Richard Murphy speaks to HMRC

A few snippets are worth bringing out from a speech yesterday to a HMRC (UK Revenue and Customs) conference on tax and corporate transparency, by our Senior Adviser Richard Murphy. A few extracts are worth noting.

"Barclays, Tescos and many, many others have used secrecy jurisdictions to reduce their tax bills. We all know that. They say it’s legal. I’m not going to dispute it. But chucking carbon into the atmosphere is also legal: no one disputes that either. But it’s most certainly seen as an issue relating to corporate responsibility. And child labour is legal in very many countries in the world. But ask any garment manufacturer about the corporate risk of being seen to use it and it’s clear that legality is not the definition of acceptability when it comes to corporate responsibility."

He mentions that we talk often about tax havens and the "secrecy space" - usually referring to tax havens. Murphy, however, mentions another, related secrecy space:

"Much less widely known, but at least as pernicious is the secrecy space provided by the rules of the accounting profession. If I were to show you now the audited published accounts of any UK quoted company I can tell you this: they are a work of fiction. Indeed, my friend Prof Prem Sikka and I have often wondered just which of them we should enter for the Booker prize.

That is a big claim: let me explain it. The published accounts of all quoted companies are consolidated accounts. Those consolidated accounts add together the individual accounts of the tens, hundreds and even thousands of separate subsidiary companies and branches that go to make up the entity as a whole. But it is not just addition because when consolidated accounts are prepared something very important is taken away. Every single bit of intra-group trading is hidden from view in a set of consolidated accounts (our italics)."

In other words, all the data from all the different parts of a company in different jurisdictions are squashed together into a single number, or set of numbers, and there's no way to unpick them. It's like pouring a lot of different paint colours together: once mixed into a single colour, you can't work out what the component parts were. And this is a big deal:
"It is an extraordinary fact that 60% of world trade is undertaken on an intragroup basis. At least, that’s what the OECD say. But not one pounds, euro, dollar, yen or whatever of that trade is reflected in the accounts of the world’s largest corporations."

And he then puts this into a context:

"Let me put this in the context of corporate responsibility. Just what does corporate responsibility mean? I suggest it is acting reasonably within the communities which host the operations of the corporate entity. With regard to tax I have no doubt at all about what this requires. It means that the corporation must seek to be tax compliant in each and every jurisdiction in which it works. Tax compliance is seeking to pay the right amount of tax (but no more) in the right place at the right time. Most accountants I know would agree with that. The trouble arrives when I add that in this context right means that the economic substance of the transactions undertaken coincides with the place and form in which they are reported for taxation purposes."

And, of course, one key way to address this is to institute country-by-country reporting, as he does later in his speech. But here's another thing: another way of thinking about offshore.

"By definition, but this is not my definition, it is the usually understood technical definition, offshore means that the place where a transaction is recorded is not the same place as that in which its economic impact arises.

That is, of course, why the tax havens could claim that the current economic crisis did not have its origins offshore. They are right: nothing happens offshore. There are just a bunch of bankers, lawyers and accountants sitting there who record transactions that really take place elsewhere, even though it seems to me that in most cases they choose not to ask where that elsewhere might be."

Indeed. That is why the Cayman Islands is able to point to Enron, Parmalat, and so on, and - with a straight face - claim that they had nothing to do with it. They all do it. The offshore system consists of a lot of clever people, all pointing elsewhere. "Not our problem! Not our fault!" they cry. And everything falls through the cracks in the international financial architecture, and all the abuse continues, just as before.

The rest of his speech - on proposals to water down audit responsibilities; the duty of companies to be tax compliant; and much more. Finally, his response to one accountant is worth reading.

"We heard what a member of the International Accounting Standards Board said in public session when this issue was forced onto their agenda. He said “it looks like this deals with transfer pricing and we don’t want to go there”.

Oh yes we do.