2009 May » Tax Research UK

PR please

May 262009

Parliament in crisis: When will MPs start to listen to the people? | Politics | The Observer .

This letter said:

The expense crisis reveals a nation governed by a political elite that has stopped listening and who are accountable to no one but their party machines. Too many MPs seem more interested in changing their homes than changing the world. Our society faces real problems – mass unemployment and growing poverty, the threat of climate chaos and an erosion of our civil liberties to name but three. These all require effective government working on behalf of the popular will. Yet our whole political system is close to collapse. We demand a new electoral system that makes everyone’s vote count.

On the day of the next general election, there should be a binding referendum on whether to change to a more proportional electoral system. This should be drawn up by a large jury of randomly selected citizens, given the time and information to deliberate on what voting system and other changes would make Parliament more accountable to citizens.

We demand the right to be able to vote for a change:

I was one of 53 signatories.

Let’s be realistic: this debt will not be repaid

Economics 12 Responses »

May 252009

The credit crisis and the recession that followed happened because of a collective suspension of belief in economic reality. It was assumed that low income related inflation could be coupled with high asset price inflation fuelled by the issue of new money in the form of credit by banks and that this imbalance between incomes and asset prices could continue ad infinitum without strain arising. That was wrong. It was always going to be wrong. The crash was inevitable, even if it took a few false starts for it to happen.

What is extraordinary is that this sleep walking to disaster as a result of collective denial of the truth is continuing. It has, for example, been reported that:

Every household in the UK will have to face a ‘fiscal squeeze’ of over £5000 a year – through tax increases and spending cuts – if the government is to get public debt back under control and meet the costs of an ageing population, PricewaterhouseCoopers (PwC) has said.

Let’s put this ion context. First this assumes we have to get back to national debt of less than 40% of GDP: there is no reason why that is true. Second, it is written deliberately, I suggest, to promote the idea that massive cuts in public services are required – an agenda PWC pursues with some enthusiasm. You can be sure it does not believe in the alternative prescription it offers of tax increases.

But whichever scenario is offered the reality is that when average household incomes in the UK are around £30,000 this cost burden of £,5,000 is not going to be imposed: as a simple matter of fact that cost could not be borne by those households without collapse of the underlying economy, not least due to the lack of demand for other goods and services it would precipitate which would leave the economy spiralling into massive depression.

So what will happen? The answer has to be that we will inflate our way out of this situation. No other option is possible. The inflation will be in incomes, not asset prices. Asset prices are what have been over-inflated to date. The benefit of this inflation will be that it will restore the relative balance between incomes and asset worth. Ordinary people – those outside the top 10% of asset owners in society – will benefit as a consequence. They will be able to afford houses once more. Those currently crippled with debt to repay obligations to the asset owners in that top tier will have their burden lifted. And the rotten money that the banks flooded into the system to allow asset price inflation will be washed out of it through the simple process of devaluation.

It’s time to be realistic: this is the only option we have. We can’t raise taxes enough to pay for the bank’s folly. We cannot impose a burden of £5,000 a year on every household in the UK to ensure that the current, post asset price inflated disorder in society that has meant the wealthy have got considerably more wealthy compared to all others in society is maintained. We would face complete economic ruin if we were to try to do so – though be sure the Conservatives, backed by the likes of PC (who have close links with them) will argue this is exactly what should be done.

Just stand back and use common sense: there is no way earth we can get out of this mess without inflation. It creates all its own problems, I know, but when in a hole you have to use the only ladder available to get out.

GSK accused of earnings stripping

Switzerland, Tax avoidance, USA 1 Response »

May 222009

Jesses Drucker is a good tax journalist, and I’ve had the privilege of working with him. In a new Wall Street Journal article he notes (and I apologise – you may have to pay to read the rest of this):

GlaxoSmithKline PLC is embroiled in a potential $1.9 billion court battle with the Internal Revenue Service, which says the drug maker owes back taxes, interest and penalties stemming from tax deductions Glaxo generated essentially by making payments to itself.

The dispute centers on a practice known as earnings stripping, in which a multinational company reduces its taxes by claiming interest deductions for payments to a related unit overseas. The company claims deductions on its U.S. tax return, but no money ultimately leaves the parent company’s coffers, and publicly reported profit is unchanged.

"The ability of U.S. subsidiaries of foreign multinationals to strip away earnings like this is a problem" because it significantly reduces the U.S. corporate-tax base, says Reuven Avi-Yonah, a former corporate tax attorney and now director of the international-tax program at the University of Michigan Law School.

What’s in dispute? That when GSK was created a Swiss structure was used to be the parent for the US operations and that substantial intra-group payments were made to this Swiss structure which GSK claims were interest and so tax deductible. But the IRS says they were dividends and not tax deductible.

That’s the face value transaction. But underneath it, as Jesse implies, is the suggestion that this was income shifting to a low tax regime that the IRS wants to challenge.

They’re right to do so. Major corporations cannot be allowed to undermine the societies on which they are dependent to make their profits. Good luck to the IRS in this one.

MPs and the Crown Dependencies: same excuses

Ethics 3 Responses »

May 222009

I loved this from Sir Anthony Steen, said on the World at One, quoted in the Guardian:

This was no fault on my part. We have a wretched government here which has completely mucked up the system and caused the resignation of me and many others because it was this government that introduced freedom of information.

Time and again we’re told by those in the Crown Dependencies that people’s private affairs are no-one’s business but their own.

Sorry, that’s not true.

You see, dodging tax legally from behind a veil of secrecy is exactly the same as making an abusive but legal expense claim in the House of Commons from behind a veil of secrecy. Both abuse the public purse. Both have to stop.

PS: He even had the temerity to offer the same explanation of those who protest about those who complain as do those who do likewise in the Crown Dependencies:

Do you know what this is about? Jealousy.

Oh no it isn’t. Wanting to uphold the rule of law, striving for ethical behaviour and seeking to ensure all are treated equally is not about jealousy. It is about justice. And that’s very, very different. Jealousy is driven by a lack of compassion for the condition of another human being, justice by the exact opposite. You’re wrong Sir Anthony: we’re better off without you. The only concern is that you’ll be replaced by someone worse.

And that’s why we need electoral reform, now.

Baucus Wants to Fast-Track Panama Agreement

Tax Havens 1 Response »

May 212009

Baucus Wants to Fast-Track Panama Agreement ¬´ Task Force on Financial Integrity and Economic Development.

Crazy

Mad

Or just bad judgement

I don’t mind which – I just hope it does not happen

The IASB sent prudence out of the window

Accounting, IASB 2 Responses »

May 212009

Fascinating stuff from the Telegraph:

Senior fund managers are becoming increasingly frustrated with the International Accounting Standards Board (IASB).

The most ardent critics of IFRS have written a document, now circulating in the City among major investors, that lays out a detailed analysis of the shortcomings of the system in relation to banks. The group believes the IFRS approach allowed certain banks such as HBOS, Bradford & Bingley and Northern Rock to trade while they were insolvent last year.

One of the biggest criticism the way banks provision for losses under IFRS. The old system allowed lenders to smooth their results from one year to the next by guessing at bad debts to come and using forward provisioning, IFRS prevents banks from making a provision unless a loan has actually gone bad. Critics believe the change fundamentally weakened banks.

A fund manager who is a member of the Financial Reporting Council, which oversees accounting and corporate governance, said: "Taking out expected loss bad debt provisioning from IFRS has meant that the process of banks making a risk assessment on all loans at the outset fell out of the scope of the annual accounts. As a result of the numbers being wrong, profits and assets were overstated, the banks looked healthier than they were."

Staggering, but true.

IFRS sent prudence out of the window.

And so they failed.

And nothing has been done to change the rules.

So, no doubt they will fail again.

Fining big company finance directors is fair

Accounting, Ethics, Tax evasion 5 Responses »

May 212009

The Times notes:

Eight in ten of Britain’s biggest companies are set to clash with HM Revenue & Customs over new rules to hold finance directors personally liable for errors in the accounts, research suggests. Under new rules in the Finance Bill, due to be passed this summer, finance directors of Britain’s largest companies will face fines of up to £15,000 if they or one of their staff make a careless mistake when compiling their company accounts.

But research from Deloitte shows that 85 per cent of FTSE 100 companies would not expect their finance directors to pay the fines personally, and would instead pick up the tab. While HMRC said it had no power to stop the company paying the fine, doing so could damage the business’s relationship with the taxman.

“Such action could affect the company’s risk score if that action was seen as endorsing the failures of the senior accounting officer in relation to his obligations, and thereby showing a disregard for ensuring that arrangements are in place to underpin the reporting of tax liabilities.” A higher risk score means that HM Revenue & Customs views a company or individual more likely to be non-compliant over paying the right amount of tax.

What troubles the finance directors is that finance directors will be liable for “careless inaccuracies”, rather than only negligent or deliberate errors.

But hang on a minute: this just creates a level playing field. Small businesses, their owners and directors have been paying such fines for years at proportionately much higher rates, and out of their own pockets too. HM Revenue & Customs does not care why tax is not paid when it comes to small business: careless inaccuracies are negligent and penalties have been due. Every practitioner knows that. The real questions are “why has been big business been allowed to be careless for so long?” and “why should we tolerate incompetence in big business when small business has always had to get it right?”

Set in this context it is clear big business has picked the wrong fight, as has the CBI which said:

This proposal has been sprung on companies without any prior consultation, and will do nothing for the UK’s reputation as a place to do business. At a time when firms are struggling during the recession, this will saddle companies with the extra cost of having to pay for professional advice to ensure that they comply with the changes, as well as placing an additional administrative burden on them. Despite that, it would only raise a relatively small sum for the Government’s coffers.

Well, excuse me, but haven’t they noticed there is a legal requirement to maintain proper books and records at all times in the Companies Acts and haven’t they read the tax returns they’ve been signing?

I’m 100% with HMRC who said that the new rules “will ensure that senior company officers have an active interest in ensuring that the systems and procedures within their companies are adequate to ensure accurate tax reporting”.

I have only one thing to add: the fines are too small. Far, far too small.

IMF urges UK to control public finances

Economics 4 Responses »

May 212009

FT.com / UK – IMF urges UK to control public finances.

Some things don’t change.

The economic policies prescribed by the IMF are one of them.

Have they never heard of the multiplier?

Government spending gets us out of recession. Cuts worsen them. OK, it has to be the right spending, I agree. But a simple presecription of cuts is guaranteed to fail.

Give us better data then

Corruption, Secrecy jurisdictions, Tax avoidance, Tax evasion, Tax Havens 3 Responses »

May 212009

Dow Jones reports via NASDAQ that:

Internal Revenue Service Commissioner Doug Shulman on Tuesday pressed House lawmakers to enact President Barack Obama’s proposals to fight offshore tax evasion, as well as other proposed IRS tools, at a hearing on the agency’s fiscal year 2010 budget request.

But Shulman dismissed an allegation often made by Levin that offshore tax evasion costs the U.S. Treasury as much as $100 billion per year in lost revenue. "There have been some wild estimates thrown out by academics that we don’t agree with," he said. "Those are broad numbers that don’t have much basis."

Shulman didn’t provide his own estimate of the annual cost of offshore tax evasion, but said IRS officials are working on quantifying that problem.

Wild? The figure is in terms of scale less than the figure I have estimated for losses to the UK of £18.5 billion – which seems by the day to be increasingly conservative.

And my previous work, estimating losses to high net worth individuals of $255 billion a year – now probably the most widely quoted number on this subject ever – was based on data from people who should know – like Merrill Lynch, Cap Gemini and Boston Consulting Group.

Remember revenue authorities have a bested interest in under-reporting this data: it’s very existence does not make them look good.

I stick by the numbers. They’re not wild. They’re the best there is. And it’s notable that tax authorities really are not willing to give us better data. Is that because the resulting figure is worse than we say?