2009 March » Tax Research UK

Tell the IASB what you think

Accounting, IASB Comments Off

Mar 232009

The International Accounting Standards Board has established the Financial Crisis Advisory Group to respond to the issues that recession is raising. On 10 March it said it was seeking input from constituents on a number of key questions including:

1. From your perspective, where has general purpose financial reporting helped identify issues of concern during the financial crisis? Where has it not helped, or even possibly created unnecessary concerns? Please be as specific as possible in your answers.

2. If prudential regulators were to require ‘through-the-cycle’ or ‘dynamic’ loan provisions that differ from the current IFRS or US GAAP requirements, how should general purpose financial statements best reflect the difference: (1) recognition in profit or loss (earnings); (2) recognition in other comprehensive income; (3) appropriation of equity outside of comprehensive income; (4) footnote disclosure only; (5) some other means; or (6) not at all? Please explain how your answer would promote transparency for investors and other resource providers.

3. Some FCAG members have indicated that they believe issues surrounding accounting for off-balance items such as securitisations and other structured entities have been far more contributory to the financial crisis than issues surrounding fair value (including mark-to-market) accounting. Do you agree, and how can we best improve IFRS and US GAAP in that area?

The Tax justice Network has now sent a response. It says, in addressing each of the above issues:

1. From our perspective general-purpose financial reporting as currently promoted by the IASB has not helped identify issues of concern during the current financial crisis. In particular, the current structure of consolidated financial statements which means that more than 60% of world trade is hidden from view as it is undertaken on an intra-group basis has been particularly harmful. As a consequence of this approach to accounting we have not known:

In which countries multinational corporations (MNC) operate;

What an MNC is called in each location in which it operates;

What an MNC’s financial performance is in every country in which it operates, identifying both third party and intra-group trade as well as labour costs and head count;

How much tax (and other benefits) it pays to government locally as a consequence.

The absence of this data has created considerable opacity within the world financial markets which we believe led to the crisis of confidence within the world’s banks and their reluctance to lend to many commercial organisations currently requesting facilities.

2. In our opinion this issue is of considerably greater importance than the absence of ‚Äòthrough the cycle’ provisioning when assessing the impact of deficiencies in general-purpose financial statements on the world financial crisis. This is because the absence of country by country information of the type noted above is a fundamental failure in the reporting process but the absence of ‚Äòthrough the cycle provisioning’ represents the omission of an indication of the subjective opinion of the management.

3 We share the opinion of some FCAG members who have indicated that they believe issues surrounding off balance sheet accounting and securitisation are more important than issues surrounding fair value accounting. We have no doubt that the opacity created by off balance sheet accounting, and the opacity of the tax haven structures used for securitisation that were in the main omitted from declaration were in combination a significant factor in creating the fundamental failure of confidence within the world’s financial system that occurred in the financial markets in August 2007. We believe that off balance sheet accounting and the use of all artificial entities associated with such mechanisms should be banned.

As a result we say:

We .. want to place on record our concern about the limitations inherent within consolidated financial statements and in particular that they do not:

Disclose the extent of intra-group trading within the reporting entity;

Allocate the trading of the entity to geographic domains, and as such prevent risk assessment on this basis being undertaken;

Show the sustainability of the profit allocations to enterprises within the entity, or the sustainability of the tax charge because its location of payment is unknown;

Show vital information required by those trading locally with the entity. This means that suppliers, employees and customers located in a particular country do not have the information they need about trading with local group members, much of which is also not available to them locally because few countries require this information to be readily available to such persons although the International Accounting Standards Board has clearly recognised its obligations to these groups.

For these reasons we strongly suggest that another view of the trading of an MNC is required and suggest this would be best achieved by requiring that the data in consolidated financial statements be reconciled to reporting published on a country-by-country basis.

If this were to be done confidence would be restored in general purpose financial statements, risk in financial markets would be reduced with a consequent lowering in the cost of capital, the now widely recognised problems that tax havens create could be properly assessed and appropriate data to ensure that corporations can demonstrate their commitment to making payment of their taxes in the right place and at the right time would be on public record, all of which is vital if the crucial relationship of trust between the public and MNCs is to be restored.

If you agree please write a letter or email in support to Adam Van Eperen, ajvaneperen@fasb.org, no later than Thursday, April 2, 2009.

Thanks.

What the world needs now….

Economics, G20, Secrecy jurisdictions, Tax Havens Comments Off

Mar 232009

The Guardian is beginning a series that could have the above title. Larry Elliott begins the series calling for:

Proposal no 1: Accept that this is the time for a new economics

Proposal no 2: A Green New Deal

Proposal no 3: Reform the IMF

Proposal no 4: Make the global financial system more progressive

Proposal no 5: Tougher global regulation

Tax haven abolition appears in 4 according to Larry.

I have it in 2, 4 and 5.

It underpins 1 and 3.

It’s a pre-requisite of the desperately needed new world economic order.

Good news on tax havens

Secrecy jurisdictions, Tax Havens 2 Responses »

Mar 232009

From the Guardian this morning:

Tax havens will be forced to submit themselves to international scrutiny under plans to tackle their culture of secrecy being proposed by Gordon Brown.

Despite a rearguard action by tax havens, the prime minister intends next week’s G20 summit to discuss plans for a multilateral exchange of information on "offshore" accounts.

G20 finance ministers discussed a crackdown on tax havens at their talks last weekend and Brown has told Britain’s international partners that he wants to build on proposals from the Organisation for Economic Cooperation and Development (OECD) to "make sure tax secrecy is a thing of the past".

Brown would like the Paris-based OECD to work out a detailed blueprint for reform over the coming months if, as expected, the London talks on 2 April back action to combat capital flight and improve transparency.

Government sources said the UK was taking reform of tax havens step by step, fearful that pressing too hard at this stage would damage the growing international consensus for reform. They said Downing Street had been "besieged" in recent days as tax havens reacted strongly to signs that they will be the prime targets of proposals to toughen up international regulation. Some tax havens – including Jersey, Switzerland and Liechtenstein – recently announced plans for bilateral exchange of information with specific countries, but Brown believes that this does not go far enough and would handicap developing countries.

I think this story is true: I do think this is what Gordon Brown wants. If so, this is a very welcome move.

Of course I want multilateral automatic information exchange. What’s being proposed is not that. And I want the secrecy of these locations shattered for good to end the abuse they permit.

But if this is the beginning and not the end of a process this is good news that I welcome. Because, let’s be realistic: the world is not going to change overnight on 2 April and all pragmatists (and I am one of them) know that.

That said, we’ll then be monitoring what Michael Foot has to say to see what comes next.

A fox in charge of the chicken coop

Bermuda, Economics, Ethics, Regulation, Secrecy jurisdictions, Tax Havens 2 Responses »

Mar 232009

I had a bit of a Sunday Times weekend. I was in twice, once for the new TJN report “Where on earth are you?” , the second a comment on a story about Paul (Lord) Myners, appointed a minister last autumn to tidy up the City.

The Sunday Times alleges that:

THE government minister in charge of stamping out corporate tax avoidance has himself set up a business in the tax haven of Bermuda. Lord Myners, already under fire for approving Sir Fred Goodwin’s massive pension from Royal Bank of Scotland (RBS), was part-time chairman of an offshore company which avoided more than £100m a year in taxes.

Details of Myners’s involvement in Aspen Insurance Holdings (AIH) have emerged as Gordon Brown seeks to win the backing of heads of government to prise open tax havens at a meeting of the G20 in London on April 2.

They suggest his company saved more than £100 million in tax – and before those from Bermuda protest I’d add I did not offer the tax advice on this article – that came from a Big 6 firm of accountants.

My concern was different. I remain very worried that the likes of Myners, Turner and those running the bank bailout are all from the old mind set of finance – and that their aim is to, as I out it, pout Humpty Dumpty back on the wall again.

I will be honest: I do not think that either possible or desirable and as such I am not confident that these are the right people to be running the reform programme. New thinking is needed. I’m not convinced they can provide it. It doesn’t mean I share all the Sunday Time views on this issue – I don’t – but I do think real change is needed.

Economic governance for health

Economics, Health, Secrecy jurisdictions, Tax Havens Comments Off

Mar 232009

There is occasional comment on this blog on health issues.

Can I draw attention to a new campaign under the above title? You can link to it here. It says its aims are:

EG4Health seeks a fair, democratic, transparent and accountable system that is based on a framework and approach that prioritizes health and social objectives, including poverty eradication and an effective response to climate change. EG4Health has been established to enable the global community of health workers to support and promote this reform agenda, working collaboratively with other actors and sections of society.

Its objectives are:

An inclusive, democratic, transparent and accountable global process with a comprehensive agenda to reform the global economic governance system
Democratization of the International Monetary Fund, World Bank and World Trade Organization
Appropriate weight to health in all decision-making on global economic issues
An end to banking secrecy and tax havens as a means of reducing capital flight, fighting corruption and generating new sources of development finance
Specific and substantive campaigns will be identified in consultation with expert non-government organisations, academics and policy analysts.

Have no doubt: these are key health issues.

There is enough for all in this world, if only we shared it appropriately.

We can afford healthcare for all in this world.

Tax havens make sure that many is stolen from those who need it.

I welcome this new campaign.

I also think the web site a great an example of what you can do with WordPress!

Liechtenstein is a tax haven

Corruption, Liechtenstein, Switzerland 1 Response »

Mar 232009

No, I didn’t say so: a Liechtenstein financial services company did. It said in a PDF made on 12 March:

Liechtenstein is a tax haven

That fact plus the availability of anonymity to facilitate abuse, including foundations set up for the benefit of the settlor, and managed by them which makes them complete sham structures – are the main selling points. Read the second page of the PDF to see how bad it is.

Please don’t tell me anything is changing as yet. It’s clear that in places like Liechtenstein (where attitudes closely match those of near neighbour Switzerland) nothing is changing on the ground.

We have a long way to go.

Time to flog off Directline

Banking, Economics 4 Responses »

Mar 232009

I’m blogging with the sound of a television in the background.

Directline adverts really annoy me right now. This is about a 95% state owned insurance broker / supplier because it is 100% owned by RBS.

For heavens sake, let’s spin it out of RBS to RBS shareholders (plus or minus a cash adjustment or state minority stake – I suspect it is worth more than the bank right now) in exchange for nationalising the remainder of that bank.

They get a viable asset which might pay dividends.

We (through the state) get a banking business we can take to pieces, repackage and refloat in due course in a new form.

It’s a strategy so blindingly obvious it deeply annoys me no one is doing it. And massively cheaper than the toxic loan scheme.

I’m pretty sure the same could be done with Lloyds with little trouble.

Barclays too come to that.

This is the strategy we need to give ourselves the breathing space to rebuild banks.

Where on earth in the Sunday Times

Banking, Barclays, Ethics, Secrecy jurisdictions, Tax avoidance, Tax Havens Comments Off

Mar 232009

The new report by the Tax Justice Network, mentioned here yesterday was in the Sunday Times today. They noted:

This weekend a new study reveals that Barclays appears to be the UK’s largest user of tax havens. Where on Earth Are You?, a study by the Tax Justice Network, investigated 33 of the biggest companies in Britain to find out how many subsidiaries they have based in tax havens. Barclays topped the list with 315.

Richard Murphy, primary author of the study, said: “I thought the biggest user of tax havens would be someone like BP or Shell, which have operations all over the place. But it isn’t: Barclays has more tax haven subsidiaries than anyone else. This is the first time we have had this information. The Barclays story is going to travel further. I think it is much more explosive than anyone has said.”

I think that true.

I’ll be returning to that theme soon, I hope.

Tax havens are a market failure

Economics, Ethics, Secrecy jurisdictions, Tax Havens 2 Responses »

Mar 222009

On 10 March the FT published an editorial saying (in part):

Today’s disastrous outcome is testimony to those leaders’ intellectual failure. Most fundamentally to blame is their unwillingness to see (or their wilful ignorance of) what markets need in order to produce good outcomes for society.

Every first-year economics student learns the conditions for an unregulated market, in theory, to function efficiently. The most important are full information, enforceable property rights and contracts, and the absence of “externalities” – effects of economic transactions on third parties. These conditions are never fulfilled, but many markets come close enough that participants’ self-interested actions achieve good outcomes for all.

When these conditions are absent, markets malfunction; the way they do so is one of the great topics of economic theory. It tells those who care to listen that when a market is too opaque, or when the effects of market transactions are too inter-dependent, the pursuit of self-interest can make everyone worse off, or unfairly land some with the losses caused by others, or – in extremis – make markets disappear altogether.

People were not unaware of the risks, but both regulation and private risk management were based on the faulty premise that if each entity looks after its own risk, no one needs to worry about systemic risk. The great mistake was to rely merely on self-interest.

Those who sound the death knell of market capitalism are therefore mistaken. This was not a failure of markets; it was a failure to create proper markets. What is to blame is a certain mindset, embodied not least by Mr Greenspan. It ignored a capitalist economy’s inherent instabilities – and therefore relieved policymakers who could manage those instabilities of their responsibility to do so. This is not the bankruptcy of a social system, but the intellectual and moral failure of those who were in charge of it: a failure for which there is no excuse.

John Christensen of the Tax Justice Network and I agreed, but also noted the undue support the FT has been giving to tax havens / secrecy jurisdictions and sent the following letter, which it now seems unlikely will be printed:

Sir

We note your editorial comment “The consequence of bad economics” (10 March) in which you say that without full information, enforceable property rights and the limitation of externalities markets malfunction at cost to society at large.

We agree, but we also note that your pages are being used to argue that the G20 should not focus upon the issue of tax havens. Tax havens are used to create opacity. The regulation they promote is designed to undermine regulation elsewhere – it is an artificial externality that is intended to and does undermine markets. And without knowing about the true ownership, control and financial status of tax haven entities enforcing property rights against them is almost impossible.

You argue that an intellectual and moral failure of those who were in charge of the financial system allowed it to fail. We argue that the toleration of tax havens was an integral part of that intellectual and moral failure.

Using your own analysis we suggest you have a choice: you are either for sound markets and against tax havens, or for the continuation of failure and for tax havens. There is no in-between.

On which side are you?

Yours faithfully, etc

The point is simple: using the FT’s logic it is very obvious tax havens are a market failure.

Those who argue for their perpetuation argue for market failure, for the protectionism for monopoly power they provide, and for sub-optimal economic outcomes. No other interpretation of their actions is possible.

Odd then that they usually call themselves believers in markets. The fact is they are, but only so long as they are rigged in their favour. We do not accept that.

Which side are you on?