Economia magazine, the official journal of the Institute of Chartered Accountants in England and Wales, has published the following debate this afternoon under the above title, between me in the first instance, and then Ben Saunders, a Chartered Tax Adviser who works for Tolley Publishing, who has set himself up as one of the main critics of the Fair Tax Mark, which I direct.
I wrote in favour of the Fair Tax Mark:
“Debate on tax has become headline news, largely as a result of civil society research and pressure. Now people are familiar with the idea that multinational corporations tax abuse using tax havens and transfer mispricing. However, no systematic approach to who is being fair, and not, has been available. This is where the Fair Tax Mark comes in.
Launched in June 2013 by the Fair Tax Campaign, which I direct, the Fair Tax Mark focuses on three issues, which are whether a company provides enough country-by-country data to let us determine whether it is profit shifting out of the UK; whether it uses tax havens or not as a proxy for its potential to tax avoid, and its attitude to that issue and the difference between its current tax rate and the headline UK tax rate it should have paid over a six-year period.
The first two issues reflect concerns picked up by the G8 and are at the centre of the OECD's Base Erosion and Profit Shifting project. They could not be more topical or appropriate as measures of what is seen as important in tax at this time. Fair tax is not just about paying tax in the right place; it is also about proving it.
However, it is the tax rate issue that has so far dominated the debate. We deliberately only look at current tax: people do not want promises of tax payment, they want to see the colour of business's money. We use six years of data to overcome short-term timing issues. If economic profit and tax paid do not align over such a period then there's something wrong with the tax system in our view. The actions of the companies involved may well be wholly legitimate, but the answer's still wrong if these two do not align and change is needed.
Some companies scored well. Many didn't. The case for significant change has been made as a result. That is what people want though: they want fair tax to be paid by big business.
We are telling them that in many cases they're not getting what they want, and businesses are hiding the explanations as to why that may be the case.
That, we think, is a powerful public service worthy of support from across the profession.
I would like to quote Ben's comment in full, but the Institute of Chartered Accountants in England and Wales have asked me not to do so, in which case it is available here.
Of course I have an opinion on what Ben has written, but it's Friday afternoon. I leave it for others to comment first and I will do so over the weekend or on Monday.
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OT (again!).
Can’t find anywhere to put this, thought some on here would like to read it, tells where we are going, as if we didn’t know!!!…
“Lord Advocate Frank Mulholland instructed Police witch-hunt against media leaks.”
http://scottishlaw.blogspot.de/2013/07/lord-advocate-crown-office-target.html
“BREAKING: NSA Whistleblower and US Justice Dept. Fugitive Edward Snowden Has Accepted Russian Asylum Offer”
http://rinf.com/alt-news/breaking-news/breaking-nsa-whistleblower-and-us-justice-dept-fugitive-edward-snowden-has-accepted-russian-asylum-offer/50101/
Ben Saunders takes aim at the Fair Tax mark by claiming “this methodology judges that complying with democratically established law is unfair , irrespective of whether this behaviour is abusive or benign.”
I would argue that the tax laws introduced that favour big business starting with the substantial shareholdings exemption through to the patents box rules have been put in place by far from democratic means, but by corporate capture of HMRC. The multinationals have lobbied hard for these rules. Their “Big 4” ciphers have been parachuted into roles in HMRC and the Treasury to ensure they get their way. This has nothing to do with democracy.
Ben then proceeds to try and put together three factors to undermine the basis of of the “Fair Tax Mark”. This is the typical “politician’s” ploy of identifying a trinity, which for cultural and historical reasons has more impact than say indentifying two or four issues. Ben is trying to establish an “unholy trinity”.
These alleged weaknesses are the accounting profit, timing differences and arbitrary weighting.
Accounting profit – This is the only logical place to start. This is the figure reported in the accounts published for the shareholders and other interested parties. If IAS are used then a fair comparison can be between activity in one country and another can be made. Ben appears to argue that the methodology does not distinguish between incidences where profits are justly apportioned to a low tax jurisdiction on the basis of economic activity and those unjustly apportioned due to abusive practices. Surely though “Country by Country” reporting resolves this issue as any multi-national not engaging in abusive practices would have no objection to presenting its results in “Country by Country” format as it would have nothing to hide?
Timing differences – the main issue here is deferred tax. I think this is more smoke and mirrors criticism. I think that it is not unreasonable to assume that during a six year period, timing differences should even out. I don’t think the true mean rate issue is a “fundamental mathematical flaw”, no more than the tax rate(s) used in the calculations of deferred tax is a “fundamental mathematical flaw”. Ben then employs a not entirely convincing “reductio ad absurdum” example to make his point.
Arbitrary Weighting – apparently this magnifies the “effects of the most recent years meaning that timing differences can never even themselves out even if profits remain the same”. Given that deferred tax is in effect an accounting fiction, because the rate(s) used when the calculations were first made may not be same as those when the timing differences finally unwind, I don’t think this argument holds much water.
Towards the end Ben states “these are just my concerns over one aspect of a methodology”. This conflates the three points made earlier into one factor and then tries to create the impression that there are large number of issues that need to be addressed. Is this a “Freidmanite” approach of “blowing smoke”? I’ll leave it to readers of your blog to judge and in this respect they may be interested in the following links:-
http://unlearningeconomics.wordpress.com/2012/11/27/milton-friedmans-distortions/
http://unlearningeconomics.wordpress.com/2013/07/12/milton-friedmans-distortions-part-ii/
In conclusion, I can see nothing of substance, only one of politics (multi-nationals believing that they transcend states and should not be judged by any democratic process) standing in the way of the Fair Tax Mark. I believe that there is scope to fine tune it and this could be achieved by progressive rather than reactionary input from the tax profession and “Country by Country” reporting.
Thank you for such reasoned observation
I appreciate it