Tax compliance » Tax Research UK

What the banks have signed up to

Banking, ConDems, Tax avoidance, Tax compliance, Tax Havens 5 Responses »

Dec 012010

The banks who have signed agreements with the Treasury and HM Revenue & Customs on tax avoidance have agreed to this Code:

Code of Practice on Taxation for Banks

OVERVIEW
1. The Government expects that banking groups, their subsidiaries, and their branches operating in the UK, will comply with the spirit, as well as the letter, of tax law, discerning and following the intentions of Parliament.

1.1 This means that banks should:

o adopt adequate governance to control the types of transactions they enter into;

o not undertake tax planning that aims to achieve a tax result that is contrary to the intentions of Parliament;

o comply fully with all their tax obligations; and

o maintain a transparent relationship with HM Revenue & Customs (HMRC).

GOVERNANCE

2. The bank should have a documented strategy and governance process for taxation matters encompassed within a formal policy. Accountability for this policy should rest with the UK board of directors or, for foreign banks, a senior accountable person in the UK.

2.1 This policy should include a commitment to comply with tax obligations and to maintain an open, professional, and transparent relationship with HMRC.

2.2 Appropriate processes should be maintained, by use of product approval committees or other means, to ensure the tax policy is taken into account in business decision making. The bank’s tax department should play a critical role and its opinion should not be ignored by business units. There may be a documented appeals process to senior management for occasions when the tax department and business unit disagree.

TAX PLANNING

3. The bank should not engage in tax planning other than that which supports genuine commercial activity.

3.1 Transactions should not be structured in a way that will have tax results for the bank that are inconsistent with the underlying economic consequences unless there exists specific legislation designed to give that result. In that case, the bank should reasonably believe that the transaction is structured in a way that gives a tax result for the bank which is not contrary to the intentions of Parliament

3.2 There should be no promotion of arrangements to other parties unless the bank reasonably believes that the tax result of those arrangements for the other parties is not contrary to the intentions of Parliament.

In many ways rather like my definition of tax compliance, which is that tax compliance is seeking to pay the right amount of tax (but no more) in the right place at the right time where right means that the economic substance of the transactions undertaken coincides with the place and form in which they are reported for taxation purposes.

But let’s be quite clear: HSBC can’t sign this and maintain a private bank in Switzerland. It’s just not possible.

So how are they going to reconcile that?

And since offshore, by definition, conflicts with the location in which a transaction takes place they must now close down all their offshore operations.

I’m not holding my breath – but this will come back to haunt them.

Tax is now the focus of reputational risk

Accounting, Country-by-country, Tax compliance, Tax gap 1 Response »

Nov 092010

Vanessa Houlder has written an excellent article in the Financial Times this morning on the subject of tax and reputational risk. As she notes:

One lesson for companies is clear: tax is becoming an important source of reputational risk. Increasingly, businesses are weighing up whether they are vulnerable to attack and how they should respond if they become the target of a campaign.

The article has, of course, been inspired by the latest Vodafone protests,but it is much broader in it’s focus than that. It does, in particular, look at the tax campaigning undertaken by Christian Aid and it discusses corporate reactions to country-by-country reporting.

And as Vanessa notes, the campaign is working:

Measures to prise open multinationals’ tax affairs are also being considered by policymakers across the world thanks in large part to charities’ emotive campaigns on corruption, tax and capital flight. For example, Christian Aid has challenged companies and their advisers by arguing that a new “country-by-country” accounting standard requiring companies to report profit and taxes in individual countries would make it harder for companies to “shift” taxable profits out of developing countries.

But as she adds:

Unsurprisingly, companies are cool about these initiatives, even if they are sympathetic to the charities’ goals of improving tax collection in developing countries. Unilever, for example, insists that “there are other and better ways to tackle poverty and corruption, for example by building the capacity of tax authorities in the countries concerned”.

One exception is Standard Chartered. The global bank has already made a start on publishing accounts for individual countries, but it wants a level playing field. Dan Mobley, head of government relations, says: “We cannot justify spending a lot of resources if our competitors are not. We need civil society to push on this.”

Perhaps, almost inevitably, the critics are quoted at length. The most notable is Susan Symons, a tax partner at PwC, who is noted as saying:

[A]ssessing whether a company had done anything wrong would require an in-depth understanding of how the business was organised. It could be easily misunderstood or misused, whether inadvertently or deliberately.

With the very greatest of respect to Susan, who I know, that is nonsense, and she must know it is. If this were to be the reason for nondisclosure of accounting information then no information at all should be put on public record, or be disclosed to shareholders. All accounting information is subject to exactly those same risks. It is patronising and disingenuous to argue actually does.

The same could be said of the comments made by Caroline Dewing, a senior communications manager at Vodafone, who is quoted as saying:

[P]utting the kind of details that are given to tax authorities into the public domain, might strain the bounds of taxpayer and commercial confidentiality

No they wouldn’t. And nor could they,especially if everyone is required to do it, as we propose.

And nor can be the issue be dismissed, as PwC and their clients would like, by claiming that the tax that is paid on profits is not a relevant issue. PwC have for some years been promoting what they call the " Otal Tax Contribution” Thisis a Mickey Mouse form of accounting which adds up all the payments a company makes to a government and claims that these are then the responsibility of the corporate entity that writes the cheque. This is, of course, completely untrue . The payments in question include employees tax liabilities, payments made by customers and payments for services received. Extracting such information from a company’s general ledger is hard, and we often hear that this is the basis for corporate objection to country by country reporting. But we do not ask for such nonsensical data, although Susan Symons continues to promote it in the comments she made to the FT.

We ask for accounting data on a country by country basis: data that shows the activities that a corporation undertakes in a jurisdiction and the payment of tax that flows from that activity. This is coherent, usable, comparable, comprehensive , consistent, and one would hope reliable information on which to form objective opinion. PwC say this could be open to misinterpretation. My response is simple: at least it has the merit that it isintended to be objective when prepared. That cannot be said of PwC’s alternative. PwC’s motive is blatant and clear: they wish to aggregate the payments of tax the company makes as agent and add them to the payments that it makes as principle with the obvious goal of seeking to reduce the liability that the company has to make on its own behalf. This is a blatant, political and abusive act. No doubt this does appeal to the FT community, and that explains the prominence given to the issue in the article, but there is no one, anywhere taking the proposal seriously. In contrast country by country reporting is on the agenda of the OECD,the IASB and the European Commission. It’s not hard to tell who is winning this debate. The companies that are resisting had better get worried.

Guernsey is abusing the truth

EU STD, Guernsey, Information exchange, Tax compliance 7 Responses »

Oct 132010

I noted the following this morning after Guernsey emailed me about it:

Guernsey plans timing for move to automatic exchange of information

Guernsey’s Government has announced that it plans to give financial institutions a window from 1st January 2011 to 1st July 2011 for moving to automatic exchange of information.

The Fiscal and Economic Policy Group carried out a public consultation earlier in the summer and this morning Chief Minister Lyndon Trott told the local Parliament, the States of Guernsey, of the planned transition to automatic exchange of information for the equivalent measurers Guernsey adopts relating to the EU Savings Tax Directive.

His statement outlined the intended timing of a movement to automatic exchange of information following the consideration of the results of the consultation process.

The Chief Minister said: “In light of the views expressed by members of industry and industry bodies, and given the States’ commitment to maintaining the highest standards of tax transparency, the Fiscal and Economic Policy Group recommended to Policy Council that institutions in Guernsey should move to automatic exchange of information from 1st January 2011 and no later than 1st July 2011. This transition period is to provide the maximum flexibility to our industry in making their necessary adjustments to their payment systems.”

And to be candid this is complete and utter misinformation.

All that Guernsey is doing is moving to a standard that the EU made clear would be compulsory in 2005 when the European Union Savings Tax Directive was introduced. It’s just belatedly coming into line.

And far from there being – as you would think from the release – automatic information exchange on all activities in Guernsey from 2011 onwards this is not true. All that will happen is that information on interest paid on bank deposits held in the name of individual account payers within the EU will be subject to exchange of info0rmatyion with the tax authorities of the states in which they are resident.

So we have this comparison ( simplify a little, but only a little):

Type of income	Exchanged	Not exchanged
Bank and some other forms of interest:
Individuals, EU resident
Individuals, not EU resident
Companies
Trusts
Dividends
Rents
Many forms of unit trust and investment funds
Profits
Capital gains
Trust distributions
Pensions
Proceeds from most life assurance based products

In other words there is no move at all towards automatic information exchange going on here. There is just belated compliance with the very basic, and now widely acknowledged inadequate requirements of the European Union Savings Tax Directive.

It would be so much easier to take places like Guernsey seriously if they were honest. But it’s a sad fact that there rhetoric is a million miles apart from the reality of what they offer and that as a result they remain an ideal location in which to undertake tax evasion, and more, at cost to society at large, both within and more importantly outside that island.

Tax avoidance, evasion, compliance and planning

Tax avoidance, Tax compliance, Tax evasion 17 Responses »

Jul 072010

I have published a new Tax Briefing that offers definitions of each of the above terms, which are frequently abused. The briefing says the following:

Introduction

The language of the tax gap and all issues relating to it is confusing for many lay observers of the tax world. This briefing seeks to tackle one major cause of confusion, which is the difference between tax evasion, tax avoidance, tax compliance and tax planning.

Tax evasion

Tax evasion is the illegal non payment or under-payment of taxes, usually resulting from the making of a false declaration or no declaration at all of taxes due to the relevant tax authorities, resulting in legal penalties (which may be civil or criminal) if the perpetrator of tax evasion is caught.

Tax avoidance

Tax avoidance is seeking to minimise a tax bill without deliberate deception (which would be tax evasion) but contrary to the spirit of the law. It therefore involves the exploitation of loopholes and gaps in tax and other legislation in ways not anticipated by the law. Those loopholes may be in domestic tax law alone, but they may also be between domestic tax law and company law or between domestic tax law and accounting regulations, for example. The process can also seek to exploit gaps that exist between domestic tax law and the law of other countries when undertaking international transactions.

The tax avoider faces uncertainty when pursuing their activities. That uncertainty focuses mainly on their not really knowing the true meaning of the laws they seek to exploit and taking the chance that either a) they may not be discovered to be tax avoiding or b) that if they are the interpretation placed on the law that they seek to exploit is favourable to them. Their risk of penalties arising as a result of their actions depends upon what the outcome of these risky situations might be.

Tax compliance

Tax compliance is different from tax avoidance and tax evasion because it is defined as seeking to pay the right amount of tax (but no more) in the right place at the right time where right means that the economic substance of the transactions undertaken coincides with the place and form in which they are reported for taxation purposes. The significant difference between tax avoidance and tax compliance is the intent of the taxpayer. A tax avoider seeks to pay less than the tax due as required by the spirit of the law. A tax compliant tax payer seeks to pay the tax due (but no more).

Tax planning

Tax planning is a part of tax compliant behaviour. It is not a part of tax avoidance. Tax law reflects the complexity of modern life and the multitude of choices and options available to all taxpayers when legitimately seeking to structure their affairs. This necessary offer of options within tax legislation creates the opportunity for choice on the part of the tax payer and means that determining the right amount of tax (but no more) that they seek to pay does necessarily requires the exercise of judgement on occasion.

So long as the exercise of that judgement seeks to ensure that the taxpayer makes choices that exercise options clearly allowed by law and that they do not exploit unintended loopholes created between laws then that process of a taxpayer choosing how to structure their affairs is the process of tax planning, which is a legitimate, proper and socially acceptable act.

As example, a taxpayer choosing to save in an ISA (Individual Savings Account) is exercising an option made available to them in law that is entirely tax compliant so long as all the published conditions for saving in that way are met. As a consequence no one can accuse a person using an ISA of tax avoidance. Those who say they are tax avoiding can safely be said to be wrong.

The Great Tax Parachute: How to save the public finances and keep the economy afloat

Economics, Tax avoidance, Tax compliance, Tax evasion 2 Responses »

Apr 282010

The Green New Deal group has published a new report on tax which is, they and I will admit, largely my work.

As it says:

As the public are told by all the main political parties that large spending cuts are inevitable, the Green New Deal Group show that real alternatives exist. This briefing reveals, for the first time, that the public deficit could, in fact, be substantially offset by a range of progressive measures on tax.

In the short term, government spending is needed to keep people in work as the only guaranteed way to reduce a deficit in a time of unemployment. When the immediate crisis has passed and the government needs to balance its books again, there are two options: to cut government spending or to raise revenue. As the Green New Deal Group’s briefing, The Great Tax Parachute: How to save the public finances and give the economy a soft landing shows, the first of these, does not need to be an option.

Taken together, the Green New Deal Group estimate that more than £100 billion a year is lost at present because of abuse of loopholes in the tax system, tax bills remaining unpaid and from illegal non-payment of
tax. Of course not all these abuses can be stopped. No tax system is perfect. But, while some of this revenue would be absorbed by the modest additional resources needed to implement the measures, by taking action to tackle these issues substantial amounts could still be made available to the public purse. This is not about new taxes, simply collecting taxes that are due, closing loopholes in the tax system and clamping down on illegal non-payment of taxes. Action on these issues is needed now.

In addition, as the Green New Deal group show, there is an enormous range of additional taxes available that would make the UK’s tax system fairer. Those with the greatest capacity to pay tax could carry more of the burden of addressing the economic crisis whilst the taxes of those who simply cannot afford to pay more could be eased. Such an approach also stands to reduce the high social costs of inequality borne by the taxpayer.

Once economic recovery begins the UK’s structural deficit needs to be tackled in this way, not by cutting public services.

The report builds on a range of previous work and brings together recommendations from the TUC, Compass, the Green New Deal group, PCS and others to show that there is no case for cuts – just a case for collecting the tax revenue due to our government.

Those who say otherwise are in the case not stating a fact – they’re making a political statement of choice.

And that difference is very important, indeed, because it undermines the current hegemony, and that’s going to be vital in the days, weeks, months and years to come as those whop seek to undermine the effectiveness of UK government services, and society as we know it in the UK, demand cut backs in the essential state services that underpin our well being.

Footnote: The report featured on Newsnight last night – see the Tuesday repeat

Did Lloyds use tax avoidance to boost profits?

Banking, Tax avoidance, Tax compliance Comments Off

Mar 202010

Lloyds accused of avoiding tax to artificially boost profits | Business | guardian.co.uk .

The Guardian reports;

A former employee of Lloyds Banking Group has accused the bank of artificially inflating its profits by almost £1bn through the use of aggressive tax-avoidance schemes and exotic “Lehman- style” offshore deals which he said amounted to false accounting.

The former senior tax manager at the bank told an employment tribunal Lloyds was involved in running battles with Revenue & Customs after it embarked on a hostile relationship with the tax authority over multimillion-pound corporation tax bills while involved in extensive manipulation of the way it accounted for unpaid taxes.

Between 2005 and 2007, he said, the bank insisted that finance staff devise ever more elaborate ways to depress a growing tax bill, many of them involving the now collapsed Lehman Brothers and the discredited financial products division of AIG, the American insurer that cost the US government $80bn to rescue. By 2007, the bank was excluding more than £900m of potential tax in its accounts, allowing it to inflate profits by the same amount.

They continue:

The bank’s former head of tax compliance, Andrew Constantine, told the employment tribunal that Lloyds refused to listen to staff who voiced concerns about the tactics adopted by the finance department, or institute reforms that would put its finances on a legal footing.

For three years he made representations to board members that the tax planning adopted by the bank was unethical and amounted to false accounting. He also warned that a breakdown in the relationship with HMRC would damage the bank and lead to even higher tax bills.

As for Lloyds it said:

Lloyds said it did not dispute that Constantine told senior executives of his deep misgivings. It said: “Mr Constantine’s allegations about the Group’s tax planning were fully investigated and found to be without merit. The Group maintains an open and transparent dialogue with HM Revenue & Customs. We have made adequate provisions for all our tax liabilities.

“Like any organisation, we will seek to reduce tax impact where it is practical and appropriate but we always comply with all aspects of tax regulations in all the jurisdictions within which we operate.”

I know Andrew Constantine. I have, I admit, discussed this situation with him.

I think he’s a good, honest and ethical tax accountant – not words I readily strong together too often.

And as the Guardian notes – Lloyds’ tax history is not great.

I have no doubt who I am backing to win.

But the law can be an ass.

Time everyone paid their fair share of tax

Tax compliance Comments Off

Feb 212010

Time everyone paid their fair share of tax | Business | The Observer .

That’s the headline in the business columns of the Observer, relaunched today.

Ruth Sunderland says:

In praise of paying tax. Now there’s a controversial idea in a country like the UK that is in thrall to the tax avoidance industry, as we explore [today].

As she concludes

Paying tax has terrible PR. But it is actually a good thing to pay the right amount of tax. It is also a good thing when the economic substance of a taxpayer’s affairs reflects the picture they have painted to the Revenue and not some sham structure.

The contempt for taxpaying of the past few decades has gone hand in hand with greater inequality, strained public services and an unthinking faith in the market, ideas that are now discredited. As we head towards an election, it’s time for a new way of thinking.

Can’t think who she was talking to on Friday afternoon…

What is meant by the spirit of the law?

Tax compliance 2 Responses »

Dec 142009

http://taxadvicenetwork.blogspot.com/2009/12/what-is-meant-by-spirit-of-law.html.

Mark Lee throws in his pennyworth – which is worth reading.

From my perspective this has rarely been difficuklt to determine – but there are none so blind as those who do n0t want to see.

That’s most accountants when it comes to this issue.

The Times admits secrecy jurisdictions undermine deomcracy

Banking, Tax compliance 8 Responses »

Dec 122009

Not time for Tobin -Times Online .

I’m sure the Times did not want their rather pathetic attack ion the Tobin Tax to admit what it actually did – that tax havens / secrecy jurisdiction undermine democracy and the rule of law in the world’s major states for the sole benefit of bankers and the wealthy, but they did.

They said:

The main objection to a Tobin tax, however, is that it will not work. … Perhaps all the main financial centres would sign up to the tax. But that still leaves the offshore financial centres. It is difficult to see what possible incentive they would have to implement a tax when it would plainly be in their financial interest to attract business from international banks.

This is the perverted logic of neo-liberalism, that we let the 20 or so institutions (and that is about the real sum total of banks involved in this equation) split themselves across jurisdictions and so undermine the law.

Well, we have to stop that.

And I assure you that is possible. The answer would be simple: any bank doing this would have to lose its banking licence in London ans elsewhere. Of course they should be at liberty to trade in tax havens / secrecy jurisdictions, but not here as well, and not if they are not tax compliant.

Tax compliance is seeking to pay the right amount of tax (but no more) in the right place at the right time where right means that the economic substance of the transactions undertaken coincides with the place and form in which they are reported for taxation purposes.

This is what the new bank code on taxation demands.

It is what we expect. It’s time the world woke up and realised it is what must be delivered.