Posturing over the pound

The debate about what currency Scotland could, would or should have has sprung into life now that the SNP's white paper proposal for 'keeping the pound' has been rejected by all of the major Westminster parties, and the Liberal Democrats too.

This represents a new stage in the debate, with the stakes ramped up for both sides. But if we sweep aside the political posturing, the debate over the last few days has revealed - to this disinterested observer - some interesting truths:

1. The establishment is worried by the prospect of a 'Yes' vote

The unity among the leaderships of the Tories, Labour and Liberal Democrats (and UKIP incidentally) reinforced by the unusual decision to publish the advice of a senior civil servant is a clear indication that the establishment is concerned about the prospect of Scotland seceding from the union.

You might argue that this consensus is a reflection that currency union is a bad idea (especially for Scotland), but Sir Nicholas MacPherson's letter and the statements of the three parties (working together for a No vote under the Better Together banner) go further than criticising currency union and contain some ridiculous scaremongering. The 'no' side - ahead in all the polls - is obviously worried though.

And it has good reason. If Scotland votes to leave and is refused currency union, it could quite legitimately reject the UK debt (a possibility acknowledged in MacPherson's paper). However, even if Scotland took a share of the national debt (based on population size) it would have a debt to GDP ratio of 81%, compared with 104% for the rest of the UK (according to an NIESR paper).

The Treasury paper implicitly acknowledges these possibilities but implicitly says the UK would get its way because "an extensive wrangle about [Scotland's] share of the debt would increase uncertainty and hence its funding costs". What it doesn't say is that is true too for the remaining UK ... and that's why they're worried.

2. HM Treasury believes the Euro is still bad for the UK

It believes that economic union is problematic without political union - and that economic independence is incompatible with currency union. In this it is right: witness how a technocrat was imposed in Italy and government policy imposed in Greece (and elsewhere) under Eurozone orthodoxy.

3. The SNP is economically bankrupt

The SNP clearly lacks the confidence to argue for an independent currency under a central bank of Scotland. Instead it wants a more familiar and convenient currency union with the UK, knowing that it will inevitably mean that Scotland would not be economically independent.

At best Scotland might get one seat on the Monetary Policy Committee of the Bank of England (given size of economy or population), and the interests of the Scottish economy would be totally marginalised (it is arguable that is the case now since the Bank of England largely operates in the interests of the City of London's square mile, but then why vote for independence only to accept the situation of pre-independence?)

As such an 'independent' Scotland under the SNP's vision would leave Scotland as a crown dependency, similar to the Isle of Man or Jersey. Given that Salmond's economic vision has previously been to turn Scotland into a tax haven, maybe that's the aim. Scotland as an outpost of the City of London?

4. The UK banks are still fragile, and if they crash again the establishment will bail them out again

The Treasury paper states "Scotland's banking sector is far too big in relation to its national income, which means that there is a very real risk that the continuing UK would end up bearing most of the liquidity and solvency risk". So the Westminster consensus still believes if banks fail they should be bailed out exactly as before. They have learned nothing from the greatest crash in over a century - their neoliberal ideology remains unshaken. The SNP does not demur from this, nor suggest the Icelandic route.

Conclusion

These points do not make the case for either a yes or no vote in the referendum. What they point out is that however Scotland votes, it will be governed by people unable to govern in their economic interests.

What is also reveals is that the referendum debate is likely to step up, with more vitriol and posturing, that will make independence negotiations more difficult if Scotland does vote yes.

Google and ExxonMobil run rings around outdated tax laws

Prem Sikka

Tax avoidance shows no sign of abating. Google, the company with the slogan “Don’t be evil", is at it again. The company has been named and shamed by the UK House of Commons' Public Accounts Committee, but that has not persuaded directors to change their ways.

According to information filed with the US Securities and Exchange Commission (SEC), the Google group of companies generated global revenues of US$50.175 billion last year. Some US$4.872 billion (nearly £3.25 billion) of revenues came from the UK.

Google explains these revenues are “based on the billing addresses of our customers for the Google segment and the ship-to-addresses of our customers for the Mobile segment”. But this does not mean the revenues are necessarily booked in the UK, which acts as a marketing mechanism for its Ireland operations. As the Public Accounts Committee heard, through careful attention to detail, a large part of the revenues is booked in Ireland.

Despite the US data, Google’s UK operations reported a revenues of just £506m in 2012, some way short of the figure reported to the SEC. This gave rise to a UK profit of £36.2 million and a corporate tax bill of £11.2 million.

Google’s Irish arm reported revenues of €15.5 billion (£13 billion), of which €11 billion is wiped out by “administrative expenses”. The Irish operations reported a profit of €154m (£131m) in 2012, but paid just €17m (£14.5m) in tax.

Google uses complex corporate structures. Royalty payments, masquerading as administrative expenses, are a key part of the profit shifting strategies. For example, its intellectual property is held in Bermuda, which does not levy corporate taxes. Various subsidiaries pay royalty fees which result in tax deductible expenses in Ireland and elsewhere, but tax-free income in Bermuda.

Google’s SEC filing shows the company had foreign income before taxes of just over US$8 billion for 2012. Most of the income from foreign operations was recorded by an Irish subsidiary. The foreign tax paid/payable was US$358m, equivalent to a rate of 4.43%. The accounts received the customary clean bill of health from auditors Ernst & Young.

Another company using complex corporate structures and intergroup transactions to avoid taxes is ExxonMobil. Its Spanish subsidiary operated for a while from the same address as its auditors PricewaterhouseCoopers. The Spanish company apparently had one employee on an annual salary of €55,000, but it reported net profits of €9.9 billion for the period 2009 to 2011. The key to this was a strategy designed to take advantage of Spanish laws for attracting foreign investment. The company shuffled the payment of dividends and avoided taxes in the US elsewhere.

We can all ask companies to honour their promises of ethical and responsible conduct, but such calls have little effect. All over the world tax authorities are overwhelmed by the tide of avoidance and lack the financial and political resources to investigate giant corporations.

Yes, they can be more aggressive and governments can move to deprive tax dodging companies of any public contracts. But such efforts need to be accompanied by a fundamental reform of the way corporate profits are taxed. The current system is over a hundred years old and is fundamentally flawed.

For example, Google, ExxonMobil and other companies may have hundreds of subsidiaries, but they are unified entities with a common board of directors, common share ownership and a common strategy that directs their operations. The companies publish consolidated financial statements for the group as a whole, which recognise that transactions within the group of companies, do not add any economic value. These transactions have zero effect on their consolidated profits.

Yet the tax treatment is entirely different. For tax purposes Google and ExxonMobil are not treated as a single entity. Instead they are treated as hundreds of separate entities. This encourages them to play royalty and other games and shift profits through artificial transactions and arbitrage the global tax systems.

So the obvious solution is to treat multinational corporations as single unified entities. Their global profit, with some modifications, needs to be allocated to various countries on the basis of employee, sales, assets or other key determinants of profits and taxed at the appropriate rates.

Such a system already operates within some federal states, most notably the United States, Canada, Switzerland and Argentina. It prevents companies from artificially locating domestic profits to internal tax havens. Thus, a company trading in California cannot easily avoid taxes on its local profits by claiming that it is a located in Delaware, which offers minimal taxes on varieties of corporate income.

The above reforms do not necessarily need international agreement and can be implemented unilaterally by any government. It has considerable similarities with the Common Consolidated Corporate Tax Base proposed by the European Union.

The EU’s plan could make a serious dent in tax avoidance, but is opposed by the corporate dominated Organisation for Economic Co-operation and development (OECD). The OECD’s preference is to tweak the current system, which cannot address the fault lines.

Without a fundamental reform companies like Google and ExxonMobil will continue to deprive national governments of much needed revenues.

• This article first appeared on The Conversation website.

Barclays and KPMG involved in $660m tax ‘sham structure’

Prem Sikka

What are the chances that in the face of public criticisms, big business would curb its tax avoidance practices? Well, not much, as evidenced by a case decided by the US Court of Federal Claims.
Salem Financial Inc v United States relates to a complex financial transactions known as STARS (Structured Trust Advantaged Repackaged Securities). The case involved Salem Inc, a subsidiary of North Carolina based bank, BB&T.

The scheme was designed by Barclays Bank, a major UK financial institution; KPMG, one of the world’s biggest accountancy firms; and Sidley Austin, a US law firm. At the centre of the dispute is a tax liability of some US$660m.

Through collaboration with Barclays, KPMG specialised in developing transactions that took advantage of differences between international tax systems. Barclays marketed some versions of STARS to a number of corporations, including AIG, Microsoft, Intel, and Prudential. KPMG introduced the STARS transaction to BB&T at a January 17, 2002 meeting and used a slide show to outline the steps necessary for the scheme to work. KPMG had little prior business relationship with BB&T.

Contrived transactions

The key idea of the tax avoidance scheme was to generate large-scale foreign tax credits which could in turn be used to enhance revenue and reduce taxes payable by BB&T in the US. A series of transactions with circular cash flows were designed to create the tax savings.

The court noted that in essence the scheme called for BB&T to establish a trust containing approximately US$6 billion in revenue-producing bank assets. The monthly revenue from the trust was then cycled through a UK trustee, an act that served as a basis for UK taxation. Although the revenue was immediately returned to BB&T’s trust, the assessment of UK taxes generated tax credits that were shared 50/50 between Barclays and BB&T.

A US$1.5 billion loan from Barclays to BB&T was also part of the structured transaction, although the loan was not necessary to the objective of generating foreign tax credits. The Barclays monthly payment to BB&T represented BB&T’s share of the tax credits, and had the effect of reducing the interest cost of BB&T’s loan.

The main question for the 21-day court hearing was whether the STARS transaction had any purpose other than to generate tax savings, and if not, whether penalties should be assessed against BB&T. The 67-page court judgment found in favour of the government and the company has been ordered to pay US$680 million plus penalties of US$112 million.

After examining some 1,250 exhibits the judge referred to the scheme as “an abusive tax avoidance scheme” and said that the “conduct of those persons from BB&T, Barclays, KPMG, and the Sidley Austin law firm who were involved in this and other transactions was nothing short of reprehensible”.

The judge went on: “The professionals involved should have known better than to follow the STARS path, rife with its conflicts of interest, questionable pro forma legal and accounting opinions, and a taxpayer with a seemingly insatiable appetite for tax avoidance”. The whole STARS set-up was described as “a sham structure”.

Controversial pasts

Barclays and KPMG are no strangers to tax avoidance controversies. After lengthy investigations by the US Senate Permanent Subcommittee on Investigations and action by the US Department of Justice, KPMG were fined US$456 million for “criminal wrongdoing” in tax matters and a number of its former personnel were also given prison sentences. The firm has also been the subject of investigation of the UK House of Commons Public Accounts Committee, but this has not dulled its appetite for profits through the sale of tax avoidance schemes.

Barclays relies upon taxpayer guarantees for its core business, but operates a very lucrative tax avoidance business which is estimated to have generated around a billion pounds in fees each year between 2007 and 2010. Last year the UK government had to introduce emergency legislation to negate two avoidance schemes used by Barclays for its own business which could have deprived the UK Treasury of around £500 million. Despite fines and prison sentences major businesses remain addicted to tax avoidance. Public opprobrium has become just another cost of doing business.

It is time to shut down businesses who routinely pick citizens’ pockets through tax avoidance. Their schemes are undermining revenues that are much needed to revive the economy and provide education, healthcare, pensions, security and other public goods that distinguish civilised societies from the rest.

Yet the UK government continues to shower gifts on tax avoiders, KPMG continues to receive public contracts and Barclays is propped up by taxpayer-funded guarantees and loans. Only this week Ed Miliband hired KPMG’s deputy chairman for advice on low pay. Rather than giving them another consultancy job, politicians should be asking KPMG to explain the firm’s role in the erosion of social fabric.


This article first appeared on The Conversation website

Big business is policing tax avoidance – what could possibly go wrong?

David Heaton's resignation from an advisory panel on tax abuse exposes the perils of hiving off tax avoidance enforcement

Prem Sikka

The privatisation of Royal Mail is making headlines, but another form of privatisation is attracting less attention – of UK law enforcement in vital areas, such as organised tax avoidance. Now it is business interests that decide whether Her Majesty's Revenue and Customs (HMRC) can go after those involved in abusive tax avoidance schemes, and this includes those who are close to the tax avoidance industry.

The flaws in the privatisation of law enforcement have been highlighted by the resignation of David Heaton from the government's flagship general anti-abuse rule (Gaar) panel. The panel is supposed to tackle tax abuses but Heaton was freely giving tips for dodging taxes. Heaton is a partner in accountancy firm Baker Tilly and is also a recent chair of the Tax Faculty at the Institute of Chartered Accountants in England and Wales. Baker Tilly is no stranger to tax controversies as the firm's revenues are dependent on novel interpretations of tax laws. In January 2011, the UK government raised VAT from 17.5% to 20% and the firm urged companies to do their billing in advance and thus avoid the hike. In recent years, Baker Tilly has expanded its revenue-earning capacity by absorbing organisations chastised for designing aggressive tax-avoidance schemes.

The Gaar legislation came into effect on 1 July 2013 and is part of a trend of giving business a key role in law enforcement. Originally, it was intended to enable HMRC to challenge "aggressive" tax avoidance, but was soon diluted to focus only on the most abusive forms of tax avoidance. The flaws were noted by Lord MacGregor, chair of the House of Lords economic affairs sub-committee on the finance bill, who said that: "There is a misconception that Gaar will mean the likes of Starbucks and Amazon will be slapped with massive tax bills. This is wrong and the government needs to explain that to the public. Gaar is narrowly defined and will only impact on the most abusive of tax avoidance".

The Gaar legislation contains a "double reasonableness" test and requires HMRC to show that the tax avoidance schemes under scrutiny "cannot [reasonably] be regarded as a reasonable course of action". An avoidance scheme will be treated as abusive only if it would not be reasonable to hold such a view. So, if a dubious practice is widespread and established then it may well be considered to be reasonable.

HMRC is further shackled in that it can't easily go to the courts to enforce Gaar because it needs permission from a panel of experts on whether the arrangements in question constitute a reasonable course of action. The panel members are unpaid and this inevitably favours businesses that can bear the cost of seconding staff. In addition to Heaton, other members of the panel are Patrick Mears (chair), a senior tax partner at law firm Allen and Overy; Michael Hardwick, a consultant at law firm Linklaters; Brian Jackson, vice-president for group tax at Burberry group plc and previously tax partner at KPMG; Sue Laing, a partner at law firm Boodle Hatfield; Gary Shiels, a business consultant; and Bob Wheatcroft, a partner in accountancy firm Armstrong Watson.

There is no representation from NGOs and others who routinely expose tax avoidance. If matters reach a court, then judges need to take into account the opinion of the Gaar advisory panel given to the HMRC. The legislation says little about the public accountability of the panel.

George Osborne courted public opinion by saying that he found tax avoidance/evasion "morally repugnant", but the government's sense of morality is to appoint foxes to guard the henhouse. No doubt, members of the Gaar panel are devoted to serving the public interest, but their conception of the public interest is likely to be informed by their business and professional interests, especially as their profits and bonuses are dependent on serving clients. So who is safeguarding the interests of the ordinary people?

Neoliberals would defend the current arrangements by arguing that government needs people who know the practices and are thus best suited to be the guards. If that logic had any substance then those falling on hard times or suffering because of the bedroom tax should be deciding who can reasonably be prosecuted for, say, benefit fraud. But that is not the case. The government has mobilised the full might of the state to tackle benefit fraud estimated to be around £1.9bn a year, but the same does not apply to tax avoidance/evasion running at between £35bn and £100bn a year.

This article first appeared on Comment is Free

The race is on, but the field is limited in the auditing business

Prem Sikka

Isn’t it interesting how governments go through the rituals of promoting competition, but little actually changes? The latest example is the UK Competition Commission’s report on the UK auditing industry.
The report is supposedly concerned with enhancing competition in the UK auditing market. The current position is dire. Thanks to the close alignment between corporate interests, policymakers and politicians, successive governments permitted restrained mergers.

Today the auditing market is dominated by just four accounting firms. These are PricewaterhouseCoopers, Ernst & Young, Deloitte & Touche and KPMG (known as the Big Four firms), and between them they audit 99 of the UK’s biggest listed companies (FTSE100) and around 240 of the next 250. On average, a FTSE100 auditor remains in office for about 48 years; for the FTSE250 the average is 36 years. The Big Four firms are dominant in most western countries. Their global income from auditing and consultancy services is about £77 billion (US$115 billion) and some £7.9 billion ($11.9bn) of it comes from the UK. This provides plenty of financial and political resources to thwart any unwelcome policies.

The probability of another accounting firm breaking into this magic circle is extremely low as the entry costs are high. The challengers need help but there is little on the table from the Competition Commission. The Commission does not want to break-up the Big Four firms or place any limits on the proportion of market they can dominate. It does not want to place any time limits on the audit firm’s tenure either.

This monopoly of company audits has been the springboard for the growth of the Big Four accounting firms. Audits give accounting firms easy access to company boards and lets the accountants sell all kind of additional services, ranging from tax avoidance, advice on mergers and takeovers to printing T-shirts, badges and laying golf courses. All this increases fee dependency on clients and must lessen the probability of speaking out against unsavoury practices. At the dawn of the banking crash, concerned savers were forming queues outside distressed banks and governments were bailing out banks, but auditors gave their customary clean bill of health to all distressed banks. This silence was not followed by any investigation by the UK government. There is no action by any regulator either. Even if they act, it takes years. The matters relating to the audit of automaker MG Rover by Deloitte were referred to the Financial Reporting Council, the UK regulator, in 2005. It finally reported on 29 July 2013.

The regulatory inertia neither encourages competition nor improves the quality of audits. Last year, a tax tribunal heard a case relating to a tax avoidance scheme designed by Ernst & Young for Iliffe News and Media. The company was very profitable, but was concerned that healthy profits would encourage employees to demand higher wages. So Ernst & Young, who were also the company’s auditors, designed a scheme that would artificially depress profits and avoid tax too. The company’s board minutes stated that Ernst & Young confirmed that the use of the scheme would also “significantly lessen the transparency of reported results”. Despite such episodes, the Competition Commission does not want to ban the sale of consultancy by auditors to their audit clients. The best that it can come-up with is that companies might put audits out of tender every five years.

The Competition Commission could have increased the market pressures on auditors to improve quality of audits by empowering consumers of audit opinions, but it does not do that. Auditors only owe a “duty of care” to the company rather than to any individual shareholder, creditor or any other stakeholder. So individuals can do little to bring negligent auditors to book. Court cases such as MAN Nutzfahrzeuge AG & Anor v Freightliner Ltd & Anor [2007] show that there is little recourse against auditors even when they are found to be negligent.

At annual general meetings (AGMs) shareholders are asked to vote on auditor appointment and remuneration, but this resolution is not supported by any information about quality of audit work, lawsuits or regulatory action against auditors. Shareholders are not given any sight of auditor working papers. Shareholders have no idea of the work done by auditors. Auditing firms are commercial concerns and their success is measured by profits. In pursuit of profits, the firms reduce the time allocated to each audit even though audits are labour intensive and need a higher time budget. The hope is that aspiring accountants will work evenings and week-ends for free. Academic research shows that a large number of audit staff do not go along with such strategies and resort to falsification of audit work or ignore awkward transactions because they require more time than is allocated. Audit failures are manufactured by the business model and organisation culture of accountancy firms, but this does not even appear on the radar of the Competition Commission.

There is little meaningful public information about auditors. There is no public availability of audit contract, information composition of the audit team, time spent on the job, details of meetings with company directors, or anything else that might enable the consumers of audit opinions to assess audit quality.

The Competition Commission has capitulated to the lobbying power of the Big Four and failed to introduce any meaningful reforms. Maybe such issues will be considered after the next banking crash.


This article first appeared on The Conversation website

Prince Charles must go public with tax dealings

Prem Sikka

The UK House of Commons Public Accounts Committee is examining some of the financial affairs of Prince Charles, heir to the British throne. The Committee should be concerned that the Duchy of Cornwall, Prince’s business arm, is exempt from corporation and capital gains tax. This means that the Duchy does not make any financial contribution towards the social infrastructure used by it. Its tax exemptions also give it unfair advantage over its rivals.

The Duchy of Cornwall is the remnant of a bygone feudal age. The Duchy’s estate was created in 1337 by Edward III for his son and heir, Prince Edward. It provides income for the Duke of Cornwall, always the male heir to the throne. Today, the Duchy’s estate is no longer confined to land in Cornwall. It is a sprawling conglomerate, the third largest landowner in the UK, owning 53,154 hectares of land in 24 counties, mostly in the South West of England.

The Duchy’s 2013 balance sheet shows net assets of £762 million though the market value is likely to be several billions. Its portfolio of assets includes 3,500 individual lettings, including 700 agricultural agreements, 700 residential agreements, and 1,000 commercial agreements. The Duchy owns Dartmoor Prison, the Oval cricket ground in London, a Waitrose warehouse in Milton Keynes, pubs, shops, hotels and building occupied by King’s College London. The Duchy also jointly owns a biomethane injection plant.

The Duchy directly competes with commercial organisations to trade in property, house building, holiday rentals, organic food, jam, marmalades and biscuits. Its profits are boosted by the direct use of social infrastructure funded by taxpayers in the shape of local/central government, transport, security, legal system, and education and healthcare provided to its employees. But the Duchy makes no direct financial contribution towards any of this because it is exempt from the UK corporation and capital gains tax.

The tax privileges of the Duchy are often defended by claims that it is a private estate (is the monarchy private?), or that it is a private trust for the benefit of the Duke of Cornwall, or that somehow the Duchy and the Duke merge into one.

An ongoing freedom of information case has lifted some of the legal murk surrounding the Duchy to reveal its economic substance: it is a legal person in its own right. The evidence provided by Prince Charles’s representatives showed that the Duchy enters into legal contracts in its own name. Its staff are employed by the Duchy rather than the Duke. The Duchy has sued and has been sued in its own name. It is registered for VAT and Pay As You Earn (PAYE). Employees give their consent to the Duchy to process their personal data. The Duchy is notified as the Data Controller under the Data Protection Act 1998. The Duchy has bank accounts in its own name. There have been transactions between the Duchy and Duke, clearly acknowledging that the two are separate.

Parliament has no say in how the profits are to be distributed. The Duchy’s entire income goes to Prince Charles. Between 2008 and 2013, UK workers saw a real terms cut of 6% in their pay. By contrast, Prince Charles’s income rose from to £18.7 million to £20.2 million for the same period. A large part of this came from the Duchy of Cornwall, whose contribution increased from £16.27 million in 2008 to £19.05 million in 2013.
The Duchy of Cornwall’s website states:

As The Prince already pays income tax on the Duchy’s surplus, the Duchy does not pay Corporation Tax. If the Duchy also paid Corporation Tax, The Prince would effectively be taxed twice on the same income. Only companies pay Corporation Tax; many other large organisations which are not companies pay income tax.

Inevitably, the Prince is seeking to endear himself to the people by claiming that he pays income tax, just like anyone else. But how much income tax does he pay? Page 27 of the Prince’s 2013 annual review states:

The Prince of Wales pays income tax voluntarily on the surplus of the Duchy of Cornwall, applying normal income tax rules and at the 50 per cent rate, and pays income tax on all other income and capital gains tax like any private individual. The £4.426 million includes VAT.

It is worth noting that income tax and VAT payments, which are payable by all consumers, have been lumped together to produce a higher amount. Why this obfuscation by combining direct and indirect taxes?

Any comparison of the Prince’s direct (income tax) and indirect (VAT) tax contribution with that of an ordinary citizen is difficult, but statistics provide some food for thought. The most recent government statistics show that for 2011/12, direct and indirect taxes added up to 36.6% of the income of the bottom 20% of the UK households, and averaged at 34.6% of the income of all households. The £4.426 million tax payment by the Prince amounts to 23.2% of his income.

The controversies about Prince Charles’s business dealings are unlikely to go away. The feudal arrangements do not sit easily with contemporary notions of democracy and public accountability. Insetad, we must subject all payments to any part of the monarchy to parliamentary approval and scrutiny.

This article first appeared on The Conversation website

Country-by-country reporting is a victory for citizens over companies

Prem Sikka

The Twitter age is about to chalk up its first success in the grey world of corporate accounting. It has been reported that the European Union will seek to make large companies disclose the taxes they pay and profits they make on a country-by-country basis.

This is part of the crackdown on corporations avoiding their obligations. The concerns are driven by tax avoidance, as companies have sales, employees and assets in one place, but end up booking them in jurisdictions with comparatively few employees, sales and assets. The idea behind country by country (CbC) reporting is to enable citizens to scrutinise corporate practices and ask critical questions.

The EU proposals mark the beginning, but CbC is a much broader idea. It supplements the traditional model of publishing profit and loss account, balance sheet and a cash flow statement. These statements relate to the company as a single economic entity and do not provide any disaggregated information. So these statements do not reveal the taxes a company may have paid in each country, or the profits and losses made there.

The traditional approach in accounting circles has been to require companies to publish “segmental reports”, in which company directors offer a commentary on major operating segments, products and services, the geographical areas in which they operate and their major customers. Such reports are too general and do not focus on each country.

In contrast, CbC requires companies to publish a table showing sales, costs, profits, losses, taxes, loans, subsidies and employees for each country of its operations. It could even be used to demand information about carbon emissions and other corporate footprints in each country. Such a table would show that a location has relatively few employees but is reporting very high profits, or that a country has a high proportion of a company’s sales and employees, but pays little or no tax. Armed with this information, citizens may be able to construct shadow accounts and question conventional accounts offered by corporations – the ones that say, “we are good citizens, we pay taxes and really care for the community”.

CbC is the culmination of a decade-long campaign by civil society organisations. When fully enacted, it will be the first accounting standard formulated and developed by civil society rather than the traditional accounting standard setters. It represents the first time activists have demanded and secured an accounting standard that the establishment was not keen on in the social media age.


In 2003, in my capacity as director of the Association for Accountancy and Business Affairs (AABA), I encouraged Richard Murphy, a chartered accountant, to draft a proposal that could highlight flight of capital, profits and the mismatch between profits, employees, assets and tax.

The first draft was published in 2003 and has continued to be refined. Initially, meetings were sought with the more traditional accounting standard setters, such as the International Accounting Standards Board (IASB) and the Financial Reporting Council (FRC), but they showed no interest.

There was considerable opposition from the professional accountancy bodies. For example, the Institute of Chartered Accountants in England and Wales was vehemently opposed to it. Major accounting firms and corporations were also opposed to CbC.

For example, Deloitte said “we do not believe that imposing incremental country by country disclosure in financial statements prepared under IFRSs is warranted”. A survey in 2010 did not show much enthusiasm for CbC among FTSE 100 directors. The usual arguments were that disclosure would be costly, even though companies should already have the information about the performance of their subsidiaries in each country of their operation. The cost of publishing this internally held information is negligible.

The main turning point was the support given by NGOs, such as Christian-Aid, Publish What You Pay (PWYP), War on Want, Tax Justice Network, Oxfam and many others, not only in the UK and the EU, but also in developing countries and the US. The credit for this must go to Richard Murphy. This campaign was joined by some Members of the European Parliament (MEPs) and also Labour MPs.

Much to the dismay of the accounting establishment, their pressure persuaded the EU to launch a consultation exercise in 2010 and has now resulted in partial implementation of CbC. No doubt, there is more to come.

The story of the country by country reporting is that in the digital era, it may well be possible to mobilise alternative centres of power, at least in crafting new accounting disclosure rules. This announcement has been a victory for those of us who campaign for greater transparency on tax. Let’s hope it’s the first of many.

Prem Sikka is senior adviser to Tax Justice Network.

This article first appeared on The Conversation website

Hype wars: Return of the FDI?

Here's the propaganda: Chancellor George Osborne has pulled off a massive coup by personally negotiating a deal to secure the next film in the blockbuster Star Wars saga will be made in the UK.

George Osborne has not been shy about hyping his own success in making this happen:

"It is clear evidence that our incentives are attracting the largest studios back to the UK.

"I am personally committed to seeing more great films and television made in Britain."

Yes, there's our doughty chancellor securing foreign direct investment (FDI) to Britain and securing a healthy future for the UK film industry ... or so he'd want you to believe ...

Here's the reality: previous Star Wars films (in fact the first four) have been made (entirely or substantially) in the UK too, so this is hardly breaking new ground or attracting new business to our shores.

It's also worth analysing what Osborne means when he talks about "our incentives". What that means is that even if just a quarter of the film's production occurs within the UK, then the producers (Lucasfilm) can claim back tax relief on 80% of the full budget. This is a colossal tax break - and is basically offering multinational firms a tax avoidance scheme - giving them the option to reassign profits from elsewhere to the UK.

Hailing this as some kind of success story - when in reality it represents a race to the bottom on tax (i.e. governments prostrating themselves to business)  - is typical of a chancellor who hailed the 'Irish miracle' in 2006 for its slashed corporation tax, shortly before that economy spectacularly imploded.

Of course, Osborne's economic strategy is based on slashing taxes for business and the super-rich. What underpins the Chancellor's thinking is either a deeply flawed belief in Hayekian economics or more crudely a policy of class war: reducing taxes on the wealthy while slashing services and entitlements for everyone else.

Far from being return of the FDI, this is more the (evil) empire fights back ...

Redistributing ... to the rich

Andrew Fisher, LEAP co-ordinator looks beyond the fluff to discover the real issues in the Budget. (This article first appears in the May 2012 edition of Labour Briefing)

Pasty tax, charity tax, granny tax and even caravan tax – if you live too much of your life on planet Twitter then you’d be forgiven for thinking these were the main issues in the Budget.

I admit, as someone who doesn’t tan I was initially perturbed about #pastytax until I realised it referred to Cornish pastries rather than a lack of cutaneous pigmentation.

But the real stories of the Budget – involving the big billions – were about the more commonly known income and corporation taxes. Osborne gave corporate Britain another cash giveaway: taking corporation tax down from 26% to 24%, and committing in his statement to reduce it further to 22%, with the aspiration of reducing corporation tax even further.

"So that by 2014, Britain will have a 22% rate of corporation tax ... And a rate that puts our country within sight of a 20% rate of business tax that would align basic rate income tax, the small companies rate and the corporation tax rate."

This largesse to big business will cost the Exchequer an extra £3.76bn in the period covered by the spending review. This is on top of the £25bn in tax breaks for business announced in 2010 which included Osborne's commitment to cut corporation tax from 28% to 24% over four years.

Now Osborne will cut taxes for big business to 22% over the same period. It is not as if the previous government had been loading the tax burden on business either. Under the New Labour, corporation tax fell from 33% to 28% – which LEAP estimated cost the exchequer £50bn over 13 years.

So how does Osborne's new corporation tax rate compare with other countries? He was kind enough to tell us in the Budget:

"A headline rate that is not just lower than our competitors, but dramatically lower. 18% lower than the US. 16% lower than Japan. 12% below France and 8% below Germany. An advertisement for investment and jobs in Britain."

 So more like ... Ireland? And by coincidence that is a country that Osborne deeply admires. It was Osborne who said in 2006, "Ireland stands as a shining example of the art of the possible in long-term economic policymaking". The problem isn’t that Osborne said that in 2006, but that he still believes it now!

Ireland has been through an even more adverse austerity shock doctrine than Britain, and has slipped back into recession this year. Slashing corporation tax simply undercuts the tax base and hinders recovery.

But it does something else – it redistributes wealth. Lower corporation tax means larger net profits, so instead these larger profits go to large shareholders in dividends and directors in bonuses.

Those same directors will be laughing all the way home from their banks thanks to Osborne slashing the top rate of tax from 50 to 45 per cent. That will cost £3bn per year, which will stay in the pockets of the richest 1% in the country.

This was the issue that Ed Miliband led on when he rose in the House of Commons to challenge the Chancellor’s Budget. It was an uncharacteristically forceful performance, coruscating Osborne for cutting taxes for his Cabinet mates and their chums, while doling out austerity for the 99%.

Of course, Ed Miliband went from that to photo opps in Greggs, and jumped on every bandwagon (or should that be caravan?) going. Now he leads the charge against cutting tax reliefs for wealthy philanthropists – from class warrior to woolly liberal in two weeks. It is a snapshot of his leadership – vacillating, inconsistent and ultimately inconsequential.

So back to the Budget. The lost corporation and income tax revenue requires other taxes to rise to make up the void and/or public spending is cut.

In a throwaway remark, Osborne casually added that to balance the books “we would need to make savings in welfare of £10 billion by 2016”. This is on top of the £20 billion in welfare cuts already set out and being implemented with much misery and resistance.

What was unique about this comment, was that when you delved into the Budget Red Book (the lengthy tome that accompanies that parliamentary pantomime) there was no detail. In fact all you could find is that the precise figure is £10.5bn and neither Treasury nor social security ministers could say where a penny of these new cuts would fall.

The Budget highlighted that we have an incompetent government waging class war let off the hook by a pallid (some might say pasty) opposition.

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The consequences of ever vanishing corporation tax revenues

In his Budget statement, Osborne gave corporate Britain another cash giveaway: taking corporation tax down from 26% to 24% from next month, and committing in his statement to reduce it further to 22%, with the aspiration of reducing corporation tax to 20%.

"So that by 2014, Britain will have a 22% rate of corporation tax ... And a rate that puts our country within sight of a 20% rate of business tax that would align basic rate income tax, the small companies rate and the corporation tax rate."

This largesse to big business will cost the Exchequer an extra £3.76bn in the period covered by the spending review. This is on top of the £25bn in tax breaks for business announced in 2010 which included Osborne's commitment to cut corporation tax from 28% to 24% over four years.

Now Osborne will cut taxes for big business from 28% to 22% over the same period. It is not as if the previous government had been loading the tax burden on business either. Under the New Labour government, corporation tax fell from 33% to 28% - costing the Exchequer £50bn in foregone revenues over 13 years (as LEAP previously estimated).

So how does Osborne's new coporation tax rate compare with other countries? He was kind enough to tell us in the Budget:

"A headline rate that is not just lower than our competitors, but dramatically lower.
18% lower than the US.
16% lower than Japan.
12% below France and 8% below Germany.
An advertisement for investment and jobs in Britain."

So more like ... Ireland? (well, yes as the table above shows, via OECD in 2011) And by coincidence that is a country that Osborne deeply admires. It was Osborne who said in 2006, "Ireland stands as a shining example of the art of the possible in long-term economic policymaking".

Ireland has been through an even more adverse austerity shock doctrine than Britain, and today slipped back into recession. Slashing corporation tax - Osborne's Irish solution - simply undercuts the tax base and hinders recovery.

But it does something else - it redistributes wealth. Lower corporation tax means larger net profits, so instead these larger profits go to large shareholders in dividends and directors in bonuses.

And instead of corporation tax, other taxes have to make up the void and/or public spending is cut. On the latter that has - as the IFS has shown (slide 4 here) - disproportionately hit the poorest: cutting benefits and tax credits.

The other part of this equation is the effect on the tax base (details can be found in OBR data published yesterday).

My analysis of this data shows that the OBR forecast the following increases between 2010/11-2016/17 in tax receipts from each of the four 'big ticket' taxes:

Income Tax
up 33.9%
National Insurance
up 36.1%
VAT
up 40.7%
Corporation Tax
up 14.9%

So while taxes from earnings rise sharply (and the regressive NI more sharply) and rise steeply for consumption (regressive VAT), taxation on profits falls as a proportion of the tax base, and relative to other taxation.

So whereas in 2010/11 corporation tax accounted for 8.13% of total tax take, by 2016/17 that figure will have fallen to just 7.02%. By contrast VAT will have risen from 16.32% in 2010/11 to 17.25% in 2016/17.

Corporate Britain: The wages into profits miracle

Times are tough - living standards are falling, as the IFS reported last month. Average wages are rising by around 2% while inflation is over 5%. Consumers are cutting back on spending, demand on the high street is suppressed and employers are laying people off: unemployment continues to rise.

Amid all the gloomy headlines about unemployment, pay freezes, lay-offs, the eurozone crisis and the imminent need for further bank bailouts, you might have missed this virtually unreported statistical release from the Office for National Statistics.

The release demonstrates that corporate Britain is actually doing rather well: the profitability of UK companies was 12.1% for the second quarter of 2011 - up from 11.7% in 2010 and 11.3% in 2009.

In the service sector the picture is even more rosy, with companies profit rate at 15% in Q2 2011, up from 14.7% in 2010 and 14.2% in 2009.

Now of course LEAP did point out in its March 2011 report that some UK firms were engaging in rampant profiteering. We identified banks, supermarkets and energy companies - and called for a windfall tax on each sector.

So how - when times are tough, wages are falling further behind inflation, benefits are being cut and unemployment is rising - is the corporate sector managing to increase its profits?

The answer is part of the reason why we're in this crisis: because there has been a power shift from workers to corporations ('from labour to capital' if you like it in Marxist terms). As the share of the national wealth going to wages has declined so the the proportion going to corporate profits has increased. Workers are easier to sack and harder to unionise, and we have deregulated, liberalised and privatised.

Take a couple of examples where this is true in corporate Britain today:

Newsquest, a company which owns a large number of local newspapers in the UK has frozen staff pay, slashed 800 UK jobs, and last year closed its pension scheme. Times are tough? Well, not for the shareholders: their profits went up 15% (£10.8m) to £82.5m. More on Newsquest here.

Park Cake is a company you've probably never heard of, but you have probably seen their products. Its biggest customer is Marks & Spencer, for which it makes its famous Colin the Caterpillar cake and its popular chocolate ganache birthday cake. This year Park Cake directors awarded themselves a 10.6% pay increase and the Managing Director a 15% pay rise. Their workers' pay was frozen. To compound their greed, they are also exploiting their agency staff by exploiting a loophole in the new agency workers regulations. No pay rise, no rights, let them eat cake. More on Park Cake here.

In both these cases, the workforce is unionised - which is why you've now heard of them - but the law is so stacked in employers' favour that even the best unions (and the NUJ and BFAWU are two of them) are struggling to fight back.

Of course this squeeze cannot go on forever - if wages continue to be squeezed and unemployment continue to rise then people will cut back on buying things like newspapers and caterpillar cakes. As Nouriel Roubini said, capitalism might eat itself.

The solution to this crisis is therefore to restore trade union rights, raise not cut (as Osborne is doing) taxes on big business, uprate the national minimum wage and invest to create jobs. Trade unions are saying it. They're right. Labour should say it too.

Don't scare off the banks, says Demos

Amid all the suffering - unemployment, welfare cuts, redundancy notices, pay freezes, etc - some of us have turned our frustrations on the banks. Thankfully the self-described 'leading independent think tank in British politics' (Demos) has come to their rescue with a new publication by New Labour's former City Minister Kitty Ussher.

The Guardian reports that Ussher carried out in-depth interviews with senior bankers and gleaned anecdotal evidence that suggests banking may be on the verge of leaving the UK citing rising taxes, threats to split the big banks and scrutiny of bonuses. Hmm, the 'we'll go overseas' line. Ironically the Economist recently gleaned some anecdotal evidence of its own that "they might be bluffing".

Ussher's report asserts that UK-based banks employ "1 million people and supporting a further 500,000 – and data showing the sector brings in £53bn in tax, 11.2% of the UK's total tax take". So best not push them away or that's 1.5 million jobs gone and £53 billion in tax down the swanny?

But Ussher, rather conveniently, conflates two issues: elite speculative investment bankers with the banking sector. Allow me to elaborate. Let's say Bob Diamond and his ilk despair at the bank levy, 50% tax rate, and the findings of the Vickers Commission and decide to relocate their head offices to Zurich. Does that mean every branch of Barclays would close on UK high streets and its 60,000 staff be made redundant? No, in fact no branches would close, and all but a global elite of staff would still work and pay their taxes in the UK.

Funnily enough, I have an ally in the Financial Times too - which wrote the below in its editorial earlier this month:

Such threats should be faced down, not just because they are unreasonable but because they are of questionable credibility.

It is not clear what “moving abroad” actually means. Were a bank such as Barclays to shift its headquarters, the impact on the UK would surely be minimal as it would still do much of its business and pay taxes in the country.

What is more likely anyway is that rather than upping sticks altogether, some banks may reduce their new investments in Britain. This might make the City slightly less of a hot spot, but it would not be a disaster. And were it to be the price of financial stability,this would be a price worth paying.

So where did Ussher's '£53bn in tax' figures come from? Again her anecdotal assertions are of "questionable credibility". Given the total corporation tax take in the UK was only £43 billion in 2010-11 this seems a pretty fanciful calculation. Indeed the report doesn't explain how the figure was arrived at, just that PriceWaterhouseCooopers calculated it.

So what do the banks - not their staff - contribute in tax? According to the Richard Murphy penned TUC report - The Corporate Tax Gap - not much. It says that as well as benefiting from an £850 billion bailout from taxpayers and the Bank of England during the recession, banks are able to offset their £19 billion [cash value] of tax losses between 2007 and 2009 against paying tax on future profits.

In 2009 Barclays paid just £113m in corporation tax - just 0.26% of total corporation tax and a would-we-miss-it 0.02% of total tax receipts.

Let's say the four big UK banks are similar to Barclays - that's 1% of corporation tax receipts and 0.08% of total tax receipts. And we wouldn't have to bail them out again (not that we should have done before without full nationalisation).

Despite what Demos might tell you, there is little to be lost from the departure of these parasitical tax avoiders. Nevertheless expect the Cabinet of millionaires to pay more attention to Demos than to LEAP.

Banks' bluster can't disguise lightweight levy

The UK bank bailout was £1.3 trillion. The UK’s big five banks made pre-tax profits of £15bn in the first half of 2010. Let’s estimate the second half of 2010 was as good and their annual profits were £30bn. Bank bonuses were estimated to be over £7 billion last year. Osborne's levy of £2.5 billion (and let's see how much is actually collected) is a drop in the ocean - especially when Osborne is cutting corporation tax every year for the next four years.

Very good analysis in yesterday's Morning Star:

This levy will not do

Judging by the headlines it's been a tough week to be a banker. Not only have they been subject to "Project Merlin," which set minor restrictions on their multimillion pound bonuses, but they also have had the levy on their borrowing increased. Times are indeed tough for the leading members of the top 1 per cent of earners. Or are they?

Chancellor George Osborne slapped - well, more precisely, tickled - bankers with the levy at the beginning of the week following a period of prolonged procrastination by the Treasury over the question of limiting their runaway bonuses.

But far from being a "pre-emptive strike against the City," as the Telegraph exclaimed earlier this week, the levy is tame and easily manageable by the banks.

So what are the facts? Well, the government aims to increasing the levy on banks' borrowing to £2.5 billion this year, an extra £800 million on its previous plan.

This represents an annual tax of 0.075 per cent on the value of all of the debts of British banks.

The coalition is adamant that the levy on bank balance sheets is the best way of making sure companies make a fair contribution to tackling the deficit.

However, despite banks reportedly being "livid" at the levy, unions have described the move as a mere "drop in the ocean."

The £2.5bn figure represents only 10 per cent of the overall profits made by Britain's banks last year.

And when you consider that banking profits were in the region of £25bn, compared to the National Audit Office statistics showing that the financial sector still owes £90bn to the public following the taxpayer-led banking bailout, to say that the banks have got off lightly is an understatement.

Despite this City representatives have suggested that the higher levy calls Osborne's commitment to bankers and big business into question.

This seems odd given the news - as if Star readers really needed it - disclosed earlier this week that more than 50 per cent of funding for the Conservatives' general election campaign came from financiers in the City of London.

Over £11m was donated, according to an investigation by the Bureau for Investigative Journalism, a figure which puts real meaning into the saying: "He who pays the piper, calls the tune."

Unions and even the shadow Labour cabinet have highlighted this link as proof of Osborne's inertia in dealing with the banks and their behaviour.

Left economists have been busy too, providing much-needed analysis and counter balance to the agenda being thrust on the British public over this issue.

Left Economic Advisory Panel co-ordinator Andrew Fisher and left economist Michael Burke point out that, as a result of the coalition's cuts to corporation tax, the rise in banking profits will actually be higher than the £800m increase in the levy that Chancellor Osborne is imposing.

"Corporation tax is being reduced this year to 27 per cent - this would save £1.1bn for the UK banking sector," Fisher tells the Morning Star.

"One also has to look at how banks manage to disguise their balance sheets, for example through subsidiaries and how much the Treasury actually collects."

Fisher adds that the bank levy will only pull in an estimated £10bn over the next four years, while welfare will be cut by £18bn over the same period as the government pushes to slash Britain's budget deficit.

"The poor are paying more for a crisis they did not create," says Fisher.

And scant regard has been paid to any possible and immediate alternatives.

Although differences exist in exactly what to do with the banks, left economists are clear that it is not simply a question of how big the levy is. They argue that the whole relationship between the state and the bank must change.

"The way out of the banking crisis and the economic crisis is the same - instructing the banks, starting with the state-owned banks, to lend for productive investments," says Burke.

"This would both increase their profitability, to the benefit of taxpayers, and boost growth to the benefit of all."

University of the West of Scotland Professor John Foster goes further.

"The only way to get money out of the hands of speculators and into the productive economy is for the retail banks to be fully nationalised - and for the government to close down the centres for unregulated speculative banking and tax avoidance in Britain's crown dependencies," he says.

Update: excerpt from Prime Minister's Questions on bank bonuses. Miliband exposes Cameron's rhetoric, but Cameron's retort is fairly spot on to be fair.