Dennis Howlett » Tax Research UK

Free markets require fair taxation

Code of Conduct, Dennis Howlett, Tax management, Tax planning, VAT 3 Responses »

Dec 312007

It’s a fact that we cannot do without taxes. That’s because we cannot do without government. And we cannot do without markets either, at least in the world as we know it. The relationship is symbiotic: governments provide the structure in which markets can work: markets need government as their insurer of last resort: populations need governments to protect them from the excesses and failings of the market. Those who argue for one as opposed to the other will always be on a losing ticket: they ignore the obvious fact that as we have structured our society this is an indivisible relationship, not a matter of choice.

But relationship carries obligations. One is that each plays an appropriate part. The other is that outsiders are held at bay and not allowed to interfere to the point that they harm the process which ensures a continuation of the productive benefit that flows from reasonable harmony.

What’s the relevance of this? Simply that unfair taxation harms the relationship between a government and markets. Take the example of Setanta’s relocation of its subscription TV service from Ireland to Luxembourg. It has saved £17 million in VAT as a result as Luxembourg has a 3% VAT rate on such supplies, apparently. Ireland charges more. But what is absurd is that this is happening within the single market of the European Union where such anomalies are meant to be eliminated and the free movement of capital is not meant to be either encouraged or hindered by taxation.

It’s clear that Luxembourg’s VAT abuse needs to be tackled.

But there’s more to it than that. Setanta is a substantially Irish company. Half of its staff are there. That’s likely to make it the core of its activities. They’re not in Luxembourg. So this is an artificial move. As such it contravenes section 1b of the TJN / AABA Code of Conduct for Taxation which says:

1b. No incentives are offered to encourage the artificial relocation of international or interstate transactions;

Luxembourg is not honouring its international obligations to other states.

Setanta is also in breach of sections 3b and 3c of the Code:

3b. Tax planning seeks to reflect the economic substance of the transactions undertaken;

3c. No steps are put into a transaction solely or mainly to secure a tax advantage.

I also think they’re in breach of 4c and 5b:

4c. Taxation reporting will reflect the whole economic substance and not just the form of transactions.

5b. All parties shall act in good faith at all times with regard to the management of taxation liabilities;

There’s a great deal of unacceptable conduct taking place here. Relationships rarely survive such behaviour. That’s why we’re worried when this sort of abuse takes place. It’s bad for the economies that suffer, it’s long term unsustainable for the compnaies involved, eventually consumers usually lose as a result, but worst of all, it’s bad for the whole effectiveness of the market which is best sustained when each party accepts their duties and obligations to each other and to those they relate to outside the immediate relationship.

This isn’t pie in the sky stuff: this is about creating well-being. And that, at its core, is what economics is meant to be about.

It’s accountants who think economics is about market abuse.

NB: Hat tip to Dennis Howlett.

Dennis Howlett on PWC and the Total Tax Contribution

Accounting, Dennis Howlett, Ethics, PWC 2 Responses »

Dec 022007

Dennis has waded into this debate.

And he can see no more merit in PWC’s TTC than I can. As he put it:

[Do] PwC think we’re all idiots? A year 1 CIMA student could work out just how appallingly illogical this argument really is.

The sadness in all this is that well meaning people are being hood winked by consulting brands that are intellectually bankrupt and thoroughly discredited in the wider context of CSR. But it matters not to them. When you’re painting a picture of this kind, it is so much easier to sell GRC services tied to falsehoods around CSR. Especially if you can make the seductive, if entirely false claim that business tax is a cost of doing business.

One more nail in the profession’s reputational coffin.

(NB, GRC = gross recurring fees, the regular income that all accountants look for as their bread and butter and which is what PWC are really seeking out of the TTC).

Simply worth reading

Accounting, Corruption, Dennis Howlett, Ethics Comments Off

Nov 302007

There are some things that are simply worth reading this weekend and which I won’t have time to blog in detail

Please read Prem Sikka on audit failings and the sub prime crisis.

Read Dennis Howlett on the same issue.

And Dennis again on TI.

These aren’t to be missed. Your weekend will be better for them.

On the ball

Accounting, Dennis Howlett, Ethics, Europe, Guernsey, Isle of Man, Jersey, Tax Justice Network, Tax management Comments Off

Nov 292007

Dennis Howlett was on the ball whilst I was away in Brussels that last couple of days.

First about the Revenue’s data loss. As he rightly said, this is an IT issue, not a tax one. Second, he was spot on to say that the ICAEW is wrong to say

that the causes are likely to be deep-rooted and point to the need for a much wider reform of HMRC’s management and operational practices.

This was a systems failure. Solve that first, then worry about the strategy. It will cost a lost less that way, and be a lot more effective.

Then Dennis picked up the FT on climate change:

Fighting Climate Change: Human Solidarity in a Divided World, released ahead of the opening of the UN conference on climate change in Bali next week, estimated that by 2015, a minimum of $40bn would be needed for poverty alleviation in the face of climate change, while several billion more will be needed for infrastructure, and for disaster mitigation caused by global warming.

As he noted, that’s a great deal less than we at the Tax Justice Network know tax evasion costs a year. In fact Jersey, Guernsey and the Isle of Man cost $20 billion in tax evasion a year before them. Add in Cayman and maybe the BVI then and we have climate change licked.

Funnily enough I was discussing just this point with some NGOs with concern about climate change in Brussels. Which should be enough to have all the tax haven supporting, climate change denying readers of this blog (and they seem to go hand-in-hand, by the way) foaming on the comment button.

Their hands in our pockets

Accounting, Dennis Howlett, Economics, Ethics Comments Off

Sep 232007

Prem Sikka is using his Guardian blog to great effect. His latests is called ‘Their hands in our pockets’ and shows just how often big business abuses the market system for its own benefit.

As Dennis Howlett said in his review of this blog:

Prem Sikka’s indictment of Tesco, Asda, Morrisons, Safeway and Sainsbury’s as a cartel operating to fix prices of basic foodstuffs is the sharpest critique I’ve seen of the UK’s enterprise culture.

He particularly referred to this comment:

Increasing profits through tax avoidance, pension mis-selling, dilution of workers’ pension rights or through cartels has become part of an “enterprise” culture that persuades many to believe that bending the rules for personal gain is a sign of business acumen. Stealing a march on a competitor, at almost any price, to gain financial advantage is considered to be an entrepreneurial skill, especially where competitive pressures link promotion, status, profits, market shares and niches with meeting business targets‚Ä¶

The vicious enterprise culture is rarely constrained by any notion of ethics and morality.

All I can say is read it. But then ask this question. Why isn’t Prem Sikka the man in most demand to be a non-executive director in the UK today? He’s the best track record in the UK of asking awkward questions of business on which it has transpired that he has been right. But as As Ruth Sutherland says in the Observer today (and I paraphrase a bit):

Non-executives have been likened to bidets: they add a touch of class but no-one knows what they are for. They are well-rewarded by most standards, earning in the region of £30,000-£60,000 for attending board meetings 12 or so days a year. Most have demanding full-time jobs, families, charity interests and often a portfolio of other roles, so there are limits to the detailed scrutiny they will provide.

What they should do, though, is ask the right questions. No one, however, seems to have made the simple inquiry as to why a modest mortgage bank in Newcastle upon Tyne was playing at the casino end of the capital markets.

Being a non-executive director is not the sinecure it once was. But despite genuine improvements deep-seated problems remain.

One is the sheer shortage of top talent; astute non-executives are in huge demand and may sit at a number of mahogany tables. The pool of people from which non-executives are drawn is relatively small; more effort needs to be made to recruit robust candidates from outside the cosy City club, or its Geordie branch.

That’s just not true. Such people do exist. Prem is one of them. But the fact is that the executive directors don’t wan the awkward squad questioning them. When will investors realise that it is in their best interests that they do? Soon I hope.

Patented tax avoidance

Accounting, Dennis Howlett, Ethics, Tax management 2 Responses »

Jul 312007

The NJ Biz reported yesterday that:

Growing concern over a federal agency’s four-year-old decision to grant patents on tax strategies has some CPAs in New Jersey and elsewhere worried about counseling clients on tax planning.

But “if drugs can be patented, why not tax strategies?” asks E. Martin Davidoff, a Dayton CPA and tax attorney, referring to a decision by the U.S. Patent and Trademark Office to extend patent protection to tax strategies.

I have to say I linked this story to an excellent piece by Dennis Howlett yesterday on the professions and self interest, which I recommend. The reason is simple: this is the profession putting its interests above those of the society it serves and which grants its right to charge super-normal levels of fee.

And if you want an answer as to why not, just consider this. Suppose the government wants to outlaw a patented tax strategy. Does that mean they will have to pay compensation to the patent holder for loss of royalty income? In a society like the US that is on obvious risk. And in that case the right to legislate on tax has been privatised. That’s why not, Mr Davidoff.

Tax is a public good. The problem our profession has is that it sees it as a public bad. And that is undermining not just our profession, but the stability of our society as a whole. That’s the inevitable result of putting individuals above communities. And that’s what our obsession with private property is doing.

If you’re not independent you’re not a professional

Dennis Howlett, Ethics 2 Responses »

Jul 092007

Dennis Howlett has written a long and considered response on his blog to a claim made elsewhere that claimed:

If the cult of the amateur is growing, it’s a direct response to the failures of said professions. As budgets are repeatedly slashed (we can’t afford to actually audit those accounts!) authority dissolves and ethics collapse. The grassroots pro-am revolution didn’t create these problems, its filling a vacuum.

The writer of that paragraph had previously maligned lawyers, accountants, teachers, doctors, journalists and others. Dennis’ point (if I can paraphrase) is that it’s a pretty sad day for the professions if these things can be said to be true, but in fact they’re not true.

His defence is based on the premise that it’s not technical knowledge that defines a professional – it’s how we use it that matters. And I agree with that. I think being a professional requires technical mastery of a subject as a prerequisite, but not as a characteristic of the status. It is the application of that knowledge that counts. When it comes to application the requirement is to profess, that is to state an opinion that is honestly formed based upon the available evidence that answers the question that is posed. Most importantly though, that answer must be objective in the sense that it does not just answer the question in the way that the enquirer might wish to hear. It must do so in the way that the professional thinks is right.

This is what professional ethics are about. They require the exercise of independent judgement in the pursuit of what is seen to be in the interest of broader society. That’s why I’ve said before now that an accountant has a duty to others before their duty to the client standing in front of them. It’s the fact that this has been forgotten that has given the ‘amateurs’ the chance to eclipse the professionals. The person who claims to be professional but who does in fact merely seek to serve the interest of the piper who calls their tune is not a professional at all. They’re propagandists. And unsurprisingly no one takes heed of them. Nor should they.

It’s getting over this issue that will challenge the profession. So, and for example, when we see the tax professions making measured contribution to tax debate rather then delivering the standard knee-jerk reactions that all tax and everything HMRC does is a bad thing that remains almost universal on their part we’ll have some idea that they can be trusted to be using their judgement as their status requires. Until then they remain destined for the margins because people will not trust their judgments. And rightly so.

Dennis Howlett – on the nail

Accounting, Corruption, Dennis Howlett 4 Responses »

Jun 062007

Dennis Howlett has commented on the same Sunday Times price that I referred to yesterday (which I suspect he found here). He’s much more robust than me. He does not accept that blame for offshore tax evasion can be deflected to banks. He blames accountants , as I do too: in the scale of suppliers of corruption services accountants are at number 1. As a result he says:

Yes Dave [Hartnett] – and what are you going to do about the professionals who were complicit in these arrangements? Again from experience, firms that do naughties usually find themselves under the spotlight. Having opened the door on one lot, surely you’re not going to let other culprits get away free and clear. Are you? Or am I stealing your next headline?

I think Dennis is on the nail with this.

Tax and corruption

Dennis Howlett, Tax Justice Network 2 Responses »

Feb 072007

Dennis Howlett and I have an interesting relationship. We are both natural bloggers. Sometimes we agree: sometimes we don’t!

Dennis has commented on ‘Closing the Floodgates’ at his place. One comment I found curious. He said:

There are some weaknesses in the argument. It depends on a definition of ‘corruption’ that embraces commercial activities that while logical is far from universally accepted as appropriate.

The definition we use is logical. It’s not accepted because it’s new. But that’s the case with all new ideas. The fact is, that if they’re logical they often are accepted. We think this one will be.

No, it’s more than that. We’re sure this one will be. To read more, go here.