IFRS 8 » Tax Research UK

Where corporate relocation is leading

Accounting, Economics, IFRS 8, Tax compliance, Tax Havens, Tax management 1 Response »

May 062008

The FT has published an analysis this morning of the trend for companies to relocate their headquarters. Its conclusion is:

A view sometimes aired in government is that large countries such as the UK should be more sanguine about losing the headquarters of big domestic businesses and focus on attracting “real business” into the country, regardless of who owns or controls it. Genuine investment goes to countries where it can be deployed. Tax is far less important in these considerations than proximity to markets, infrastructure and the availability of skilled staff.

Yet if countries such as Britain become reconciled to losing headquarters to lower-tax rivals, they will pay a price. As well as shedding well-paid jobs and advisory work, they risk a decline in influence and investment as decision-makers go elsewhere. When world-leading businesses uproot themselves, more is at stake than national pride.

I’m afraid that this misses the point. The facts are:

1) No major financial centre significantly rivals the UK on tax rates;

2) People do not relocate to low tax states; it’s transactions that relocate to these places;

3) The political backlash against this trend, seen in the US and only beginning here will be significant, and will be effective.

4) Most low tax states do not have the capacity or the people to service those claiming to ‘relocate’ to them. They most certainly do not the advisors, especially if the quality of those I have met from some such locations is indicative of what is challenging London;

5) The only reason why this debate is happening in the UK is that UK business knows Gordon Brown has an irrational desire to maintain the UK as a tax haven, and to support its satellite tax havens. I explained why here.

The truth is that in practice there is no attempt to really relocate going on. What business is seeking to do is to float above the geographic constraint that locating transactions in a place imposes upon it, pretending that it is ‘global’ and therefore has little concern for the ‘local’ dimension of where it might be considered to be, and how that gives rise to regulatory consequence.

But this is a pretence. It ignores the fact that there is but one world, that business is always staffed by people and is always undertaken for human benefit, and that we are always, ultimately local. Even the mega-rich can be located, and when citizens of places like the USA have obligations to a place irrespective of location (of which I approve).

The real analysis of what is happening is this. Until the 1980s world taxation was largely source based (i.e tax was charged in the first instance where profits arose), with treaties to ensure that double taxation did not take place in the location where a person was resident. But with the collapse of empires, whether real or of influence, and the rise of global capital (actually, and almost inevitably ultimately located in either London or New York) the emphasis in taxation shifted and became residence based. This mean that the right to tax at source has been eliminated in many cases.For example, tax withholdings on many intangible sources of income have been virtually eliminated as if they were a contagious disease. Treaties are now designed to ensure that tax is charged only in the place of residence. That place of residence is becoming increasingly esoteric for some companies as they seek to locate in more and more obscure places (and St Helier and Dublin both qualify as such). But this trend can only go so far until it becomes very apparent that there is a disconnect between real and claimed residence. This is what is now happening in the tussle taking place over the future direction of UK corporate taxation of foreign income. When that point is reached the life expectancy of the model about which the argument is taking place is shown to be limited and what is really heralded is the dawn of a new model.

That model is one that will have to embrace corporation’s claim to be global but which allocates its activity to the local domain in which people live. The reconciliation is, of course, provided by country-by-country accounting and unitary taxation regulated (inevitably) by international agreement (which are essential in taxation) to ensure that the rate of leakage of taxation revenue is as low as possible.

The short term story is of relocation. The long term analysis is that this is a death-throw of an outdated system that is both over due for replacement, and which will, inevitably be replaced.

Off blance sheet reporting irretrievably broken

Accounting, Dennis Howlett, IFRS 8 Comments Off

Apr 102008

Dennis Howlett has done a great job writing on the above issue.

So good, I just recommend you go over to his place and read it.

If ever there was a measure of the crisis in accounting, this is it.

Country-by-country reporting

Accounting, IFRS 8, Tax Justice Network 2 Responses »

Apr 022008

At the core of what the Tax Justice Network campaigns for is greater transparency. With regard to multinational corporations this could be achieved by country-by-country reporting. A new Tax Justice Network briefing paper explains how, and why this is so important.

If bak accounts are to change bring in country-by-country reporting

Accounting, IFRS 8 Comments Off

Feb 082008

German banking regulators are saying that there are good reasons for changing the rules of international banking in the light of the credit crunch, and they’ll go it alone if need be, according to the FT. I especially agree with the sentiment that:

Berlin also wants tougher accounting rules that would prevent banks from shifting certain categories of assets off their balance sheet and into structured investment vehicles or conduits.

Country by country reporting would be good.

Country-bycountry reporting in the FT

Accounting, Development, IFRS 8 Comments Off

Jan 312008

Prem Sikka had this letter in the FT yesterday, follwoing on from a blog here:

PM’s proposed cure for markets is problematic

From Prof Prem Sikka.

Sir, The UK prime minister’s view that a deficit of transparency, particularly in commercial organisations, is the source of many of the problems plaguing financial markets is spot on (“Ways to fix the world’s financial system”, January 25). However, his suggestion that the International Monetary Fund should lead the reforms is problematic.

The IMF lacks democratic accountability and is tainted by its tendency to promote corporate interests. In any case, it does not have experience of regulating companies. Such tasks will inevitably fall on national or regional regulators, but their capacities are hindered by poor information.

FTSE 100 companies have more than 15,000 subsidiaries and an unknown number of trusts and structured investment vehicles (SIVs). Yet company accounts do not provide any information about the constituents of global companies. They do not provide any information about corporate income, profits, taxes, investments, assets, liabilities or carbon emissions in each country of operation.

Companies use transfer prices and intra-group transactions to shift profits and risks, but do not publish any relevant country-specific information. Thus neither the regulators nor the markets are able to make a meaningful assessment of the quality of earnings or risks, which are often specific to a country.

Several academics and non-governmental organisations have proposed a “country-by-country” approach, which would require companies to publish the above information and thus improve transparency. The cost of publishing this information is negligible as most companies already have it. The requirement to publish it can be made mandatory by law, or through accounting standards.

One hopes the prime minister and the UK government are ready to sponsor this much-needed change.

Prem Sikka,
Professor of Accounting,
University of Essex,
Colchester, Essex CO4 3SQ

The time for this has come.

Country-by-country reporting: a new summary of why this is essential

IFRS 8 Comments Off

Jan 282008

The Tax Justice Network has updated its two page summary of why country-by-country reporting is essential for multinational corporations, as the current credit crisis is proving almost daily.

The new version is available for download here.

Country-by-country reporting is key to the new economic order

Accounting, Economics, IFRS 8 2 Responses »

Jan 252008

The prime minister wrote in the FT yesterday, in a link up with Davos. He said (and I quote only in part):

Most political and business leaders gathered at the World Economic Forum this week agree on one thing: the global economy is facing its biggest test in more than a decade.

But we should also agree that turbulent conditions, throughout history, have been an opportunity for reform. This latest test of world financial systems presents a window in which to address fundamental issues that, if tackled properly, will improve economic management, regulation and the fight against inflation, and help us prevent similar crises in the future.

We’re at one, so far.

Recent turbulence [ ] has exposed four big questions and issues for policymakers around the globe.

First, we need to respond to the significant underpricing of risk. [T]he source of many of the problems was a deficit of transparency. That transparency deficit needs to be addressed – from within organisations, their auditors, the credit rating agencies and through regulatory requirements, leading to an increased understanding by firms, investors and regulators.

I buy that too.

Second, as financial markets become increasingly interlinked, countries must ensure they have robust and effective cross-border crisis management arrangements. We now need not only strengthened national regulatory frameworks, but also strengthened international co-operation.

While financial flows and therefore risks have crossed borders effortlessly and reside in global companies, their supervisors and regulators are largely national. The world has no effective early warning system and no common approach to handling major global market disruptions. Many of the problems were identified in advance but were not acted upon. We need a clearer, more authoritative watchdog. Regulators need to be enabled to overcome their boundaries with common principles, shared analyses and information, and collaborative management of crises.

Again, I agree. But let me assure you, this is not a love in. He goes on to say:

There is also much more we can propose for the long term to reform the international financial institutions. The International Monetary Fund should be at the heart of this reform. It should work with the other global supervisors, such as the Financial Stability Forum and the Bank for International Settlements, to create the early warning system we need against the threats from financial sector developments. We should also consider how the IMF’s responsibilities for financial stability could be made clearer.

Well, maybe. You see, by now Gordon is missing the point. These organisations have a tenuous hold on companies – but he’s just located the problem as being within them. In that case these bodies can’t help. Second, even if they could they simply don’t have the data from the companies that they need to regulate this issue: they do not know where the companies really are and what they are doing.

The fact is that there has been a conflict between national regulators and global companies: it is one that those companies really rather enjoy and exploit. But in the interests of economic stability the location in which a problem can be addressed does have to be identified. Country-by-country reporting of just what a company does and where it locates its assets and liabilities will enormously assist that process. Without that information the link between the local and global regulator, the local economic crisis and the global company that has helped precipitate it cannot be made.

That is why a reform in accounting is needed as part of this process.

I will write to Gordon Brown and ask to meet on this issue: it’s too important to the achievement of economic stability to ignore it.

One World Trust – open for talks

Ethics, IFRS 8 Comments Off

Dec 072007

Accountancy Age has reported that:

The One World Trust received a formal complaint about the IASB report into NGOs and its accountability this week.

And it has noted that:

One of the authors of the report, Michael Hammer, said the report was about systems rather than necessarily about performance.

‘The report is about capability, not necessarily about the practice element itself,’ said Hammer.

Hammer added that the trust would consider the points raised by Murphy. ‘We will look at the criticisms levelled if an organisation feels that what we’re portraying is not actually what the organisation is like,’ said Hammer.

And in fairness, Mike Hammer has asked for copies of my emails to him – which have finally made it through their spam filter. Or so I believe.

Transparency please

Accounting, IFRS 8 Comments Off

Dec 062007

Accountancy Age reports that:

Senior US figure urges banks to create transparency instead of making changes to accounting rules at New York International Federation of Accountants’ World Accountancy Forum

I’d agree with that.

It’s clear the IASB has got things seriously wrong in obsessing with measurement. What people want is disclosure.

Country-by-country reporting is a disclosure standard that will massively improve transparency.