2007 August » Tax Research UK

Poverty of thinking at the ICAEW

Accounting, Ethics, Tax Havens, Tax management 1 Response »

Aug 312007

I’d love to believe in the ICAEW Tax Faculty’s project in what they say is ‘thought leadership‘ called ‘Towards a Better Tax System’. The only trouble is, I can’t. The reason is simple. I see no evidence of thought leadership within it, but I do see lots of evidence of self-interested thinking. They’re not the same thing.

In the prospectus for this project the ICAEW claims that:

Set out in this document are key challenges which policy makers are currently facing and the important issues which the ICAEW Tax Faculty will now be addressing

It’s hard to tell if the word ‘the’ before the word ‘key’ has been deliberately omitted or not. Certainly the sentence construction is poor without it, and I assume that a simple sign of omission. But if it was omitted then the resulting key issues are wrongly identified and it was not omitted then the claim that the resulting work is thought leadership is incorrect. The latter would require some indication of ability to think beyond the framework of self interest and to consider the needs of others in the tax system. But this document certainly does not do that.

That’s because only three key issues are identified. They are:

1. The role of tax in society.

This issue the paper addresses by saying:

Tax is one of the foundations upon which society is built and tax systems should reflect society’s ambitions while respecting the important role that enterprise and business play in creating prosperity.

But just think what it does not say, such as:

- What society is
- Why tax is key within it
- Why subversion of that role threatens society
- What society’s ambitions are and how they are determined
- Why enterprise is so important that it justifies being considered in this sentence when other issue are not
- What prosperity is.

These are massive oversights. But they’re not as bad as moving in the next sentence to say:

Tax systems are under pressure due to increased complexity and uncertainty. The constant amendment of existing rules means that the volume of tax legislation continues to grow, caused partly by governments’ perceived need to launch new initiatives and to counter tax avoidance with highly complicated anti-avoidance rules

I’m completely baffled. How one gets to this point so early in the document and when considering the role of tax in society is entirely beyond me. For the sake of the record in Closing the Floodgates I (and my co-authors) defined the roles of tax in society as being to:

‚Ä¢ Provide public funds;
‚Ä¢ Redistribute income to reduce poverty and inequality. Progressive forms of taxation, are one of the main means by which wealth is redistributed in any society;
‚Ä¢ ‘Reprice’ goods and services to ensure that all social costs of production and consumption are reflected in the market price;
‚Ä¢ Strengthen and protect channels of political representation;
‚Ä¢ Provide a tool for the management of an economy, usually in combination with government borrowing.

Not one of these issues is mentioned by the ICAEW. Instead the ICAEW summarises its introduction to tax and society with this paragraph:

And tax systems are also under pressure because, throughout the world, governments face a challenge to deliver public policy objectives while supporting enterprise. Governments are often required to raise greater tax revenues while facing downward pressures on headline tax rates.

Which may or may not be true (because the ICAEW is not an independent participant in this process, it being one of those who brings pressure to bear for lower headline tax rates) but however viewed this is as far away from being a ‘key’ issue as it is about possible to be in an introductory document.

2. The Trust Gap.

This is the second issue the ICAEW addresses. This is a Loughlin Hickey theme. He raised at a Philip Hardman lecture at the ICAEW. But whilst the profession (and Hickey) continue to endorse the role of accountants in tax havens the ICAEW is morally bankrupt when raising such concerns.

Now it so happens that I agree with the ICAEW that:

Tax systems can only function effectively if there is underlying trust,based on transparency, honesty, integrity and mutual respect.

But I do not believe that they are committed to those objectives, and nor do they require that there members be so. Harsh words maybe, but true. Hickey’s commitment to tax havens proves it. When the ICAEW tells its members to quit these places I’ll believe them. Until then this statement is pure hypocrisy.

3. The challenges ahead.

The ICAEW says there are three of these:

- deciding how much business should contribute in tax;
- proper training for people at HMRC
- getting the use of technology right.

And that’s it! Apparently that’s all we need to think about.

The poverty of thinking in this document will be apparent as a result to anyone but a self interested accountant. Far from thought leadership it is a determined and ill-disguised attempt to promote the cause of lower taxes imposed with a lighter touch and less regulation for business as a whole.

That’s an exercise in greed promotion. Since when has that been thought leadership?

I despair of my own professional institute and am ashamed that it can produce something like this when I see other professions (medicine for example) populated by people of real intellect, genuine social concern, broad imagination and above all open and enquiring minds. If there’s ever been one of those at the ICAEW it long ago turned out the lights as it abandoned a sinking ship.

Tax avoidance is bad for your image

Corruption, Jersey, Tax Havens, Tax planning 4 Responses »

Aug 302007

Accountancy Age reports that Michael Parkinson has dropped out of the totally artificial tax planning schemes organised by UK accountants Vantis.

The schemes involved four companies set up by Vantis in which people invested. The companies were then floated on the Jersey Stock Exchange (which is a farce if ever there was one), after which there prices mysteriously rose substantially. Not just a bit I add, but phenomenally. One such company was called Your Health. Once this price increase had happened (by some mysterious chance) the investors gave their shares to UK based charities and claimed gift aid tax relief on the value of the shares donated so generating substantial tax refunds for themselves whilst dumping wholly worthless investments on the charities in question who then had to write their value off as a cost in their accounts.

To put it nicely the whole scheme stunk and those behind it deserve to be drummed out of any professional organisation of which they are a member for unethical conduct whether or not it was legal.

Accountancy Age report that Parkinson’s agent said:

He certainly put his money into Your Health to get tax relief. We were assured it was approved by the Revenue. The minute we realised it wasn’t kosher we dropped [it]. We took the hit. We were very sensitive, extremely upset with the advice we got. It came up that the underlying charities were not over the moon about [the gifts].

The agent added that all the advice on the scheme came from Vantis.

To be fair Parkinson has done the bets he can to get out of sticky mess. But three things come out of this:

1) You can’t tax plan and expect to come out smelling of roses, because you won’t.

2) Greed and charity don’t mix.

3) The accountancy profession continues to be dragged through the mud by the far too many within it who appear to have no conscience at all.

Tax justice on Radio New Internationalist

Tax Havens, Tax Justice Network Comments Off

Aug 302007

John Christensen of Tax Justice Network and Nick Shaxson, an adviser to it, both feature prominently in a podcast for New Internationalist on tax justice issues.

It’s a great piece of work, well recorded and produced and a good introduction to all the issues relating to tax justice and the world of offshore. Recommended.

Available here or here.

Podcast: Play in new window | Download

Will changing the private equity rules increase tax paid?

Ethics, Private equity, Tax avoidance, Tax management Comments Off

Aug 302007

One of the regular challenges I face is the suggestion that whatever changes to the tax rules are made the rich will never pay tax. Tim Congdon raised it continually (and annoyingly) on Hecklers last week, for example. In a way, everyone who says this reworks the now near legendary comment in tax justice circles made by a chap called Guy Smith who worked for Moore Stephens who said to the Guardian in 2004:

No matter what legislation is in place, the accountants and lawyers will find a way around it. Rules are rules, but rules are meant to be broken.

The latest argument to this effect comes in a paper by a chap called Michael S Knoll who is at the University of Pennsylvania Law School; University of Pennsylvania – Real Estate Department in a paper entitled “The Taxation of Private Equity Carried Interests: Estimating the Revenue Effects of Taxing Profit Interests as Ordinary Income”. There’s quite a good summary of it (because it’s about as dry as its title) on this tax avoidance site (which presence there gives you some idea of the flavour of what’s to follow).

Michael Knoll suggests that if private equity partners in the US were taxed at the 35% income tax rate that they should pay on their earnings (for what is what they are) rather than the 15% tax rate they actually pay on capital gains (which they are not) then the additional revenue that might be raised for the US government would be at least $3.2 billion a year, assuming no avoidance behaviour.

It’s curious that LowTax.com call this “negligible”. I somehow doubt they say that of all government waste – because tax not collected is, of course, the same as money misspent. But in practice they are, anyway, wrong. For a start this sum is 1% of the US tax gap. Given that half of that, at best, will be recoverable this makes the sum material and far from insignificant.

Note however that both Knoll and LowTax.com promote the idea that in practice this tax would not be collected. Knoll argues that the partners in these funds would shift the burden of their tax to others. Those others might be their clients who might have to pay more than the 20% fee they already pay for the services of private equity operators, or the companies they manage, recharged to them as fees for management services. That will in turn be a cost born by the client in due course.

The assumption is extraordinary. Knoll specifically recognises it. He seems to accept in doing so that private equity operators think they have a right to an after tax income and others have a duty to provide it to them if that tax rate changes.

Those others, it should be noted, include pension funds and other mutual investors these days in addition to the more traditionally wealthy. But both Knoll and LowTax.com assume that this exploitation of those unable to respond directly to this abuse will happen. Implicit in that assumption is the belief that those who represent those collective investment vehicles that will be exploited, be they pension funds, other mutual funds or even charities investing their endowments will not protect their client who engages them as investment manager. That is, of course, likely to be true since those investment managers are part of the same financial hierarchy as the private equity operators.

It’s precisely this willing acceptance of fiscal and financial abuse that the Tax Justice Network challenges. We believe in the right of the state to tax. We think that this is legitimate. We think taxpayers should comply with the requirements of the states in which they earn their income. But we also oppose measures, whether in legislation or in so called professional practice that shift the burden of tax from those best able to pay it to these less able to do so. And this is why we object to private equity practices.

If private equity really is the right way to manage a business so be it. I won’t argue. But if it’s a medium for tax abuse or for making the tax system ever more regressive then I will. And so will my colleagues. Because that’s an abuse of social justice, and ethical financial practice come to that.

The pleasure of blogging

Blogging 2 Responses »

Aug 292007

I’ve got to say one of the best things I’ve decided to do in the last couple of years was to start this blog.

I enjoy doing it; you may have noticed.

I’m pleased so many people read it. Anyone who writes enjoys knowing they’re read and writing has been an essential part of my life since about the age of 8 when I learned to type on an old Remington that was portable if I could rope in the services of my twin (yes, I have one) to help move it.

And I appreciate the feedback and comment I get.

Take this as an example. I’d not have been corresponding with Martin Tittle in Ann Arbor, Michigan but for this blog. We still haven’t spoken but over the last couple of weeks I’ve enjoyed an email conversation with Martin, and I’m truly impressed by his own web site, one I would not have otherwise seen.

It’s worth a look for serious tax thinkers anywhere, but especially those from the USA. Anyone who co-authors with Reuven S. Avi-Yonah has got to be worth reading, but Martin seems to me like a really decent man too. It’s that sort of contact that has been one of the rewards of blogging.

PS I am rather amused to note that Martin calls me a tax maven. It’s an interesting term for someone who writes as much as I do on tax havens. But I’d have never thought of it.

Paying NIC is no substitute for corporation tax

Accounting, Ethics, PWC, Tax avoidance Comments Off

Aug 292007

I’m bored by the argument created by PWC and rolled out on BBC news last night by the CBI and even by HMRC that if a company pays national insurance because it employs people in the UK it’s OK for it not to pay corporation on the profits those employees then generate for it in this country.

This is not true. It’s akin to arguing that if you’ve paid your road tax in the UK then you do not need to pay for car insurance. Except that both are legally required if you want to drive a car on the road. It’s not an option to have one but not the other.

Now, I accept that there’s nothing wrong with seeking a good deal on your insurance. That’s fair. But then I also say that tax compliance does not require you to pay more tax than is required, so long as that tax you do pay is paid in the right place and at the right time in accordance with the spirit of the law, something which we know is recognisable. .

So let’s also be clear. Complying with the law in this way is not the same thing as avoiding it. And as almost all commentators on yesterday’s story on UK companies not paying tax agreed, it’s the fact that these companies are multinational that lets them avoid tax in the UK. That’s because they use their multinational status to get round the law, which is exactly what avoidance means in this case.

In that case let’s push that car analogy a bit further. Let’s suppose it were possible for multinational companies but not companies solely operating in this country to pay their car insurance to a foreign tax haven government who then provided a certificate of insurance in exchange for a nominal sum even if they had no means of settling any resulting claim. If those companies did this they would appear to comply with the law by having the right paperwork but the economic reality would be that they would be abusing the whole of society by driving uninsured as a result. What would the CBI say to that? If they’re to be consistent they’d have to say this was OK, because that’s exactly the sort of behaviour they’re endorsing on tax. That’s because the companies they excuse from paying corporation tax have in fact in very many cases shifted their profits elsewhere, got a certificate from their auditors to say that’s OK and the UK then gets nothing from those locations where those profits are declared when the next round of tax bills goes out.

Some without any shred of ethical conscience in the companies in question might say that’s OK but why should the rest of us put up with such blatant abuse? And why is the UK Treasury endorsing it?

Let’s stop once and for all accepting this absurd argument that paying national insurance in the UK is a substitute for paying corporation tax. It isn’t, and it never will be. And only those practiced in the art of fiddling could ever believe it was.

A gentle plea for calm from HM Treasury

Economics, Tax management Comments Off

Aug 292007

When the government puts out a press release saying that reasoned argument is ‘ridiculous’ you know that something is wrong.

That’s what they did yesterday in response to the suggestion I made on BBC radio and television that corporation tax needs to be reviewed to ensure that rather more than 70% of the 700 largest companies in the UK make a reasonable contribution to the UK Exchequer. They issued a press release saying:

It is ridiculous to suggest that business does not pay its fair share of tax.

Businesses are using the capital allowances and deductions that government has put in place to stimulate investment, create jobs and build economic stability. These are not loopholes – these are properly policed business reliefs.

Well, let’s be clear. A 0% rate of tax on a profit is not a fair share. No one can claim it is.

And if those capital allowances and deductions that create this outcome are inappropriate because they constitute an unnecessary use of government money to subsidise already successful businesses and so redistribute income from those less off in our society to those best off in our society (and I make clear that this does include private pensioners as shareholders by proxy since most of them are in the top 10% income band) then these might be properly policed business reliefs but they’re also bad economic policy, which is the point I made.

I also find it almost ludicrous that the PR department at the Treasury has bought the PWC argument that corporation tax is only one of a number of taxes paid by businesses, including business rates levied by local councils and national insurance contributions, meaning by implication that avoiding it is OK in that case. I show how ludicrous this argument is elsewhere today.

But you know the Treasury are quoting dodgy stats when they suggest how competitive the UK is because it was the largest recipient of foreign direct investment (FDI) in the world in 2005. This is complete nonsense. The investment in question arose because we sold the UK’s ports to Dubai, its airports to Spain and the sale of Boots to private equity has no doubt figured in FDI this year because its new parent company is in Gibraltar. Selling the family silver is not something to shout about. It’s a sign of weakness.

In which case a little less hyperbole by the Treasury and a little more calm reaction of the sort I provided might suit the occasion better I think. Because nothing I said was ridiculous. Not least because 0% tax is not fair.

Case proven, I think.

Prem Sikka on the IASB

Accounting, Ethics, Europe, IFRS 8 Comments Off

Aug 292007

Prem Sikka has a blog column on the Guardian site. Today he argues:

International accounting standards are colonialism in another guise, allowing tax avoidance while foisting failed practices without oversight or democratic control.

Prem has been one of the most consistent, and correct, commentators on the course of accounting for the last 15 years or more, so I don’t need to reiterate his case for him. I agree with it.

It’s worth however repeating the follwoing comment though, simply because so few people realise it is true and are incredulous when it is pointed out to them:

The IASB claims to advance business accountability and transparency, but is itself a highly secretive organisation. It is the offshoot of a private company registered in the US state of Delaware, a place well known for corporate secrecy. It is funded by the “big four” accounting firms – PricewaterhouseCoopers, KPMG, Deloitte & Touche and Ernst & Young – and major corporations. The same interests dominate all its structures and committees.

Prem asks the questions we have often debated in private – why is it, and how is it that the public interest has been passed to such a body that is so powerful that the EC is not sure it can contradict it even when it gets something like IFRS 8 so obviously wrong?

When the world lives in fear of progressive taxes

Ethics, Flat tax, KPMG Comments Off

Aug 292007

The was an article in the Polish press yesterday with the title:

Poland’s progressive tax system could alienate investors

As the story said:

Finance experts and business people are pointing out that Poland is surrounded by countries with low, flat tax rates. If Polish governments refuse to grasp the nettle and lower tax, investment might just head abroad.

The pressure, of course, comes from the so called ‘flat tax’ states – so called because they are nothing of the sort.

But who were the ‘finance experts’? Why, KPMG (of course):

“If ]Poland] doesn’t introduce it, the country lose the foreign investment battle, we’ll be less and less competitive”, Peter Kay, financial expert from KPMG, a worldwide consultancy was quoted in Poland’s Dziennik daily.

As the senior prime minister rightly said though:

Flat tax works like a counter Robin Hood: takes away from the poor to give to the rich

Which is, of course why progressive taxation is essential. But do KPMG care about that? Not one bit. They’ll whistle all the way to the destruction of social justice.