Europe » Tax Research UK

Forgive my cynicism but this Euro deal’s not a deal

Oct 272011

Yesterday was a long day. For me. It was longer for Europe’s senior politicians. But at least IU got home late and tired feeling like I’d achieved something. What did the Euro politicians achieve?

Well, forgive my cynicism please, but the answer is ‘not a lot‘. A deal that does not say how much money is going to Greece, how much is left over for Italy and how much is going into banks to cover the mess left for them, plus where any of it is coming from is somewhat less than a filling short of a sandwich; it’s just more talk with no substance.

There are simple choices to be made on the Euro. Debt has to be written off or we lose more than a decade of growth: we also face the breakdown of Europe itself with all the risks that go with that. Banks have to be nationalised: the system has obviously failed. Wealthier Euro nations have to bear a serious cost or face social turmoil at their doors which will sweep into them, inevitably, if the terms of any bailout are unsustainable on the countries affected. And the realities of differing economies have to be recognised whilst at the same time the mechanisms to support effective tax systems, the elimination of corruption and the end of political patronage have to be put in place in those countries worst affected.

They’re not options. All of them are necessary. And they’re a package, not parts. The ‘haircut’ is pointless without the reform. Failing to address the real scale of losses will simply allow the contagion to spread. And right now self-interest is a very poor guide as to what to do as a result, but it seems to still be the prevalent sentiment.

All of which makes me wonder of the Germans learned anything from Versailles. The worst thing that come happen now is that this deal could give rise to the need for a twenty first century version of ‘The Economic Consequences of the Peace‘ but I still fear it might. And that’s why so far this is no deal.

EU to come down very hard on the UK – Swiss tax deal

EU STD, Europe, Secrecy jurisdictions, Switzerland, Tax evasion, Tax Havens, Tax Justice Network 2 Responses »

Oct 252011

Europolitics has reported today:

The European Commission is planning to attack the tax agreements concluded by Switzerland with Germany and the United Kingdom, on 25 October in Strasbourg. It finds that Berlin and London have encroached upon the Union’s powers by negotiating bilateral arrangements with Berne that interfere with savings taxation rules.

Taxation Commissioner Algirdas Semeta will answer that evening an oral question by British Liberal Sharon Bowles, on behalf of the EP Committee on Economic and Monetary Affairs (ECON), which she chairs.

MEPs question the compatibility of these Rubik agreements, set to enter into force in 2013, with EU rules on taxatin of savings income, which provides for a 35% withholding tax at the source (not in full discharge of liability) on interest earned on savings. More generally, they wonder whether states have the power to negotiate such bilateral tax agreements and whether the Rubik system may present an “obstacle” to revision of the EU savings taxation directive and of the EU’s agreements in this area with Switzerland, Liechtenstein, Andorra, San Marino and Monaco. Will not Rubik agreements “have the effect of halting the move towards an automatic exchange of information for tax purposes,” they ask.

The question answers itself. Luxembourg and Austria have already seized the pretext of Berne’s arrangements with London and Berlin to hold up the savings taxation issue in the EU.

Keen on being treated equally with Switzerland, in order to prevent any capital flight, they refuse to be obliged to switch from the system of withholding at the source to the automatic exchange of information between tax administrations, and to abolish their banking secrecy in the process.

In the context, Commissioner Semeta plans to take a very hard line, on 25 October, and to denounce an abuse of power by Germany and the United Kingdom – except no doubt for the amnesty operation, which the Commission does not have the competence to prevent.

And as they note this is in the context of:

The global network Tax Justice will publish, on 25 October, a study that pillories London and Berne. Its conclusions will doubtless be identical to those of a tax specialist based in Zurich, who is consulted regularly by the Commission and prefers to remain anonymous.

So not only are the UK incompetent in their dealings with Switzerland, they’re also incompetent in their dealings with Brussels who have rumbled exactly what Osborne and Hartnett are doing – which is to undermine any effective challenge to tax havens.

It’s good news that the EU is fighting back. So they should. The promotion of tax haven abuse is unacceptable anywhere - including in London.

Cameron’s opponents aren’t just anti-EU, most are also pro-flat tax – and that’s all about making the rich richer

Conservatives, Europe, Flat tax, Tax justice, Uncategorized 19 Responses »

Oct 252011

Cameron faced his backbenchers yesterday on the EU, and lost.

But the EU was not the whole reason for this. Polly Toynbee had what was, without doubt, the best line on this issue:

But the “in or out” debate was never just a dry calculation of national interest. The two sides stand for profoundly different visions of the good society. A few Labour mavericks straddle the divide, but most anti-Europeans are from the far right for good reason. To them EU red tape, health and safety, human rights and labour regulations throttle British business.

Their vision is of a Britain thriving by undercutting basic protection of the workforce – working hours, maternity rights, holidays, sickness, security at work, equal treatment of agency workers. Read the sceptics’ outpourings to see their vision of our island as a low-tax, maybe flat-tax haven for the super-rich, free to treat employees as “flexibly” as they like. This is a fine distraction from the real cause of our worsening economic crisis – this government’s extreme austerity choking demand.

She’s right. Those voting against Cameron weren’t just anti-EU. They’re anti society as we know it in the UK and want to throw it all over in favour of radical transformation that will hasten the flow of funds from the poor to the rich; something flat taxes are designed to do.

If in doubt look to their inspiration across the pond: Rick Perry is proposing a flat tax. There is only one explanation – and that is that these taxes push governments to the very margins of existence – which is exactly what their proponents want. If in doubt look at the detailed analysis of the proposal by my friends Citizens for Tax Justice in the USA. They say Perry’s plan would give:

- Enormous tax cuts for the richest five percent of taxpayers and of $209,562 for the richest one percent in 2010.

- Tax hikes for all other income groups. The bottom 95 percent of taxpayers would pay an average of $2,887 more in federal taxes in 2010.

That’s what the Tories oppising Cameron really want.

There’s going to be a role for those in favour of tax justice for a long time to come.

If Europe is serious about reform it should suspend its competition laws

Economics, Europe, Uncategorized 19 Responses »

Oct 102011

The European Union is built on the basis of the idea that the free flow of capital between nation states without impediment placed in its way is a good thing. It is assumed that this will increase wealth. And it is assumed that anything that gets in the way of competition is a bad thing, and so is illegal.

Those assumptions are wrong. Unbridled competition is not a good thing. Whilst I am a fan of competition in many areas of life in some it is just straightforwardly wasteful. Take the NHS as an example. Given the objective of the NHS is to provide first class healthcare to everyone involving competition in the process is just folly. Competition requires choice – so every resource would have to be duplicated and then, to ensure the capacity for people to make choice was available, would have to work at way less than full capacity. That would impose an enormous cost, and is likely to seriously undermine excellence as resources were diverted into advertising, marketing, media, and contracting that would destroy investment in healthcare excellence. So unless we substantially increase resources available to the NHS (I suspect by as much as 50%, which we do not have) we can have competition in the NHS or we can have excellence. I know which I want.

And laws that supposedly support competition and that actually support monopolistic power are a decidedly bad thing. That could happen in banking right now. We need nationalised banks in Europe at present. If €2 trillion or more of taxpayer funds are going into banks then they need to be stated owned. but it will be argued by other banks that this will create unfair competition when in fact they are part of the problem that is being cured and will already benefit massively from it. The result is that instead of those funds being used for social good to reform banking forever they will be used to support he status quo. In other words, competition law is being used to impede progress, development and the creation of new opportunity which is the exact opposite of what they should be doing.

There is an answer right now. With the EU in crisis two things are needed. First of all the assumption that the free flow of capital is beneficial has to be questioned. There is very clear evidence that as the markets continue to circle it is not. Ans second competition laws that preserve the status quo of privilege and abuse most people have to be suspended.

Now.

Reacting to the draft EU Accounting Directive on country-by-country reporting

Accounting, Country-by-country, Europe, Uncategorized 2 Responses »

Oct 032011

I have now published (at the request of those who supplied them to me) the drafts of the EU Accounting and Transparency directives as they apply to country-by-country reporting. Of the two the Accounting Directive is much the more detailed and since the two are meant to be consistent it it to the Accounting Directive (AD) that I will refer.

Chapter 9 of this draft contains the issues of relevance for this is the draft AD itself rather than the preamble and notes to it.

Highlighting what I think are some of the key issues, the following jump out:

1) The AD applies to all large companies in the extractive industries and forestry.

2) Government is very widely defined to mean a government, regional government and a government agency.

3) Project level reporting is currently included – as requested by Publish What You Pay.

4) Large undertakings are required to file an annual report on payments made by them in aggregate across all their subsidiaries operating in a jurisdiction to the government of that place and its agencies.

5) Payment includes payments in kind.

6) Only taxes relating to the extractive industries are covered. sales and payroll taxes are excluded, although sales taxes are likely to be minimal anyway.

7) Materiality is defined in terms of the recipient country not the paying company.

It is not entirely clear that the report is part of the annual accounts and it is not clear whether it has to be audited, but the reference to Chapter 2 of Directive 2009/101/EC implies that this is the case because I can’t see what else it could mean since it does not seem to add this new report to the list of disclosures required there but adds it into those disclosures – and that can only be in the accounts.

9) Reporting exemptions are offered but thankfully will be very hard as written for any company to use.

10) The EU is reserving the right to define materiality specifically.

So that’s the good news.

Now the problems:

1) Defining an extractive industries company will be a nightmare.

2) I suspect project reporting to be a major obstacle – but welcome it.

3) There is a real problem that only tax payments are to be included. Let’s not for a minute pretend that this is as a result country-by-country reporting because it is not. It’s just disclosure data that will be very hard to interpret because no one will know what sales and profits are, for example, in the countries in question meaning that very little meaningful interpretation of the data disclosed form an accounting perspective will be possible. I’ll address this in more detail, later.

4) More broadly, I welcome the fact that the AD seems to require reporting whether or not the EI company is actually extracting resources in a territory or not – meaning that, for example, profits taxes appear to have to be reported everywhere, although I am troubled that tax havens will not be covered since a non-payment can’t trigger disclosure under the rules noted and that is a major omission.

5) There is no requirement in here to demand some other very basic disclosures we have asked for including:

- a list of every country in the company operates

- a list of its subsidiaries by territory

6) No reserves data by country is required, meaning a massive information source critical to civil society in many developing countries is omitted from disclosure.

7) The data demanded appears to be cash flow data. This imposes serious cost on companies and is inconsistent with the accounting basis used by companies themselves. More logically accounting data requiring profit and loss account charges due by category of liability reconciled with opening and closing liabilities due and total payments made in aggregate would have been of much ore use as this then becomes accounting data.

But most problematically, this is not accounting data. So, for example, without sales data the rate of royalty paid cannot be checked and consistency over time cannot be appraised. Likewise without profits data whether or not taxes due on profits are reasonably stated cannot be appraised. And if data is not required for all territories – such as tax havens – then the risk of profits being artificially relocated from developing countries to such places cannot be appraised.

I do of course welcome this development but it is a very long way short indeed of meaningful accounting disclosure that will really hold these companies to account. In that sense this is a profound disappointment: the message that capital must be held to account for what it does not just in developing countries but on its flow into and out of such places has bot been heard as yet. That’s worrying.

Country-by-country reporting has come a very long way since I published the first version of it in January 2003 but it still has a long way to go as well. The campaign has to go on – and pressure has to still be brought to bear on the EU to get these reforms through, with improvements if possible.

My thanks to all who are bringing that pressure to bear in Publish What You Pay and elsewhere: their efforts have been quite extraordinary, and will be in the months to come too, I know.

NB: published in haste and maybe subject to revision later

What the draft EU Accounting Directive says on country-by-country reporting

Accounting, Country-by-country, Europe Comments Off

Oct 032011

I have just referred to the fact that I have seen a copy of the draft EU Transparency Directive and I have published its suggested changes relating to country-by-country reporting. I have also seen the draft new Accounting Directive. The relevant content from the preamble and discussion on this says: Continue reading »

What the draft EU Transparency Directive says on country-by-country reporting

Accounting, Country-by-country, Europe Comments Off

Oct 032011

I have seen a copy of the proposed revisions to the EU’s Transparency Directive. The content relating to country-by-country reporting is as follows:

Reporting of payments to governments

The EU legislation does not currently require issuers to disclose, on a country basis, payments made to countries where they operate. There is therefore a lack of transparency on payments made to governments to a specific country, although those payments by the extractive or forestry industry can represent a large amount of the country resources, especially in resources-rich countries. In order to make governments accountable for these resources and promote good governance, it is proposed to require their disclosure at the individual or consolidated level of a company. Continue reading »

The UK Swiss tax deal – not so fast the EU begins to say

EU STD, Europe, Switzerland, Tax evasion 9 Responses »

Sep 262011

I hear rumours from the EU Commission on the UK Swiss tax deal.

First rumour is forget the Swiss German deal – it won’t get through the parliament so the UK is going to be in the Swiss dodgy deal market all on its own.

Second, forget the 26% tax rate being less than the EU savings tax rate, although that’ obviously unacceptable

The reality is that the official policy of the EU Commission is automatic exchange of information, nothing less. This is a principle they have not wavered from one iota with the EU savings tax amendments and even set in concrete with the Administrative Cooperation and Mutual Assistance on Tax Matters Directive adopted unanimously by ECOFIN in February this year.

The German and UK agreements with Switzerland apparently state that “withholding tax is equivalent to automatic exchange of information in the long-run”. Well, so they might. But that’s in conflict with the EU policy. In that case the EU will “intervene” i.e. block the entire agreement by saying it is illegal within the EU.

Why will they do that? Simply because the EU Commission doesn’t believe the PR that withholding tax is equivalent to exchange of information, besides which the EU Commission believes the withholding tax agreement has loopholes in which case an ineffective agreement with the Swiss certainly doesn’t match automatic exchange of information.

So Dave Hartnett may have signed a deal.

But there’s a good chance he may not actually see it come about.

Back to the much better European Union Savings Tax Directive then.

The EU is to ask IASB to change its priorities to include public policy concerns

Accounting, Country-by-country, Europe, IASB Comments Off

Sep 052011

Green MEP Sven Giegold tabled a question to the European Commission in July asking about the EU’s position on the IASB’s revision to its constitution that has downgraded its obligation to anyone but those people who use accounts to make investment decisions. I discussed that issue here.

Now the Commission has replied as follows:

Answer given by Mr Barnier on behalf of the Commission

The Commission shares the view of the Honourable Member regarding the importance of properly taking into account the public interest in the IFRS standards setting.

In its written contribution to the first consultation on the strategy Review undertaken by the Trustees of the IFRS Foundation, the Commission stressed that legitimate public policy objectives must be given appropriate consideration ex ante in the standard-setting process, while recognising that the primary objective of accounting standards is to deliver decision-relevant information to investors, other participants in the world’s capital markets and other users of financial information. A key challenge is to ensure that the IASB’s mission of producing high-quality accounting standards should not undermine other important policy objectives. These include prudential regulation and financial stability. The Commission suggested that this may imply a revision of the respective provisions in both the IFRS Foundation’s constitution and in the IASB’s conceptual framework in order to give due consideration to such public policy objectives, including a revision of the current definition of the public interest within the Constitution of the IFRS Foundation. The Commission will repeat this message in its contribution to the second consultation document published by the Trustees.

In any case, as required by Article 3(2) of the EU Regulation on the application of international accounting standards(1), the Commission adopts international accounting standards issued by the IASB if they are conducive to the European public good. However, the regulation does not foresee the possibility for the Commission to set accounting standards itself. This would undermine the objective of achieving a single set of global high quality international financial reporting standards.

In dipolmatic speak that’s pretty clear: the EU is saying that they’ve got the conceptual framework wrong and public policy issues need to feature much more prominently.

And rightly so.

And don’t ignore the significance of this. The IASB has basically said such public policy matters are no concern of its – it has even said that accounts prepared using International Financial Reporting Standard should not be considered suitable for tax purposes without giving any indication in that case which accounts might be. If the EU is saying that this gross irresponsibility on the part of the International Accounting Standards Board should end, then I welcome it.

And remember, in this context, one reason (maybe the major reason) why the European Union will be proposing adoption of country-by-country reporting this autumn is that they’re so frustred with the failure of the International Accounting Standards Board to do so.

Now will they listen, or do they think themselves above such tedious issues as accountability?