the Savings Directive. These are the changes that they would like to to implement:-

1) The definition of a Paying Agent would change to include foreign branches of outside the EU who have headquarters within EUSD jurisdiction e.g. the Singapore branch of a UK bank.

2) The definition of a beneficial owner of an account might change to ensure the following are caught:
- Private companies if the ultimate owner(s) are in the EU as shown by a banks ‘know your client’ procedure;
- The settlor of Discretionary Trusts if they are revocable or have settlor reserved powers. Nominee Settlors will not be acceptable
- In the case of Foundations the provider of the source of funds, which need not be the founder, will be considered the beneficial owner.
- All types of partnership will be covered – the partners will be treated as the owners.

3) Interest will now include non-UCITS funds, unregulated funds, derivatives comprising or based on interest e.g. structured products, baskets, certificates and interest swaps.

4) In the case of insurance policies the insurance company will be considered the paying agent and will apply the EUSD as soon as it receives interest. The beneficial owner is the policyholder. International pensions will be treated as if they are insurance products except the pension providor is deemed to be the Paying Agent.

If these happened most of the loopholes in the ES Savings Directive would go.

Now that would be a good thing. It would blow Jersey’s sham trusts apart for a start – and that would be especially welcome. One has to hope the countries line up in an orderly queue to sign this as soon as possible.

Tesco to Switzerland means its time for the UK to act

Jersey, Tax Havens, VAT 2 Responses »

Mar 292007

Accountancy Age has reported what has been known for some time, that Tesco is moving its Jersey CD and DVD operation to Switzerland.

The UK put significant pressure on Jersey to push this unethical trade out of its territory (with only partial success as Jersey is allowing Play.com to stay). It’s now doing the same to Guernsey as the Budget notes report (sorry, link not available right now).

If the UK is to honour what Jersey ha done it has a duty to now close the new abuse of the VAT loophole from Switzerland. There is only one way to honour that. The UK now has to close this practice down entirely. If the limit for exempting imports from VAT was cut to about £7 this whole abuse would be stopped.

The government has promised to respond to the threat of a judicial review on this issue by 5 April. Let’s hope the response is positive, unambiguous and a clear move to stop tax abuse. We really should expect nothing else. What is going on is an abuse of the market. And the EU requires action of that is taking place.

Why throwing money at pensions will not work

Economics Comments Off

Mar 292007

The FT reported last week that:

J Sainsbury’s pension trustees have signalled to the consortium of private equity investors stalking the supermarket that it would have to tackle a hole in the pension scheme of up to £3bn to succeed in an acquisition.

There is nothing new about pension deficits. We’ve seen them on a grand scale since the 2000 stock market crash. What is depressing is that the attitude of those in the industry, and the trustees who administer these funds has not changed in the face of the evidence accumulated since then that simple throwing more money at this problem in the way we always have does not solve it.

What I mean is this: giving the J Sainsbury pension trustees £3 billion will not in any way solve the pension deficit it faces if they simply out it in the Stock Exchange. The reason is simple. 66% of pension fund assets are held in equities. Total equity issues in the UK in 2006 were £21 billion. Half the average UK pension fund’s equities are UK based. The UK equity market was worth £1,931 billion at the end of 2006.

So, new issues of shares were 1% of market value in 2006. The ratios are worse in the US, the last time I looked. Putting £3 billion extra into the market does therefore contribute less than £30 million to real UK economic activity in the sense that it ends up in company hands to do fund some real economic activity. The rest gets sunk in the ‘gambling pot’ of the exchange itself. It’s simply a reshuffling of money. nothing new is added.

And the value of that pot is based on three things. One is a shortage of supply. They keep prices up by making sure there are far too few new shares to actually meet demand. That’s basic market manipulation for you. Second, is hype, which is why that £3 billion could go up and down in value without any consideration of what’s really going on in the underlying investments. Third it’s real economic returns.

Now here suddenly we face a reality. The additional £30 million or so that will go into the real economy if Sainsbury’s make good their shortfall by pumping money into the stock market will not generate sufficient return to pay a dividend or generate a capital gain on £3 billion. You only have to think about this for a second or two to realise that’s impossible. So, the reality is that putting in £3 billion dilutes the return real businesses are making over a wider pool of funds. That’s all. And if everyone made up their deficit in the same way, guess what? Everybody’s return would go down equally and the pension deficit would remain exactly the same.

The fact is that equity investment can’t solve the pension crisis. Only direct investment in companies or in real infrastructure and other development, where the return will be made over the long run (which is when we want our pensions) will do that.

The pension crisis is far from over until we change our thinking. That’s what I’m saying, in a nutshell.

The Isle of Man – preferring abuse to the truth

Isle of Man 3 Responses »

Mar 282007

Isle of Man Today has reported the reaction of the Island’s Treasury Minister Allan Bell on the research Tax Research and the Tax Justice Network issued recently on the subsidy of £270 million the UK provides to the Isle of Man Government a year. What did the honourable minister have to say?:

In his speech Mr Bell said the article [in the Observer] had been initiated by the Tax Justice Network which he described as a ‘motley crew doing their very best to stir up resentment against not just the Isle of Man but off-shore jurisdictions in general.’

‘They (the Tax Justice Network] will use every opportunity to undermine the Island and try to damage our economy,’ he said. ‘We do need to keep an eye on these sort of bodies as well.’

To be candid, he did find a flaw in the article:

Mr Bell had pointed out that the article included several inaccuracies, the most glaring being that the Island’s population was 26,000.

True! The Observer sub-editor made a typing mistake. The original research did not. Clearly Mr Bell is not keeping a very close eye on us. The reality is he needs to, because a little abuse on his part does not let him off the hook. Looking at his budget for 2007-08 explains why:

1) Amazingly the ‘Pink Book’ that includes the budget details does not even refer to the ‘Common Purse’

2) The budget speech did, once. It said:

This year, as we move into our new sharing arrangement within the Common Purse Agreement, I believe that it is wise to take a more cautious view as to our levels of indirect income in the short to medium term, and to restrain our spending commitments accordingly

Which is scant regard for the importance of the issue.

3) As Isle of Man Today reported the reality is this:

[Mr Bell] said the agreement was negotiated in 1979 and relates to VAT-sharing scheme which sets the VAT rate at the same level as the UK with revenue going into a common pool. At the end of the year the Isle of Man gets a proportion of the revenue back on a pro rata basis.

Mr Bell said the scheme had proved ‘very beneficial’ to the Island and had helped government achieve the zero rate of corporate tax. ‘We have been able to ride out any shortfall from corporate taxation, unlike Jersey and Guernsey where they have no VAT and have had to bring in fresh measures and sales tax.’

The Minister said the system had worked in the Island’s favour, but in 2005 the UK government merged the customs and excise and revenue departments leading to a review of all existing agreements, including the common purse agreement. Negotiations between the Island government and the UK began in 2006 and a new deal was reached in the last few weeks. Mr Bell said VAT will still be pooled with the UK but the deal now introduced new criteria with payments in future being related to GNP.

Which simply confirms everything we said. So much for us being a ‘motley crew’. Actually, we’ve exposed a truth the Isle of Man has been trying to hide.

I’ve done some research on the new scheme. First of all it is not cutting Isle of Man income, so its no less generous than before. We can safely assume that the £270 million subsidy is correct. Second, the new scheme seems to work from an agreed subsidy level and increases it by respective GNP growth. In other words it has no relationship to real activity still. In fact, what’s abundantly clear is that the UK has agreed to continue to subsidise the Isle of Man to continue to act as a tax haven – one where we know tax evasion is promoted, as the US Senate reported last year.

Mr Bell is wise to watch us. We have nothing against the Isle of Man, at all. We do have a profound dislike for those who knowingly assist others to avoid their obligations under law. And that practice is widespread in the Isle of Man. How do I know? Well, put it like this. The Isle of Man deliberately chose not to opt into information sharing under the EU Savings Tax Directive. That was done to ensure those who did not wish to declare their tax liabilities in their home states did not need to do so. We consider that facilitation of tax evasion by the Isle of Man government. We’re watching you Mr Bell. With good reason.

Ethics are important – but business is ignoring the fact

Ethics, Tax Justice Network Comments Off

Mar 282007

I’ve come across a press release from Integrity Interactive on the 2007 European Corporate Integrity Survey. It says:

99% of European companies have in place either a code of conduct, that prescribes rules about what people can or cannot do, or a statement of a set of values and principles that people are expected to adhere to. The report, published by Integrity Interactive, a provider of web-based tools for managing and mitigating corporate ethics and compliance risk and the Association of Corporate Counsel (ACC) however revealed that only 50% ensure that all employees are made to read these.

It concludes:

With high profile cases such as Parmalat, the report revealed that 77% of companies expected that the number and importance of ethics and compliance risks will increase in the next few years. On the back of this increase 86% anticipate increases in regulatory demand for ethics and compliance programmes. Meanwhile, the key risks that companies said they were devoting most time and resources to were cited as competition & unfair selling practices (46%), ethical company culture (42%) and financial integrity (41%).

This is why the Tax Justice Network is shortly to launch a Code of Conduct for Taxation.

But it’s also why we promote mandatory disclosure to limit risk. This is exactly what could have helped disclose practices like those of Parmalat. In combination we’d agree that with the broad thrust of the conclusion of this press release:

Training on codes and policies and the evaluation of levels of understanding of these, play a significant role in protecting a business against scandal and without it many could be heading for trouble.

Corporate reporting – we’ve got a long way to go

Accounting 1 Response »

Mar 282007

In 1975 the UK’s Accounting Standards Steering Committee published a paper called The Corporate Report, to which there appears to be no on-line link.

They said that the benefit of publishing company accounts should be the resulting ability to appraise information on:

1. the performance of the entity;
2. its effectiveness in achieving stated objectives;
3. evaluating management performance, including on employment, investment and profit distribution;
4. the company’s directors;
5. the economic stability of the entity;
6. the liquidity of the entity;
7. assessing the capacity of the entity to make future reallocations of its resources for either economic or social purposes or both;
8. estimating the future prospects of the entity;
9. assessing the performance of individual companies within a group;
10. evaluating the economic function and performance of the entity in relation to society and the national interest, and the social costs and benefits attributable to the entity;
11. the compliance of the entity with taxation regulations, company law, contractual and other legal obligations and requirements (particularly when independently identified);
12. the entity’s business and products;
13. comparative performance of the entity;
14. the value of the user’s own or other user’s present or prospective interests in or claims on the entity;
15. ascertaining the ownership and control of the entity.

It was their desire to provide information to achieve these objectives.

It’s a sad thought that 32 years later we have a long way to go on many of these.

The tragedy of poverty

Economics, Ethics Comments Off

Mar 282007

I read yesterday’s reports of poverty afflicting the lives of more children in the UK with sadness. As a parent of young children it was hard not to.

Amazingly there is one parent of a young child with the power to influence this who last week denied that poorer people in the UK pay tax. In truth they have the highest relative tax burden of any group in UK society. Tony Blair’s ignorance on this issue cannot, I feel, be unrelated to this outcome.

One of the principle purposes of taxation is to redistribute wealth. That’s a duty of government. Markets cannot do this. They can only exacerbate the problem because of unequal starting points. That is why any government in the UK should be committed to progressive taxation where tax burdens rise as a proportion of income as that income rises. It’s a travesty of justice that we do not have such a system.

I also believe it’s a principle reason why despite increasing material well-being we are no happier now than in the 1970s. You can’t be when if you’re wealthy you spend your time fearfully protecting your wealth as the void between you and the rest of society increases (a fact from which you might seek to take pleasure at the same time as you appreciate the pain it causes, so increasing your stress) and if you’re amongst the poorest you can only see your relative well-being declining.

To put it another way, anyone who wants to increase well-being in the UK has to commit to seriously progressive taxation.

Objective analysis from KPMG

KPMG Comments Off

Mar 272007

KPMG have issued another of their notorious press releases (noted far and wide for missing the mark). This time they have surveyed finance directors following the budget.

The survey was rather small. They also imply private equity represents the FTSE, which is quite strange. But perhaps the most telling finding was this:

Over a quarter (28%) believe Budget too complicated to work out total impact of tax measures on their effective tax rate

What does that mean? They’re not up to their jobs? Or they need KPMG to help them? Or that tax is simply too hard for mere mortals (which I can tell you, is not true?)

Read the rest of this clearly biased report here.

PS I take my hat off to the none person who persistently praised the budget. Was he cantankerous, looking for a peerage or just able to stand out from the crowd? I suspect the latter in which case he or she is, I hope, going places. The rest show a remarkable lack of original thinking.