Friday, 18 February 2011

Judging a book by it's predecessors?

There was a post in the Guardian on Monday by George Monbiot regarding what he seems to believe is an attempt to turn the city of London into a giant tax haven from what appears to me to be a simplification of legislation.  This was picked up by Max Teuerman in the Lib Dem Voice on Wednesday.  

What the actual issue boils down to is that previously a multinational who had a branch overseas would have to declare the income/expenditure in order to be taxed in the UK whilst receiving relief for the tax that they had paid in country.  Under the new proposed method this is just dealt with in the country where the branch is based.  For instance, the UK is introducing a Corporation Tax rate of 24%, if the branch was based in a country where the Corporation Tax rate was 20% they would be charged the additional 4% here.  This however lead to a lot of complications as often the base for the calculation would be different in each country.  The new system would basically ignore the branch details and not claim the 4%.  

This may sound like the government is just giving up potential revenue, though I fall much more into Max's way of thinking.  Having worked in the finance division of two different international companies and also having a tax background I don't see it having much of an impact.  It is very common for international operations to have separate legal identities created and become subsidiaries rather than branches, particularly when they are profit making, in order to minimise any tax liability.  Mr Monbiot obviously thinks this is wrong, however as far as I am concerned on the surface at least it just allows profits to be taxed in the country in which they were earned.  Obviously there is an issue with transferring profits however it has always been my understanding that the revenue take a closer look at these transactions to ensure any transfer pricing arrangement is done at an arms length basis, this should be checked when the accounts are audited.  By bringing branches into line with subsidiaries this stops companies doing as Max suggests claiming relief for their expenses in the early years as they establish and make losses before becoming a separate entity at a later stage.  So without seeing the figures I don't think this will be a large change plus brings us into line with a large number of other countries.  The argument therefore comes down to whether you think tax should only be paid in the country where the income is generate, which is my opinion.  This also may stop some of our bigger business moving their head office to places where this can be done and have lower tax rates, but by reducing our tax rate to 24% we could encourage the head office to move to somewhere with higher tax rates (as the head office is a cost centre not a profit generating unit) but I feel this is unlikely.

What intrigued me the most about this however, was not the different positions taken by the two authors, one is a journalist who obviously wants to find a story, is likely to not be an expert on the matter and it is quite easy to see how this could lose the exchequer money, the other is a qualified accountant and has good experience in the matter (and has interpreted it the same way as me - though he has much more relevant experience than me and without seeing the numbers we may both be wrong).  No what was most interesting was the comments on the Lib Dem Voice article that were judging the merits of the argument based solely on the characters writing the pieces as if they were either to be totally mistrusted because they are:

a) a journalist with an axe to grind (I am not familiar with Monbiot as I don't read the Guardian unless pointed that way, but Max also seems to think this is motivated rather than just how he generally has deciphered the information).
b) an accountant with experience in the industry and therefore with a bias, personal interest working for 'the man'.

As an accountant myself I find it disturbing that people have an assumption about the profession and it would appear that certain people assume we are all crooked.  I can assure anyone reading this that you have to work very hard to get to where Max is and you have to uphold the strictest moral behaviour and practices to stay there.  As a tax professional his job is to minimise tax liabilities legally, not to defraud the government.  He doesn't have a vested interest in the legislation reducing the burden of tax for companies, in fact you could argue reducing liabilities and making the legislation makes his skills less valuable and therefore the legislation might not be in his interests yet he is using his expertise to advise that it is not as much of a theft from the taxpayer by the big corporations as Monbiot thinks.


  1. What I have read of your blog looks interesting, but I must say it's a bit painful on the eyes, and I don't really have any more time to copy and paste in a different colour!

    Ironically I have started to judge your blog by it's readability which isn't fair at all!

    It looks great, but have you thought of running a parallel blog for those whose eyes are not as young as yours?

    Just a thought


  2. That's quite a fair point! After your comment I looked to find a different layout but there are none I like. Will turn all my text white when I have the time to see if that's better!