2010 June » Tax Research UK

Post G20 Toronto Summit Analysis: Official Statement is Heavy on Promises, Short on Action

Development, Economics Comments Off

Jun 302010

The G20 Summit in Toronto June 27th-28th was heavy on promises and lean on concrete action items, notes the Task Force on Financial Integrity and Economic Development. While the G20 expressed a strong desire to “close the development gap,” increase transparency, and tackle corruption and money laundering, there was a notable lack of language indicating an understanding of the interconnected nature of these different problems.

“We are disappointed that there was not an acknowledgment of the importance of curtailing illicit financial outflows from developing countries in the official statement,” said Global Financial Integrity director Raymond Baker. “The G20 seems intent on increasing official development assistance and pumping money into other lending bodies for development work but the annual loss of $1 trillion a year from developing countries will continue to dwarf development aid and undermine all efforts to foster robust and sustained economic development until corrective action is taken.”

Connect the Dots: A Prescription for Curtailing Illicit Outflows

In September 2009 the Task Force prepared a comprehensive policy paper with recommendations for curtailing illicit financial outflows from developing countries based on combating corruption and money laundering, dismantling bank secrecy, and fostering more rigorous reporting by multinational corporations.

Key policy recommendations include:

Country-by-country reporting by multinational corporations of sales, profits, and taxes paid in all jurisdictions of operation;
Reduce abusive transfer pricing, tax evasion;
Require disclosure of the beneficial ownership of companies, and the beneficiaries of trusts and foundations;
Automatic exchange of tax information;
Stronger due diligence requirements on banks, better enforcement of these requirements;
Harmonizing predicate offenses for money laundering.

The measures set forth by the Task Force would directly address several of the G20’s key global priorities. Making multinational corporations and banks more transparent would significantly hinder money laundering, tax evasion, and corruption by making it difficult to impossible to launder and hide the proceeds of these illicit activities.

New Actions:

Two notable action items from the official summit statement are the establishment of two working groups tasked with addressing issues of corruption and development.

Statement on Anti-Corruption Working Group:

We agree that corruption threatens the integrity of markets, undermines fair competition, distorts resource allocation, destroys public trust and undermines the rule of law. We call for the ratification and full implementation by all G20 members of the United Nations Convention against Corruption (UNCAC) and encourage others to do the same. We will fully implement the reviews in accordance with the provisions of UNCAC. Building on the progress made since Pittsburgh to address corruption, we agree to establish a Working Group to make comprehensive recommendations for consideration by Leaders in Korea on how the G20 could continue to make practical and valuable contributions to international efforts to combat corruption and lead by example, in key areas that include, but are not limited to, adopting and enforcing strong and effective anti-bribery rules, fighting corruption in the public and private sectors, preventing access of corrupt persons to global financial systems, cooperation in visa denial, extradition and asset recovery, and protecting whistleblowers who stand-up against corruption.

Development Issues Working Group:

Narrowing the development gap and reducing poverty are integral to our broader objective of achieving strong, sustainable and balanced growth and ensuring a more robust and resilient global economy for all. In this regard, we agree to establish a Working Group on Development and mandate it to elaborate, consistent with the G20’s focus on measures to promote economic growth and resilience, a development agenda and multi-year action plans to be adopted at the Seoul Summit.

Some notable language on money laundering and tackling tax havens in the G20 statement center around the delegation of monitoring and regulatory action to the Financial Action Task Force (FATF):

We fully support the work of the Financial Action Task Force (FATF) and FATF-Style Regional Bodies in their fight against money laundering and terrorist financing and regular updates of a public list on jurisdictions with strategic deficiencies. We also encourage the FATF to continue monitoring and enhancing global compliance with the anti-money laundering and counter-terrorism financing international standards.

We agreed to consider measures and mechanisms to address non-cooperative jurisdictions based on comprehensive, consistent and transparent assessment, and encourage adherence, including by providing technical support, with the support of the international financial institutions (IFIs).

We fully support the work of the Global Forum on Transparency and Exchange of Information for Tax Purposes, and welcomed progress on their peer review process, and the development of a multilateral mechanism for information exchange which will be open to all interested countries. Since our meeting in London in April 2009, the number of signed tax information agreements has increased by almost 500. We encourage the Global Forum to report to Leaders by November 2011 on progress countries have made in addressing the legal framework required to achieve an effective exchange of information. We also welcome progress on the Stolen Asset Recovery Program, and support its efforts to monitor progress to recover the proceeds of corruption. We stand ready to use countermeasures against tax havens.

The Task Force is heartened to see that the G20 continues to prioritize economic development as part of its broader work restructuring the global financial system. But the official statement from Toronto reveals a continued failure to grasp key linkages between financial opacity in the global financial system and illicit financial outflows from developing countries.

The Task Force hopes that the policy recommendations to be presented by the new Working Groups on development and anti-corruption measures in Seoul reflect this interconnectivity and incorporate elements of the Task Force prescription.

The Task Force on Financial Integrity and Economic Development is a consortium of governments and research and advocacy organizations focused on achieving greater transparency in the global financial system for the benefit of developing countries.

Disclosure: Task Force members include: Christian Aid, the European Network on Debt and Development (Eurodad), Global Financial Integrity, Global Witness, Tax Justice Network, Tax Research LLP, and Transparency International. For full Task Force membership visit the Task Force website at http://www.financialtaskforce.org/

Time to act on tax transparency

Country-by-country, Development 3 Responses »

Jun 302010

I have the following article on the Guardian’s Comment is Free site this afternoon:

Something quite extraordinary is happening in the world of accountancy. The International Accounting Standards Board (IASB) that sets the rules on accounting for most of the world is considering a proposal for a new accounting standard put to it by civil society. This has never happened before.

The proposal is for a cut-down version of what is called country-by-country reporting. That concept is explained here, as are the benefits. The cut-down version, explained in chapter six of this IASB document, is more modest. As a first step towards full country-by-country reporting, campaign group Publish What You Pay (PWYP) has asked for country-by-country reporting to apply to just the extractive industries for now. That term applies to those companies that are engaged in the oil, gas and mining sectors.

What PWYP asks for is disclosure in the published accounts of multinational corporations engaged in the extractive industries of a breakdown of the sums they pay by way of taxes and similar charges to the countries that host their extraction activities. It also asks for disclosure of additional relevant information such as total sales by country, costs by country and reserves by country as well as the name of all local subsidiary companies so that the reasonableness of payments made and the legal identity of the local companies paying them can be determined.

The intention of the proposal is clear. PWYP, the Tax Justice Network and others who are behind this demand want multinational corporations working in this sector to be accountable for paying the tax that those in civil society believe they should pay to the societies that grant them the opportunity to make extraordinary profits. And at the same time, civil society wants this data so that they can hold governments accountable for the use they make of that money.

The aim is to reduce or even eliminate the risk arising from corruption and so make sure the people in some of the poorest nations on earth can enjoy the benefits they deserve that arise from exploitation of the mineral reserves of the countries in which they live. This is no small issue: tax losses flowing from the extractive industries could make up a big part of the lost tax revenues of developing countries illegally stripped from their grasp by multinational corporations. Christian Aid estimates that these amount to $160bn (£106bn) a year – a sum somewhat bigger than the total annual international aid budget.

However, there’s something equally extraordinary going on in the response made by the International Accounting Standards Board to this proposal. They’re saying they do not care that there could be massive benefits flowing to the ordinary people of the developing countries of the world as a result of this simple (and, as some big firms admit, cheap) accounting reform. Benefits resulting from reduced tax evasion, increased tax payments, less corruption, enhanced governance, greater confidence in the business environment in those countries encouraging new inward capital creating more jobs and so on and on are not, according to the IASB, matters of any concern to them. The IASB says that unless this change in accounting can be proven to change the way investors in a company choose to buy or sell their investments then the change is not needed.

So in other words, the apparent needs of fund managers, and their largely computer-generated investment decisions – many of them undertaken solely in pursuit of stock exchange index tracking – are paramount for the IASB. And unless those stock brokers and fund managers who do most of the buying and selling of shares change their computer programmes to assess the information provided on a country-by-country basis on taxes paid then the IASB say this information is not needed by any user of accounts.

In the process they deny that the real needs of other users of accounts exist, whether those users be governments, regulators, ordinary citizens, tax authorities, environmentalists, civil society organisations, and many others. The IASB is in effect saying that all these other users are also only interested in buying and selling shares, and nothing else.

This is wrong, of course. Worse than that, it has to be knowingly wrong. No rational person could believe this to be true. But any rational person can recognise that what the IASB is saying is a wholly artificial argument to put false impediment in the way of necessary disclosure to ensure multinational corporations are held accountable for their activities.

Why would the IASB wish to prevent that disclosure? Maybe the fact that it is a privately funded organisation, largely under the control of the big four firms of accountants, may give some clue on that issue.

Should it be acting in this way? Emphatically not. Its constitution, which is the basis on which it has been given the effective right to write UK law in this area, says it must work in the public interest and must, among other things, give special attention to the needs of emerging economies – such as those that host the extractive industries.

The IASB is clearly not acting in the public interest. It is denying information that is needed to fulfil the public interest on the extraordinary basis of claiming that the public is made up solely of the buyers and sellers of shares. And it is ignoring the needs of emerging economies altogether.

Thankfully you have the chance to object to what they’re doing by writing and telling them why you disagree with their actions. There are full details of how to do so here. Please tell them to change their ways by 30 July when the submission deadline closes. You have a real chance to create change that will increase the amount of tax developing countries receive and so break their dependency on aid. Please don’t waste it.

Worry when the accountants are going bust

Accounting 3 Responses »

Jun 302010

As Accountancy Age reports:

Top 20 [accounting] firm Vantis has announced it has entered administration weeks after suspending its shares.

A statement by the board said while directors had “vigorously explored” every available avenue to reduce debt, there was a lack of progress with those options.

This is, I admit, another case of “I told you so”. Sorry, these seem to be happening quite often. We can well do without this firm for the reason noted in the link.

But as one former employee told me in an email:

It’s been a torrid ride but tonight Vantis has gone into administration – thank God.

There’s a history to be written and its theme will be GREED. Overpaid Plc directors who sucked the business of cash to feather their own nests and who also over-traded and championed the most outrageous of tax avoidance schemes. A client said to me today that it comes to something when their financial advisers over-trade and end up going down.

Quite so. It’s another reason why the profession is well shot of Vantis plc.

If you call this a vote of confidence, I don’t

Economics 1 Response »

Jun 302010

I couldn’t help but note the FTSE 100 chart this morning. I’ve reproduced it below, from the FT.

Now let’s get out of the way the fact that markets aren’t rational and stock indexes behave quite independent of economic reality, points I have made often.

But however you look at this graph you can’t call this a vote of confidence in the UK economy or the ConDem’s management of it:

What are the prospects for growth?

About zero, I’d say.

And the graph shows that the markets have no confidence at all that anything they’re doing will change that.

Auditors failed when signing off bank accounts

Auditing, Big 4 1 Response »

Jun 302010

The Guardian reports:

The role of accountants in the banking crisis was thrust into the open yesterday when the Financial Services Authority said that the profession had not been sceptical enough about the financial firms it audited in the run up to the banking crisis.

The City regulator, setting out a case to have the powers to publicly censure and fine auditors, also noted that some firms appeared to be "systemically aggressive" in some of their accounting policies.

Paul Sharma, FSA director of prudential policy, said: "Our experience has indicated that, at times, auditors have focused too much on gathering and accepting evidence to support firms’ assertions, rather than exercising sufficient professional scepticism in their approach. This falls far short of what the FSA – and society at large – expects from auditors."

The FSA said its work since the banking crisis had led it to question whether auditors had been "sufficiently sceptical" when challenging the models used by management to measure their bad debts and said it was "concerned that the dispersion in valuations – both within and between firms – for similar items is higher than might be expected".

It said there had been an "inadequate level of challenge to firms’ management" from auditors about some of the crucial assumptions they make in deciding whether to take a provision for a loan that is not being repaid.

The regulator is particularly scathing about the way auditors tackled client assets – where, since Lehman’s collapse, firms must show they keep client’s money safe – saying it had found "material weakness" in some reports filed by auditors.

What can I add? Except the likes of Prem Sikka, Dennis Howlett, Francine McKenna and I can all say “we told you so”.

And “when will they listen?”

The Treasury confirms there will be massive job losses – as predicted here

ConDems, Economics 4 Responses »

Jun 302010

I think there were people who tho0ught I was pretty hawkish when predicting job losses as a result of ConDem cuts of between 1.5 million and 1.6 million. I’ve been saying so of their plans for a year now.

Now the Guardian has revealed that the Treasury thinks there will be at least 1.3 million job losses over the next five years:

George Osborne’s austerity budget will result in the loss of up to 1.3m jobs across the economy over the next five years according to a private Treasury assessment of the planned spending cuts, the Guardian has learned.

Unpublished estimates of the impact of the biggest squeeze on public spending since the second world war show that the government is expecting between 500,000 and 600,000 jobs to go in the public sector and between 600,000 and 700,000 to disappear in the private sector by 2015.

The chancellor gave no hint last week about the likely effect of his emergency measures on the labour market, although he would have had access to the forecasts traditionally prepared for ministers and senior civil servants in the days leading up to a budget or pre-budget report.

This is an occasion when to be found to be so near enough right (all figures are estimates, after all) is not encouraging, except to prove that plain commo0n sense and a little analysis is all that is needed to predict such an inevitable outcome of the cuts programme.

The Treasury, of course, assumes that there will also be 2.5 million jobs created over the next five years. That’s more than 8% growth in employment from new jobs. I think that’s absurd. So do the Chartered Institute of Personnel and Development who told the Guardian:

There is not a hope in hell’s chance of this happening [the creation of 2.5m new jobs]. There would have to be extraordinarily strong private sector employment growth in a ‚Ä¶ much less conducive economic environment than it was during the boom.

That’s not a bad summary.

So, let’s summarise what this means. First, unemployment will be higher than the Treasury forecasts because they assume that there will be growth and there will not be. I’ll stick with my belief that more than 1.6 million people will be losing their jobs and there will be NO net job gains. This morning’s evidence that cash is fleeing from the private sector to government bonds is sure evidence of that.

Second, this means we’re heading from a private sector crash, not private sector growth, as I’ve predicted.

Third, and perhaps most important of all, because of the cost of benefits we will see little or no fall in the deficit as a result.

In other words all this pain will be for nothing.

People and companies will rue the day they believed the claim that countries are like people and must cut spending when in a deficit. The truth is the exact opposite is true. Only spending can get us out of the mess we’re now in

That’s the choice the ConDems should have made. They didn’t. They will pay a high price for it. Mervyn King was right.

I thought cuts were meant to stop this?

Economics Comments Off

Jun 302010

FT Alphaville reports this morning:

Fresh worries about the heath of the eurozone financial system compounded with concerns over the prospects for global growth, hitting equity markets across the world and sending investors into perceived safe havens, such as US treasuries. See the FT’s rolling global overview here, which notes the the yield on the 2-year US Treasury note reached a record low on Tuesday.

Now I find that really weird. I thought cuts were meant to eliminate all worries about growth? Wasn’t growth the dead cert option that was bound to happen the moment cuts were announced? Wasn’t the end of “crowding out” going to deliver salvation for all because the private sector was going to come storming over the horizon?

And I thought markets really hatred government stock so much they were steering clear of it?

And weren’t rates set to climb through the roof?

Or were all those claims just lies to justify cutting the size of the state without consideration of the consequence?

Tax avoidance is part of the tax gap – so let’s move on

Tax gap 16 Responses »

Jun 292010

The far right have always liked to argue that my work on the tax gap is wrong because I categorise tax avoidance as part of the tax gap. But this argument is entirely wrong.

First, let’s refer back to the Revenue definition of the tax gap. It is this:

Note that the Revenue quite categorically say that tax planning – that is using allowances and reliefs provided in law for the intention that parliament considered appropriate (in my lexicon, tax compliant behaviour) is not part of the tax gap. I completely and utterly agree. I have never once suggested otherwise.

And note that David Gauke MP, the minster whose comments I am criticising, did in his speech on 16 June say:

One of the largest factors contributing to the tax gap is avoidance. Tax avoidance is estimated to contribute around 17.5%-around £7 billion-of the total tax gap. It is worth making that point at the beginning because, although those contributing to this debate today have not fallen into this trap, there is sometimes a conflation between the tax gap, which is a considerable figure, and tax avoidance, which is still a considerable figure but is only part of the £40 billion figure. None the less, £7 billion is a substantial sum, and this Government are determined to reduce it as far as possible.

That, incidentally is a sum £2.2 billion higher than HMRC suggest, but let’s ignore that right now and note instead that he is explicitly including the abuse of legitimate tax allowances and reliefs in his definition of the tax gap. There is not a whisker to be found between us on this point.

Therefore all those who wish to argue otherwise are straightforwardly wrong. Worse than that, they are deliberately peddling misinformation. It is, of course, a standard ploy of far right politics. If in doubt read this book.

But let’s also return to the real issue. The only area where this can have any consequence for my work is with regard to corporate tax avoidance. With regard to personal tax avoidance, as noted in my latest work, even the Chancellor has clearly dismissed the figure produced for personal tax avoidance by HMRC as being wholly unrealistic – having suggested during his budget speech that all of it can now be completely attributed to some specific capital gains tax abuses, which makes clear how significant an underestimate the Revenue offered when publishing their own latest estimate in December 2009.

On corporate tax avoidance though, as I have noted in my report issued yesterday, new data does suggest that there is reason to now go back and reappraise my estimate, but that is because HMRC appear to have responded to the debate which they acknowledge I and the TUC created by publishing new information.

But, having even said that, it is readily apparent first of all that HMRC do consider companies are tax avoiding abusively using the definition I use – because they acknowledge that fact and suggest that the abuse amounts to at least £3.4 billion a year. I, of course, suggested it to be £12 billion year on the basis of an assumption that the abuse I detected in large companies might be extrapolated to small companies. The new HMRC data suggests that this extrapolation may (and I strongly emphasise the may) not be appropriate. However as that would lead to the paradoxical situation where small companies are paying tax at a rate that almost exactly accords with the anticipated rate – which my hypothesis suggests they should – but large companies are paying instead at almost exactly the rate my work for the TUC predicted this still leaves an enormous range of questions unanswered – and my basis hypothesis clearly extant. That is hardly an indication that I got my work wrong. And however interpreted the new data does not support the HMRC estimate of the loss to avoidance: that would be about £7 billion on this basis – assuming that is that the avoidance I’m finding is not hidden undetected (as it may well be) in the Revenue’s measure of taxable profit.

In other words, the maximum likely adjustment that might now be required to my original total estimate (and I have not accepted this is necessary as yet) may be £5 billion.

That’s £5 billion in a total estimate of £120 billion and for reasons wholly and utterly unrelated to the claims far right commentators make. Given that any estimate of the tax gap is just that – an estimate – I’d be very happy with that outcome even if this variance is proved justified – which it has not been as yet.

So, let’s summarise this: it is clear that the far right have no idea what they’re talking about, clearly can’t do statistics or appraise them, do not understand what tax avoidance is or, alternatively, peddle straightforward incorrect information for their own political purposes.

Actually the “or” in that last sentence is probably misplaced. It seems very likely it should be an “and”.

Either way: they’re wrong. And like all pedlars of myths should be ignored.

When will the Channel Island’s VAT abuse be stopped?

Guernsey, Tax avoidance, VAT 13 Responses »

Jun 292010

The deliberate, blatant and wholly inappropriate abuse of UK VAT law by companies loosely based in the Channel Islands is an ongoing scandal costing the UKL Exchequer hundreds of millions a year, which has often been documented here.

The budget VAT increase has just made the abuse more attractive.

And it looks like some are banking on it not ending. As the Guardian notes;

The Hut Group, the fast-growing firm behind controversial VAT-free CD and DVD internet sales for Asda, WHSmith, Dixons, Argos and Woolworths, has begun rapidly expanding into other product areas – including cheap handbags, jewellery, novelty gifts, sun cream and underwear – as it builds towards a stock market flotation early next year.

New websites gifted.com, mybag.co.uk and washbag.com have been launched in the past three months. The move is a bold departure for the Cheshire-based business, which has grown into Britain’s third-largest online DVD and CD retailer in the six years since it was set up.

Note: Cheshire based. But Channel Island tax abusing. And now seeking to capitalise on it.

And this is the type of private enterprise that will get us out of recession? I don’t think so.