The Telegraph reported this weekend that Tony Blair was in Cayman recently to speak at a dinner celebrating the KPMG Legends Tennis Championships.
KPMG, the Cayman Islands and Tony Blair.
Made for each other.
PS They are his accountants.
Dec 192011
Jul 142011
Almost half of local authorities admitted they are unprepared to appoint auditors, just as the government is preparing to hand over this responsibility following the planned closure of the Audit Commission.
A survey by KMPG showed that, for 44% of chief executives, directors of finance and chairs of audit committees, the issue is “not yet on the radar”, and no one on their team had any experience of audit procurement.
So, KPMG undertakes a survey to show that local authorities need to hire their services to help them buy audit services from….well, KPMG.
Gravy train, anyone?
Just as George ordered, of course.
I was amused to find this on the KPMG UK web site under the heading Tax Efficient Supply Chain Management:
TESCM integrates supply chain design with tax optimisation delivering significant increases in profits. It is based on the premise that incorporating tax arbitrage into supply chain structures (typically by optimising the location of the key supply chain functions, assets and risks) realises benefits well beyond conventional operational savings on their own. TESCM is especially topical as tax authorities are challenging traditional tax planning structures and products. At the same time businesses are changing their operating models in response to the economic downturn.
Now let’s remind you first of all that KPMG operates in 47 of the 60 secrecy jurisdictions surveyed by the Tax Justice Network as part of its Financial Secrecy Index work. The reality is that if a place is a major tax haven / secrecy jurisdiction then KPMG is there.
And next let’s unpack what their web site says.
“Tax optimisation”: = tax avoidance to transfer tax due into private profit
“Tax arbitrage” = trading off the tax system of one state (usually a place like the UK) against the tax system of another state (usually a tax haven)
“Optimising the location” = artificially transferring or relocating solely to get a tax gain
“Relocating risks” = claiming risk is in tax havens through reinsurance contracts, hedging and other artificial means which have no overall impact on the overall profit or loss of a deal
“well beyond conventional operational savings” = we’re bereft of entrepreneurial insight but we know how to play the tax system for the advantage of the already well off
“tax authorities are challenging” = so let’s relocate things to secrecy jurisdictions where they’re hidden from view
“changing their operating models” = we don’t try to make money anymore, we just try to abuse the tax system – it’s easier than the hard work of actually making things
“economic downturn” = nobody wants what we make so we’ll capture state revenues instead.
So what does all this actually mean? Simply this: KPMG will shift key parts of your supply chain into tax havens, setting up insurance, licensing, hedging, marketing, transport and other supposed functions in those locations each of which can take a chunk of the profit and leave it there tax free – an activity all being heavily promoted by George Osborne who has, by promising a move to territorial taxation in the UK guaranteed that all such profits will stay out of the UK tax net. Talk about looking after his friends and guaranteeing his own future income from grateful companies!
That’s modern capitalism for you, in a nutshell. Just a giant con-trick because it’s bereft of any real innovative or entrepreneurial ideas.
And KPMG are, of course, pillars of society for doing this: something that their apologists repeatedly say does not happen, but which they’re openly advertising.
Time for a reappraisal, I think.
And it’s also worth a mention that there’s something that could easily expose this abuse: it is, of course, country-by-country reporting. No wonder the Big 4 and their clients are so heavily opposed to it.
Note: I was trained by Peat Marwick Mitchell & Co, now KPMG. I left a long time ago, and for good reason.
I blogged about GE’s US tax affairs, and the European dimension to its tax lobbying at the weekend.
I was not alone. It’s fascinating to note that GE seems to have taken exception to some of the commentary – but that according to the Huffington Post did so on Twitter. It’s an interesting new use for that medium. And, as they note, the effort seems to have pretty much failed. The reason? It seems they resorted to the standard (shall we call it the Barclays or OWC?) tactic of saying they’d paid lots of tax – $2.7 bn in all. But as the Huffington Post notes:
The dispute: what kind of taxes constitute that $2.7 billion GE claims to have paid? @khivi tweeted “@Gepublicaffairs tweets confirm @nytimes that GE paid $0 corporate tax,” to which GE responded “They are separate. Of $2.7B income tax paid, signf portion was US fed. GE also paid $1B+ in payroll, state & local use & property tax.”
You’d have thought they’d have realised that claiming you pay your employees tax which is their liability and not yours is a ruse that’s worn thin now – but apparently not.
More interesting comment came from Francine McKenna in her Forbes blog, where she kindly quotes me (we’re something of a mutual fan club) and then points out the role of LKPMG in this:
It’s not surprising that GE uses their auditor, KPMG, to help them put their “zero” tax return together.
The Sarbanes-Oxley Act of 2002 started out tough on tax. The rules regarding prohibited activities by the auditor, intended to preserve their independence, scared the living daylights out of the largest firms. It appeared initially that the SEC would prohibit the tax side of the firms from providing highly lucrative tax advice to their audit clients. Many of those professionals started planning an exit from their firms so they could continue working with long time clients.
A compromise was reached. The result is one of the loosest and most generous exceptions to auditor independence rules on the books.
The Commission reiterates its long-standing position that an accounting firm can provide tax services to its audit clients without impairing the firm’s independence. Accordingly, accountants may continue to provide tax services such as tax compliance, tax planning, and tax advice to audit clients, subject to the normal audit committee pre-approval requirements under 2-01(c)(7).
The Sarbanes-Oxley Act of 2002 also prohibits an auditor from providing “bookkeeping” services to its audit clients.
The rules utilize the previous definition of bookkeeping or other services, which focuses on the provision of services involving: (1) maintaining or preparing the audit client’s accounting records, (2) preparing financial statements that are filed with the Commission or the information that forms the basis of financial statements filed with the Commission, or (3) preparing or originating source data underlying the audit client’s financial statements. Our experience with this definition demonstrates that the concept of bookkeeping and other services is well understood in practice.
In defiance of these provisions, KPMG – GE’s auditor – provides “loaned staff” or staff augmentation to GE’s tax department each year. These “temps” perform tasks that would be otherwise the responsibility of GE staff. Sources tell me KPMG employees working in GE tax have GE email addresses, are supervised by GE managers – there is no KPMG manager or partner on premises – and have access to GE employee facilities. They use GE computers because the software required for their tasks is GE proprietary software.
This type of “secondment” to an audit client is never allowed. KPMG should know better. KPMG was recently sanctioned by the SEC for a similar transgression involving their Australian office.
What the heck? No tax is paid. It’s worth the risk. Haven;’ we heard that before about KPMG? Will they never learn.
Jan 142011
The FT has reported that KPMG is planning to give up its graduate recruitment programme in the UK, and is instead planning to recruit before young people go to university. It is intending to take on 75 school leavers a year and send them on a four-year accountancy degree at Durham University, for this which KPMG will pay the costs, and a salary.
Three thoughts follow: KPMG are clearly worried about the need to catch young people young so that they can train them in their way of thinking before they can be corrupted by thoughts of ethics, tax justice or duty to society.
Second, doesn’t this deny 95% of the benefit of going to university, which in my experience was to have the opportunity to learn and question independently, even if I did end up with KPMG at the end of the process?
Third, shame on Durham for being so blatantly commercial that they will degrade their academic process into being a mere training scheme. I talk about regulatory capture quite often, but this is academic capture, and it probably amounts to much the same thing because in both cases the chance of objectivity disappears.
Bloomberg have produced another of Jesse Drucker’s stunning reports on tax avoidance in the last couple of days.
This one is wholly US focussed, but has a strong offshore element and a much broader appeal than the US market because it shows two key things. First that business is still demanding tax favours, even when not due. Second, it shows that old hands in the game like KPMG are still well and truly active.
I’m not going to in any way summarise the arguments in an important article. Just a few extracts:
At the White House on Dec. 15, business executives asked President Obama for a tax holiday that would help them tap more than $1 trillion of offshore earnings, much of it sitting in island tax havens.
The money — including hundreds of billions in profits that U.S. companies attribute to overseas subsidiaries to avoid taxes — is supposed to be taxed at up to 35 percent when it’s brought home, or “repatriated.” Executives including John T. Chambers of Cisco Systems Inc. say a tax break would return a flood of cash and boost the economy.
But as Drucker notes later:
The argument that a new tax break for offshore earnings would generate a domestic stimulus “holds no water at all,” said Joel B. Slemrod, an economics professor at the University of Michigan’s school of business and former senior tax economist for President Reagan’s Council of Economic Advisers. U.S. companies are already sitting on a record pile of cash — $1.9 trillion in liquid assets, according to Federal Reserve data.
“The fact that they have these cash hoards suggests that investment is not being constrained by lack of cash,” Slemrod said.
I am convinced that is true. So what is this about?:
The tax benefits from such profit shifting can have a greater impact on share price than boosting sales or cutting other expenses, since the reduced rate goes straight to the bottom line, said John P. Kennedy, a partner at Deloitte Tax LLP, speaking at the conference in Philadelphia Nov. 3.
In other words, tax avoidance is about aggressively boosting earnings in the short term – and as I have long argued, that’s linked to executive options:
“You may think two bucks isn’t much, but when you’re the CFO and she has 100,000 options, that’s pretty interesting,” [Kennedy] said. He cited large pharmaceutical and biotech companies, including Merck, Amgen Inc. and Eli Lilly, which have reported effective income tax rates at least 10 percentage points below the statutory 35 percent rate.
This link has to be broken. It’ a vital policy issue.
But there’s also the issue of the sheer waste of this whole industry. The description of what KPMG is up to is detailed, and will I suspect to many be deeply unattractive however legal it might be. To quote Drucker again:
“Some of the best minds in the country are spent all day, every day, wheedling nickels and dimes out of the tax system,” said H. David Rosenbloom, an attorney at Caplin & Drysdale in Washington, D.C., and director of the international tax program at New York University’s school of law.
Let’s not pretend the tax avoidance game has stopped: it hasn’t. It’s real, and it costs the rest of us money by shifting the burdens of tax onto those least able to pay. And that’s why it is wrong.
It’s been argued – even to their shame by Labour politicians – that it’s inappropriate to target individual companies when protesting about tax avoidance. That’s wrong, for three reasons.
First, the decision to tax avoid or not is that of the individual company. No one asks them to. Despite the claims made by some company directors and some apologists for this abuse, company directors are under no obligation to minimise their tax bills. Indeed, if doing so increases the risk within their companies it’s quite easy to argue that they’re acting against the best interests of their shareholders when doing so. In that case the main reason why many companies do it is to increase short term earnings that trigger director’s bonuses – and that has to be wrong for everyone throughout our economy except the already overpaid directors.
Second, it’s not necessary to tax avoid. It’s quite clear that some companies don’t and get along well all the same. They seek to be tax compliant, which means that they seek to pay the tax that the law intended they should pay in each place that they operate, and no more. We can’t argue with that. No one has to voluntarily pay more tax than the law expects.
Third, it is certainly true that government is responsible in a very real sense for tax avoidance; after all, it is government that creates the laws that are avoided. However, no government invites people to abuse the law, and secondly, far too much of that law (including the loopholes in it) now exists as a result of the lobbying and advice of business itself. For some people to suggest that there is, somehow, some clear and absolute divide between the government and the rest of society when it comes to tax law is just wrong.
The reality is that big business and those with wealth and the people who act for them have enormous impact on the way in which tax law has developed. This happens in three ways. First, they fight the laws we have through the courts to undermine them. The classic example was the 1936 case involving the Duke of Westminster – who paid his gardeners using a wholly artificial device called a deed of covenant to save himself tax. As a result he won a concession from the House of Lords that said that:
Every man is entitled if he can to order his affairs so as that the tax attaching under the appropriate Acts is less than it otherwise would be. If he succeeds in ordering them so as to secure this result, then, however unappreciative the Commissioners of Inland Revenue or his fellow taxpayers may be of his ingenuity, he cannot be compelled to pay an increased tax.
This has been the tax avoiders excuse for their abuse ever since.
Second these companies, and most especially the tax profession, lobby for taxes that suit those with high incomes and in the process invariably ignore the burden they place on ordinary members of society. Two examples will suffice. The Association of Chartered Certified Accountants has argued for flat taxes in the UK. These would remove all higher rates of tax, which would massively advantage those who no pay them. Many tax institutes argue for similar ‚Äòsimplifications’ that seem to have the same net effect. PricewaterhouseCoopers, the biggest firm of accountants in the world, has regularly argued for the replacement of higher rates of tax on income and profits by Value Added Taxes. When doing so they usually fail to note that this move would be regressive – shifting the tax burden from those most able to pay to those least able to pay as a result.
Third, big business and the tax profession set up the mechanisms for tax abuse. So, for example, the Big 4 firms of accountants that dominate the profession world wide – PricewaterhouseCoopers, Deloitte, KPMG and Ernst & Young – are present in all the world’s major tax havens. That’s not chance: their presence underpins the credibility of these locations and lets big companies use them for tax avoidance. If they weren’t there then those companies couldn’t have their tax haven subsidiaries audited. But the relationship is stronger than that: in many cases the Big 4 proactively support the creation of tax havens as PricewaterhouseCoopers are doing in Jamaica, or support their abolition of taxes on business, as PWC (again) did in Jersey in 2004.
So, most certainly government has a very clear role to play in tackling tax abuse. But don’t for one minute think that because tax avoidance is legal it isn’t firstly a crime against society and secondly that large companies and their advisers aren’t guilty of it, because it is, and they are.
Guernsey has said of the decision by the EU Code of Conduct Group last week that:
it has received confirmation that, at its most recent meeting (19th November, 2010), the EU Code of Conduct on Business Taxation (‚ÄòCode Group’) agreed with unanimity that the zero/10 corporate tax regimes have harmful effects. It is understood that, whilst the formal assessment process has not technically been concluded, the expectation is that the Crown Dependencies will be required to introduce revised corporate tax regimes.
Although Guernsey’s zero/10 regime has not been subject to review by the Code of Conduct Group the implications of last Friday’s conclusion by the Code Group will need to be thoroughly reviewed and assessed.
I’ve already compared this with Jersey’s official response but now KPMG have moved response in Jersey into the world of fantasy. According to the Jersey Evening Post:
EUROPE’S response to the zero-ten tax package is ‚Äòvery good news’ for the future of the finance industry, according to the tax partner at major accountancy firm KPMG Channel Islands
John Riva said he was very pleased with the outcome of the meeting last week at which the EU Code of Conduct group on tax matters discussed zero-ten.
Mr Riva said his assessment was that there was a ‚Äòtacit’ acceptance of the zero-ten regime.‚ÄòIt would appear we will be able to maintain a zero per cent and a ten per cent rate and that will give us certainty,’ he said. Continue reading »
The FT notes that Citigroup is at the centre of a dispute among analysts and accounting experts over whether it should set aside funds to cover $50bn of deferred taxes, a move that would reduce its capital buffer and weaken its balance sheet. As it says:
The assets, a product of the accounting principles applied by US tax authorities to companies, are crucial to Citi’s financial health. At the end of the second quarter, deferred tax assets made up more than a third of Citi’s tangible equity – a measure of balance sheet strength.
The US bank has rebuffed calls to reserve for its DTAs – the biggest held by a US company – arguing that it will earn enough money in the future to justify keeping the assets on its books.
Under accounting rules, Citi has to be confident it will earn $99bn in taxable income during the next two decades to avoid making provisions for DTAs. In the 2002-2006 period Citi had annual pre-tax profits of at least $20bn.
However, some argue Citi is being too optimistic given its recent record – its pre-tax losses in 2008 and 2009 topped $60bn – and continued global economic uncertainty.
Deferred tax calculation is at best a black art. In this case Citi says that because it has either losses it can carry forward or the benefit of allowances it has not yet claimed their cash value for tax purposes. As a note to its accounts says:
The most significant source of these timing differences is the loan loss reserve build, which accounts for approximately $15 billion of the net DTA. In general, Citi would need to generate approximately $86 billion of taxable income during the respective carryforward periods to fully realize its U.S. federal, state and local DTAs.
Two generic things to note there first of all. Note that it’s clear future tax revenues from banks are going to be severely limited by the carry forward of tax losses. Second, note the injustice in this: those losses were already state funded.
More specifically, note the required profits: Citi has earned $20 billion in a year, but will it again?
Third, note something stranger still: these assets are stated at their cash value as far as I can tell from the accounts, there appears to be no discounting for the fact they may not be realised for many years to come. How very odd: a bank not noticing the value of money over time.
And finally, an issue not noticed in the report is this note in Citi’s accounts:
Citigroup’s ability to utilize its deferred tax assets (DTAs) to offset future taxable income may be significantly limited if it experiences an “ownership change” under the Internal Revenue Code.
As of December 31, 2009, Citigroup had recognized net DTAs of approximately $46.1 billion, which are included in its tangible common equity. Citigroup’s ability to utilize its DTAs to offset future taxable income may be significantly limited if Citigroup experiences an “ownership change” as defined in Section 382 of the Internal Revenue Code of 1986, as amended (the Code). In general, an ownership change will occur if there is a cumulative change in Citigroup’s ownership by “5-percent shareholders” (as defined in the Code) that exceeds 50 percentage points over a rolling three-year period.
The common stock issued pursuant to the exchange offers in July 2009, and the common stock and tangible equity units issued in December 2009 as part of Citigroup’s TARP repayment, did not result in an ownership change under the Code. However, these common stock issuances have materially increased the risk that Citigroup will experience an ownership change in the future. On June 9, 2009, the Board of Directors of Citigroup adopted a Tax Benefits Preservation Plan. This Plan is subject to shareholders’ approval at the 2010 Annual Meeting. The purpose of the Plan is to minimize the likelihood of an ownership change occurring for Section 382 purposes. Despite adoption of the Plan, future transactions in Citigroup stock that may not be in its control may cause Citigroup to experience an ownership change and thus limit its ability to utilize its DTAs, as well as cause a reduction in Citigroup’s tangible common equity and stockholders’ equity.
So on third of the value of Citi’s tangible equity is dependent upon Citi’s equity not being trade – for which reason it is having to restrict trade in its shares.
To say this is an asset of dubious worth is generous: how did KPMG satisfy themselves, I wonder?
