{"id":15208,"date":"2012-04-23T13:01:30","date_gmt":"2012-04-23T12:01:30","guid":{"rendered":"http:\/\/www.taxresearch.org.uk\/Blog\/?p=15208"},"modified":"2012-04-23T13:01:30","modified_gmt":"2012-04-23T12:01:30","slug":"cbi-tax-misinformation-effective-tax-rates-include-the-deferred-tax-charge","status":"publish","type":"post","link":"https:\/\/www.taxresearch.org.uk\/Blog\/2012\/04\/23\/cbi-tax-misinformation-effective-tax-rates-include-the-deferred-tax-charge\/","title":{"rendered":"CBI tax misinformation – effective tax rates include the deferred tax charge"},"content":{"rendered":"

The CBI's report on tax - 'Tax and British business:\u00a0Making the case<\/a>' - is a gift that just keeps giving.<\/p>\n

Look at this table, included in it:<\/p>\n

\"\"<\/p>\n

I was\u00a0surprised\u00a0the effective rate of tax is\u00a0shown\u00a0to be so high - just a little below the headline rate. As a result I smelt a rat so I went to the\u00a0Oxford Centre for Business Taxation report on which this is based<\/a>. They define effective tax rates as:<\/p>\n

There are numerous ways of constructing measures of effective tax rates. Here we define the effective tax rate (ETR) as the tax charge as a percentage of profit as measured by earnings before interest and taxation (EBIT). EBIT clearly differs from taxable profit as it does not include financial flows. However, for a number of reasons we believe that this is a more reliable measure than the alternatives. For example, financial flows can include large intra-group transactions, which can produce misleading estimates if holding companies, or more generally, the unconsolidated accounts of the headquarter companies, are not included in the dataset.<\/p><\/blockquote>\n

I could argue about EBIT, but won't here. The effect is unknown.<\/p>\n

What I will argue about is that they use the tax charge in the accounts as the measure of the tax paid by a company. This is just\u00a0financially\u00a0illiterate! Deferred tax is just an accounting entry and has literally nothing to do with tax that is being paid now. As the CBI report itself says:<\/p>\n

Deferred tax accounting ....\u00a0seeks to deal with the mismatch due to timing differences. It is\u00a0based on the temporary differences between the tax base of an\u00a0asset or liability and its carrying amount in the financial statements.\u00a0Where tax relief is obtained in advance of the charge against\u00a0accounting profit, the tax base will be lower than the book value\u00a0and so there will be a deferred tax liability. Where tax relief comes\u00a0later \u2014 for example where a loss is to be carried forward to use in a\u00a0later tax period \u2014there will be a deferred tax asset.<\/p><\/blockquote>\n

Now, if one of the main purposes of tax avoidance activity is to defer the time when tax is due by, for example, hiding profits in tax havens or seeking double allowances for tax or by postponing the recognition of income for tax in multitudinous ways (and I can assure you that\u00a0this\u00a0deferral\u00a0is one of the main motives of tax avoidance\u00a0because\u00a0this deferral very often triggers extra payments under\u00a0executive\u00a0bonus\u00a0schemes - linking this\u00a0issue\u00a0and excessive pay,\u00a0inextricably and so explaining why multinational corporation directors are so dedicated to tax abuse)\u00a0then to\u00a0include\u00a0the\u00a0deferred\u00a0tax\u00a0charge\u00a0in a company's accounts (itself\u00a0one of, if not the most subjective number in any set of accounts) in the tax charge is to ignore the fact that this accounting is precisely designed to disguise the fact from those lacking curiosity (like Oxford tax academics) that this tax avoidance is going on by suggesting a tax bill exists when there is none, and may not be for some\u00a0considerable\u00a0time to\u00a0come, if ever.<\/p>\n

What this means is that given that the tax gap is entirely about tax not being paid \u00a0then \u00a0basing an analysis of effective tax rates on a measure that\u00a0deliberately\u00a0and knowingly\u00a0ignores\u00a0the fact that tax is not being paid by\u00a0including\u00a0an accounting entry that disguises that fact as if it were tax paid when it is no such thing is to candidly,\u00a0blatantly\u00a0and knowingly distort the resulting data\u00a0presented\u00a0on\u00a0effective\u00a0tax rates and the tax gap. It can't be anything else.<\/p>\n

I have looked at\u00a0this\u00a0issue in my work for the TUC<\/a>. To make sure I\u00a0calculated\u00a0tax gaps properly I\u00a0went\u00a0into the accounts (something Oxford seemingly never do - they rely on databases, not doing something so sordid as seeking to\u00a0understand\u00a0the source data by actually reading it) and extracted the\u00a0figure\u00a0for current tax due - which\u00a0eliminates\u00a0the deferred tax charge or credit as this is\u00a0just\u00a0accounting mumbo jumbo - as the only thing that matters when considering tax gaps is what is likely to be paid now, or not. As a result in my 2010 TUC study<\/a> I showed the\u00a0following:<\/p>\n

\"\"<\/p>\n

When you actually look at tax to be paid - as I did -\u00a0effective\u00a0tax rates are\u00a0nothing\u00a0like 26% as Oxford says, but more like 21% and falling as the\u00a0corporation\u00a0tax.<\/p>\n

And why is that? Well one reason is because of movements in deferred tax, which I noted from my FTSE sample were:<\/p>\n

\"\"<\/p>\n

The sheer scale of deferred tax - that is tax unpaid and hidden in the accounts of\u00a0large\u00a0companies - is apparent, as is the fact that the scale of it has grown\u00a0enormously\u00a0over the last decade. The reason why the fall in tax rates was\u00a0also\u00a0arrested\u00a0in 2009 is also apparent - the banks saw their deferred tax provisions fall\u00a0dramatically\u00a0because\u00a0of the scale of the losses they made - few of\u00a0which\u00a0were real\u00a0however, and all of which went through deferred tax charging. They almost singlehandedly explain the fall in net deferred tax provisions\u00a0because\u00a0their losses created deferred tax assets which\u00a0reduced\u00a0the overall level of net deferred tax liabilities.<\/p>\n

The CBI must have known this, as did Oxford, but the put out grossly misleading stats that glossed over it instead. It delivers no credit to either that they did so - and shows that both are in the business of supplying misinformation on tax. Thankfully, some of us aren't. No\u00a0wonder\u00a0the CBI are losing the\u00a0debate with the Tax Justice Network.\u00a0<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

The CBI’s report on tax – ‘Tax and British business:\u00a0Making the case’ – is a gift that just keeps giving. Look at this table, included
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