Tax Research UK

The most astonishing document has been published by a body called Swiss Banking, who appear to represent the collective body of bankers in that country. Dated in December 2009 it’s only just come to my attention.

What is astonishing about it is the extraordinary arrogance of their proposals which will, they think, let them keep Swiss banking secrecy intact. To do so they are proposing a withholding tax in Switzerland on interest income, dividends, payments from funds, on capital gains and wealth. The object they say is:

to ensure that the assets deposited by foreign-domiciled clients with Swiss banks are compliant with the income tax laws of their relevant tax domicile. At the same time the purpose is to protect the privacy of these clients.

Switzerland offers to collect the flat rate tax on income paid on balances of foreign domiciled clients for countries that wish to avail themselves of the service. This tax is deducted by the paying agent (the bank) and credited to the tax authorities of the client’s tax domicile.

In return, Switzerland demands undiscriminated access to the financial markets of these countries under prevailing national law.

This needs some serious unpacking.

First: let’s be quite clear about the taxes that are proposed. They are flat taxes, about which the Swiss banks are eulogistic in their praise. Most of the rest of the world is not so enthusiastic, of course. The reality is that flat taxes are deeply regressive, and highly avoidable, as my own work on them has shown. As they say:

The model is generally also open to parties with progressive rates of tax, but on condition that a uniform rate is applied. A progressive taxation system would be technically virtually impossible to implement.

Second, let’s be clear that the Swiss determine the rate according to this model. They say it would coincide with the EU withholding rate – which will be 35% soon – but there’s no guarantee of that.

Third, they demand that:

The payment of the flat rate tax by the client is definitive, meaning that the client’s assets held with a bank in Switzerland have then been definitively assessed. The client no longer needs to declare the assets concerned in his/her/its annual tax return. The client receives (on request) an annual tax statement from the paying agent showing the tax amounts deducted.

There are massive further technical problems inherent in the proposals – which are naive on these technical issues to a degree that is quite extraordinary, but let’s stop at this point and realise what the Swiss bankers are demanding. It is this:

1. That the Swiss be allowed to set the prevailing current flat tax rate on all sorts of investment income for any state that enters into an arrangement of the proposed sort with Switzerland.
2. That progressive taxation on investment income be banned in those partner states as a consequence because they would be unenforceable. That would be because Switzerland could always undermine higher rates and there would be no penalty on anyone making use of Swiss banks rather than local banks and as such local banking would collapse if there were to be higher rate or progressive taxes in any state entering into such a deal with Switzerland.
3. That any state entering into such an agreement with Switzerland must forego its own right to set its own tax rates henceforth – not least because Switzerland wants to apply this tax rate to some forms of company and other entities as well.
4. That any state entering into such an agreement forego its right to demand tax returns that are full, complete and accurate from its residents.
5. That any state entering into such a deal forego the right to ask its taxpaying population about why they have funds in Switzerland – and whether the capital transferred there should have been taxable in the home jurisdiction or not – so foregoing all prospect of ever making investigation of tax evasion.

I have to assume that those proposing this arrangement are aware of what it means. It would be patronising to thin otherwise. But in that case there are three things to say.

First, it’s hard to take their technical competence seriously. They clearly do not understand the complexity of the issues they are addressing – which the EU has been tackling for many years with regard to the European Union Savings Tax Directive and which the Swiss seem to just brush aside.

Second, the staggering implicit assault on the tax sovereignty of other states within these proposals is breathtakingly naive and politically brazen at the same time.

Third, it is astonishing that in all this the obvious intention is to dismiss the issue of banking secrecy as a simple one of non-taxation of income arising in Switzerland. The key issue of how the funds get there in the first place is completely swept aside – it is demanded that states ignore this issue.

I have said time and again that secrecy jurisdictions are profoundly political constructs. This is inherent in my definition of them, which is:

Secrecy jurisdictions are places that intentionally create regulation for the primary benefit and use of those not resident in their geographical domain. That regulation is designed to undermine the legislation or regulation of another jurisdiction. To facilitate its use secrecy jurisdictions also create a deliberate, legally backed veil of secrecy that ensures that those from outside the jurisdiction making use of its regulation cannot be identified to be doing so.

This is an almost perfect example of that definition being seen in practice.

We could just dismiss it. The reality is though that these people are serious: they really think this should be done.

That’s why they’re a threat to democracy itself. When bankers use the abusive legislation of a state they have captured to seek to undermine the right of people in other states to set their own tax rates, determine their own fortunes and determine their own criminal justice systems we can more readily appreciate the scale of their assault on society as whole, which is why we have to fight back.

And don’t think these are fringe organisations. The members of the organisation promoting this include UBS, Credit Suisse, Barclays, HSBC, Lloyds and RBS.

Be worried. Be very worried.  These people really do want to rule the world – and that’s no joke.

Richard Murphy Banking, Corruption, Ethics, Switzerland, Tax evasion

There’s much discussion today about whether the alleged professional negligence by Ernst & Young with regard to the audit of Lehman Brothers – where it appears they turned a blind eye to the rigging of the balance sheet – might be their Enron and lead to the demise of the firm.

I’m on record as saying I think the end of at least one of the Big 4 is nigh – and with it the whole audit market.

But let’s be clear – Ernst & Youngs’ defence – that their audit complied with US GAAP (Generally Accepted Accounting Principles - pronounced ’gap’) may be true. But that’s not the point. The point is US GAAP is crap and the Big 4 engineered that their audits do not need to report either truth  or fairness.

As the rules of the IAASB (International Auditing and Assurance Standards Board), which sets auditing standards  says, an audit is:

The purpose of an audit is to enhance the degree of confidence of intended users in the financial statements. This is achieved by the expression of an opinion by the auditor on whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework. In the case of most general purpose frameworks, that opinion is on whether the financial statements are presented fairly, in all material respects, or give a true and fair view in accordance with the framework. An audit conducted in accordance with ISAs and relevant ethical requirements enables the auditor to form that opinion.

The wording is not a chance: the emphasis is on compliance with the financial reporting framework first; the consequence of being true and fair is assumed to follow, but is consequential, not the goal.

So, E & Y influence the International Accounting Standards Board that sets the framework.

And they influence the IAASB which limits the scope of the audit to the point it’s useless.

And although financial statements are meant to be produced for the benefit of the providers of capital to a business (in itself far too narrow a requirement) the auditors in the UK (by reason of the Caparo decision) and in the US under Delaware law basically can’t be sued by those providers of capital.

In other words the auditors charge a lot for doing a job badly for which they know they have almost no liability. It’s not surprising they don’t really care.

It’s not E & Y who have erred here – it’s all those who let this situation develop that have erred. The accounting structures we use are rotten to the core and so is auditing. Unless both are reformed we are heading for collapse after collapse after collapse as the prevailing mood of society to promote expedient short term greed will destroy entity after entity without any check or balance in place to stop it happening.

This can be tackled.

It needs to be tackled.

Without the political will to tackle it just watch society collapse like a pack of dominos as big business begins to fail all round us.

And I think I’m underselling the melodrama in saying that.

Richard Murphy Accounting, Auditing, Big 4, Ernst & Young, Ethics, IASB

irishtimes.com - Top Irish businessman rails at ‘intertwining with politics’ - Sat, Mar 06, 2010.

Fascinating opinion from the Irish Times on Saturday:

ONE OF Ireland’s most successful businessmen, Niall Fitzgerald, has told The Irish Times he did not feel that he could have pursued a business career in Ireland without compromising his personal principles.

Mr Fitzgerald left Ireland in 1970 and went on to become chairman and chief executive of the giant conglomerate Unilever and chairman of the global media agency Reuters.

In an interview published today, Mr Fitzgerald suggests that “many people in domestic Irish business succeeded because they were intertwined with politics” and that “unless I was prepared to engage more directly with politicians . . . and at some point be ready to compromise on my own principles, that that would restrict my abilities to develop a business career in Ireland”.

Mr Fitzgerald is critical of what he calls the “claustrophobia” of Irish business. He says “that very intimacy, the knowledge that you can take one small envelope and write all the names that matter on the back of it” militated against independent jjudgment and high ethical standards, contributing to the current crisis in the Irish economy.

Recalling a dinner last summer with friends who had served on the boards of Irish banks, Mr Fitzgerald (himself a director of Bank of Ireland during the 1990s) says he posed a question: Were they aware of the risks that were being taken and thus “complicit with the recklessness”? Or were they unaware of what was going on and thus failing to discharge their responsibilities as directors? The question, he says, prompted a “very ferocious conversation”.

Mr Fitzgerald is also critical of the argument that banks must continue to pay very high salaries to retain senior managers. “You mean, these terribly valuable people who either didn’t understand the risks they were running or understood them and continued anyway without thought for the consequences? You know what? I could do without those valuable people.”

He also criticises high-level business people and bankers who are going into exile in tax havens such as Switzerland. He is, he says, “deeply sad” that some seem obsessed with “how you avoid at almost any cost to yourself and your family being a supportive member of the wider society in which you live”.

Mr Fitzgerald expresses concerns about the ability of those in positions of power to take responsibility for what has happened. “If the leaders of a society are not prepared to hold themselves accountable or there are not the institutions which are sufficiently independent to hold them accountable, then I think you have a very serious problem on your hands.”

Apologies to the Irish Times for quoting this at length - but the opinions expressed are important, relevant and ask pertinent questions of both business and politicians.

Cleaning up the act is an essential part of reform now.

Without that change cannot happen in Ireland or anywhere else.

Richard Murphy Economics, Ethics, Ireland

Under pressure: tax inspectors turn up the heat on the rich | Business | The Observer .

The Observer relaunches its business section by highlighting the abuse of the tax profession.

This is a battle HMRC has to win - and it will get ugly before they do. Expect more accountants to spend time at Her Majesty’s pleasure - and it won’t be garden parties we’re talking about.

Until the profession rediscovers ethics it deserves to be treated like a pariah - because that’s the way too many of its members behave.

Richard Murphy Accountancy, Ethics, Tax avoidance

Reining in the corporate monster | Prem Sikka | Comment is free | guardian.co.uk .

After committing nearly £850bn to rescue failing banks and printing another £200bn of money to lubricate the economy, the government is looking for tax revenues to manage the economic crisis. But corporate barons resent paying democratically agreed taxes.

Prem, as usual, hits hard at the core of the issue.

The reality is that global corporations threaten our democratic well-being.

If they can’t co-exist what wins? Corporations, or democracy? To Prem and me the answer is obvious. But corporations, I have no doubt, think otherwise or they would not behave as they do.

Richard Murphy Ethics

FT.com / Comment / Opinion - Europe cannot afford to rescue Greece.

A former member of the board of the European Central Bank argues that the EU can bail out a bank but not a country.

This is the ultimate negation of responsibility: capital matters but people do not.

The chance that Europe can survive without serious conflict, the breakdown of democracy and the rise of extremism if this sentiment prevails is low.

Be very worried: the promoters of global corporatism are getting their way: capital roams freely wherever it will, those who suffer the local consequence must suffer at the will of those who direct that flow. The ideology is as ugly as a suspect the motivations are. The preservation of monetary discipline appears to me to be a pretext for imposition of another, and much more unpalatable discipline.

Is Greece the portender of much broader chaos to come?

Richard Murphy Economics, Ethics

If you think inequality does not matter think again. It does. It’s quite literally a matter of life and death as a major University College London led review shows.

The review – Fair Society, Healthy Lives – proposes new ways to improve everyone’s health and reduce inequalities that it describes as ‘unfair and unjust’.

The Government asked Professor Sir Michael Marmot (UCL Epidemiology & Public Health) to conduct the independent review. It concluded that, although health inequalities are normally associated with the poor, premature illness and death affects everyone below the wealthiest tier of English society.

People living in the most deprived neighbourhoods will on average die seven years earlier than people living in the richest neighbourhoods. Even more disturbing, people living in poorer areas not only die sooner, but spend more of their lives with disability – an average total difference of 17 years. The review has estimated the cost of health inequalities in England:

• Productivity losses of £31 – 33 billion every year
• Lost taxes and higher welfare payments in the range of £20 – 32 billion per year
• Additional NHS healthcare costs well in excess of £5.5 billion per year

The review also predicts an increase in the cost of treating the various illnesses that result from inequalities in obesity alone to rise from £2 billion per year to nearly £5 billion per year by 2025.

The review calls for health inequalities to sit alongside tackling climate change as one of society’s core priorities. Creating a sustainable future is, the review argues, compatible with action to reduce health inequalities: sustainable local communities, active transport, sustainable food production, and zero carbon houses will all have health benefits across society.

The six main recommendations of the review are:

• Giving every child the best start in life
• Enabling all children, young people and adults to maximize their capabilities and have control over their lives
• Creating fair employment and good work for all
• Ensuring a healthy standard of living for all
• Creating and developing sustainable places and communities
• Strengthening the role and impact of ill-health prevention

Professor Marmot, whose commission included the President of the Royal College of Physicians, Professor Ian Gilmore, and the Chief Executive of the Economic and Social Research Council, Professor Ian Diamond, said: "There will be those who say that our recommendations cannot be afforded, particularly in the current economic climate. We say that it is inaction that cannot be afforded, the economic and more importantly human costs are simply too high.

It’s disappointing in a way that we need such a review to state what should surely be obvious. And yet to for too many – especially on the right and libertarian wings of politics – there is outright denial on this issue. Their indifference to fellow human beings is staggering.

The case for reform of society is not just ethical – it’s based on hard facts that only the wealthiest can deny. Well, they can, but it’s our job to make sure they pay for reform none the less.

Richard Murphy Ethics

Ukraine’s election goes the wrong way for Uncle Sam as Viktor Yanukovych claims win | News & Politics | News & Comment | The First Post.

If you’re not the side that Uncle Sam favours then it seems you’re just not allowed to win an election fairly and squarely.

I do expect there’s a lot of truth in this.

And it’s not to the credit of the USA or the media that it’s probably true.

Richard Murphy Ethics, USA

FT.com / Comment / Editorial - Secrets and tax.

The FT has an editorial under the above title today. As they say:

The ability to keep secrets is an essential part of private banking. But sadly for the bankers of Switzerland and other tax havens, it is an ability they are losing. Stung perhaps by pressure on public budgets, governments are using ever cruder methods to pierce the veil of customer confidentiality. In recent years, the British have leaned on the Channel Islands, while the US has forced open the ledgers of Switzerland’s UBS by threatening it with commercial retaliation. But the Germans have come up with the most direct approach: purchasing stolen bank recordsfrom employees.

As the n ote:

The Swiss are outraged, and have accused the Germans of fencing stolen goods.

It is easy to see why the Swiss are alarmed. Germany is in effect establishing a market in bank data. Berlin may not be commissioning acts of larceny, but the “Merkel put” is a standing inducement for bank staff to breach their contracts. This is a potent threat to the private banking model. Even the possibility of leaks is damaging. If you were a German tax evader, you would not want to wait around to test the loyalty of the staff at your offshore bank.

So what’s the FT’s opinion on this:

It is surely legitimate to offer inducements for informers to testify. And it is in the public interest for tax cheats to be identified and forced to pay their dues.

Merkel’s put is a highly effective mechanism for achieving this. The Germans have raked in about €200m so far from LGT’s clients for their €4.6m, some of which they recouped by onward sales of data to other states. The Swiss are right to be worried.

The FT has this completely right: Switzerland is, by offering bank secrecy knowing that it will be sued to facilitate tax evasion, promoting crime. There is no other explanation for its actions. It is the Swiss and the Swiss alone who are wrong in the German - Swiss dispute on this issue. Germany is tackling crime, Switzerland actively facilitating it to the point that its actions might reasonably be considered criminal. Of course it is legitimate in that case to buy data to stop crime.

In the broader context it’s also about stopping economic warfare by Switzerland, and we’ve always paid informers to do that.

There’s just one issue I’ll argue with the FT on. They says:

Tax evasion is seen as morally ambiguous partly because it does not cause a big harm to a single individual but a small harm to many. Non-compliance is sufficiently widespread that people feel “it is all right because everybody does it”

I disagree. Undermining the rule of law is a big harm to all - especially when tax evasion does in the process deny the essential resources society needs to ensure a decent standard of living for all, as will increasingly be the case over the combing years. This is an enormous issue, and we should treat it as such.

Richard Murphy Economics, Ethics, Switzerland, Tax evasion

30 years of ‘Market knows best’ have damaged fairness | ToUChstone blog: A public policy blog from the TUC.

Brendan Barber says on the TUC blog:

The final report of the National Equalities Panel (NEP), “An Anatomy of Economic Inequality in the UK” is out today – you can download the full thing or exec summary from the Government Equalities Office website. It’s an exceptional piece of work, describing in graphic detail just how unfair and unequal our society has become thanks to ‘market knows best’ policies.

The super-rich and powerful have a vested interest in closing down any debate about inequality by talking of the ‘politics of envy’ or ‘core vote strategies’. But inequality damages the economy and society for the vast majority of the population. Politicians of every party must now meet the challenge set by this devastating analysis.

Time and again the politics of envy are seen on this blog - delivered by the right.

They don’t realise we aren’t envious. We want equality because it makes everyone better off - rich and poor alike.

This is about building better societies - and that’s a long, long way from the politics of envy. It’s time for the right to realise this.

Richard Murphy Ethics, TUC