Quote of the day: Earnings tax edition

Posted by Christie Malry on February 24, 2014 at 7:42 am

Oh yes he did:

Second, if this is to be called an Earnings Tax the obvious question to ask us why then only earnings are taxed

Will "because it's called Earnings Tax" do?

Quote of the day: bumpkin edition

Posted by Christie Malry on February 9, 2014 at 11:54 am

London is the problem of small scale thinking writ large

A city of 21 million people is "small scale thinking".

Is there any attempt at all to engage his brain before he spews out his blog posts?

Questions from Ritchie we can answer

Posted by Christie Malry on January 23, 2014 at 9:36 am


Where would you rather live? In a more or less equal society?

He presents a map showing inequality by country. The UK and US are the same mid shade of green.

But we know people want to live here. That's why we have extensive immigration hurdles, lots of asylum seekers and newspapers terrified we're about to be swamped by Bulgarians. In the US, they've built a bloody great fence to keep the Mexicans out.

Ritchie himself, as a citizen of an EU country can live in any of the EU member states. He chooses to live in the UK.

So I guess he's privately happy with our level of inequality, all things considered, else he would move to a more equal country.

Asking the right questions on digital taxation

Posted by Christie Malry on January 21, 2014 at 2:21 pm

Ritchie is his usual, lazyass self:

That does, however, presume that the right question was asked by KPMG. I am quite sure it was not. The Ft does not tease that issue out.

The right question to ask in respect of Ritchie’s article is, of course, “I wonder what questions KPMG did ask? Is there possibly any way I might be able to find out?”

And the answer, as with so much in this world, can be found via a simple Google search:

As the OECD begins to implement its Action Plan, it is important to focus on
and discuss these three key questions:
1. Re-assessing the systematic approach – Are there compelling reasons to change the systematic approach taken by the TAG in performing its similar evaluation from 1999 to 2005?
2. Distinguishing how fact patterns have changed – What significant changes have occurred since 2005 to business models, transactions in the digital domain and other considerations on which the TAG based its
3. Identifying and evaluating the alternatives – What alternative solutions have been discussed within the tax community since 2005, and how do they stack up against a set of evaluation criteria to be defined?

Under number three, they specifically consider four options: extending residence-based taxation, by tightening controlled foreign company rules; extending source-based taxation, by restricting deductions and/or changing permanent establishment rules; reforming corporation tax completely, eg via formulary apportionment or scrapping profits-based taxation altogether; and increasing transparency, such as by introducing country-by-country reporting.

In what ways are these not “the right questions”?

Of course, it’s entirely possible that the survey population was not representative of the wider population, or that the responses were ‘massaged’ once they had been received. To know that, we’d need to see the actual survey methodology and the set of responses. But at least we can conclude that Ritchie is - as ever - utterly wrong to suggest that the wrong questions were asked.

Scope creep for country by country reporting

Posted by Christie Malry on December 2, 2013 at 10:14 pm


Country-by-country reporting makes it easier to compare how member states measure up against one another in terms of their CSR standards

What? What?

Country by country reporting has been, variously, justified as being: a way to identify tax avoidance by multinational companies (it doesn't do this very well); a way to stop multinational companies from ripping off African countries (it doesn't do this very well either); and a way to stop scumbag African dictators from ripping off their own countries (it should be effective in doing this, but may not be the most efficient way of doing it).

But CSR?

What the f***?

War on Want's Alliance Boots analysis found wanting

Posted by Christie Malry on November 29, 2013 at 12:39 am

War on Want has been busy today, putting the boot into Alliance Boots over perceptions of sketchy disclosure, related party transactions and profit-shifting. They have written a formal complaint to the OECD about the profit-shifting, arguing that it’s against OECD principles.

In response to a tweet, I had a look back at their earlier report, in which they claimed that Alliance Boots had dodged £1bn of tax over the last six years. And I had a look at their methodology for claiming this.

What I found is that their methodology is seriously flawed. The facts, quite simply, don’t stack up.

There are three problems:

1. The effective group tax rate is basically the UK tax rate

2. For War on Want to be right, virtually all profits from the last six years would have had to be earned in the UK.

3. The group simply isn’t that profitable in the first place

In more detail:

1. The effective group tax rate is basically the UK tax rate

Why would Alliance Boots dodge UK taxes? In order, one presumes, to pay taxes somewhere else instead at a lower rate. Otherwise, why bother? They could save themselves effort, time and money by just paying taxes in the UK.

Under financial reporting standard IAS 12, Income Taxes, companies must give a reconciliation between their expected tax rate, based on accounting profits, and the actual tax rate recorded in their accounts (current tax plus deferred tax). The expected rate can be calculated either based on a home country or on a blended rate that incorporates all the locations where they do business. And, lo and behold, Alliance Boots uses a blended rate that shows that their expected rate is 23.6%, virtually identical to the UK rate.

If War on Want were correct, and Alliance Boots was genuinely trying to shift profits from the UK to other countries, it would have an expected rate much lower than the UK rate. There are certain ‘non-taxable’ items in the tax reconciliation that include ‘non-taxable finance income’. Might these be the results of some clever wheeze to turn UK operating profits into ‘non-taxable finance income’? Even if all this item were in fact tax dodging, it’s only £47m this year and £36m last, so it’s well below the £167m that War on Want alleges has been dodged.

So we know that, whatever the motivation, Alliance Boots doesn’t seem to be attempting to shift vast amounts of profit from the UK to lower tax jurisdictions. Therefore, the idea that they are shifting profits from the UK simply doesn’t stack up.

2. For War on Want to be right, virtually all profits from the last six years would have had to be earned in the UK.

Alliance Boots has the following profits/(losses) before tax for the last six years (taken from their accounts for 2009, 2011 and 2013):

2008: (64)

2009: 13

2010: 460

2011: 637

2012: 688

2013: 837

For a total of £2,571m. If taxed at 24%, these would give rise to tax of £617m.

How can Alliance Boots have dodged £1bn of tax in the UK over that six year period then? It simply didn’t have profits to support tax avoidance to that scale.

3. The group simply isn’t that profitable in the first place

A similar, but slightly different point. War on Want claim that Alliance Boots’s UK corporation tax payments represent “only 56% of all the tax it paid” in 2013. But sales to UK customers comprise only about one third of group revenues (note 4, p80). So perhaps Alliance Boots is actually overpaying tax in the UK?

They also make a big deal about how Alliance Boots has sales of £22bn. But the fact is: the group simply isn’t that profitable. Its business is high quantity low margin products. We should celebrate the fact that this group can support the livelihoods of 108,000 employees across the world and enjoy its position as a stalwart on the high street. But we shouldn’t expect vast amounts of corporation tax. The group doesn’t have high profits to tax in the first place.


Ben Saunders provides an explanation of why we shouldn’t get hung up about loan interest being deducted in the UK. There’s also an interesting comment from Andrew Jackson on why Ben might not be right.

As you might expect, Tim puts the boot in to War on Want as well. And also over at Forbes.

Quote of the day: the glorious foresight of Richard J Murphy

Posted by Christie Malry on November 17, 2013 at 1:02 pm

Asked to name five products manufactured and designed under collective ownership which are are widely known and respected for their quality of design and producation, their affordability and all round quality, Ritchie says:

Try the Cooperative Bank – which has not needed bailing out

Almost apologies and ad hominems

Posted by Christie Malry on November 9, 2013 at 12:28 pm

So today we get this from Ritchie:

His numbers work

Hooray! I win!

But then he had to spoil it all by saying something stupid like:

I never denied a reconciliation was possible

I'm not sure 8 out of 10 cats would agree with you there. Because in the original post, we had:

Now I can spot the £2,625m group operating profit that ties to the segment note in there. But can you find the £2,516 referred to on page 37? No, neither can I.

And is the tax charge on page 37 the same as the group P & L? Not unless £1,169m is now the same as £1,110m.


I also wonder how the auditors did not spot the difference either.

Which looks rather to me like someone who's saying that Centrica and their auditors have goofed rather than merely it's misleading.

His apology continues:

My point it is absurd to publish numbers that few could reconcile

Well, Ritchie might have a point here. Except it's really quite a weak point because Centrica actually produce a reconciliation of adjusted operating profit per their segment analysis to statutory operating profit in Note 4(b) to their accounts. They didn't reconcile the exact numbers Ritchie was looking for, but there is a clear link between the segment basis and the statutory basis.

And because this is in the notes to the accounts, it's audited.

The note is called "Segmental analysis" so anyone who wanted further clarification on where the numbers had come from ought to be able to find it quickly. And in a PDF you can always search for a particular word, or even a number, to find what you're looking for quickly.

It's the sort of due diligence someone throwing around accusations like "I also wonder how the auditors did not spot the difference" ought to have done before posting.

Elsewhere, Ritchie comments:

The comment was not an ad hominem, it was an observation of fact

Actually, it was an ad hominem. An ad hominem is a logical fallacy that occurs when one party refuses to engage in a debate about the facts and derivation from those facts but instead makes a comment about the other party. Even if the comments that he has made are true (and I don't think they are, but YMMV), it's still an ad hominem, because he's chosen to ignore criticisms of his own method and comment only on the other person's character.

Given that my argument didn't depend at all on my character, this is not a particularly effective way to respond to a challenge to his original post.

And nor do I for a moment accept I made a mistake

It doesn't matter any more whether Ritchie accepts whether he made a mistake. It's blindingly obvious that he did.

As apologies go, it's pretty weak. Best try again, eh?

Ritchie's broken promise and another accounting howler

Posted by Christie Malry on November 7, 2013 at 10:01 pm

Ritchie yesterday:

But I promise – if Centrica want to tell me where I’ve gone wrong and why someone should spend several hours trying to answer such a fair question from their accounts, I’m more than happy to publish the explanation. But right now I also wonder how the auditors did not spot the difference either. But that’s another issue.

Ritchie today, on being asked whether he'll respond to my blog post or admit he was wrong:

I do not respond to anyone who breaches almost every rule on professional ethics ever written

So his promises aren't worth jack shit. Whether I have broken almost every rule on professional ethics is by the by. All that matters is that I demonstrated in that blog post where he had gone wrong. So now he owes Centrica and PwC an apology.

Should he at some point come to his senses, the senior statutory auditor on Centrica is Charles Bowman, who can be reached at  charles.bowman [at] uk.pwc.com. Although I'm sure he'd prefer any apology to be made publicly on Ritchie's blog. Ball's in your court, Ritchie.

Anyway, Ritchie made another claim yesterday which again betrayed his complete lack of accounting expertise. He said:

Nor do I think its IFRS8 segment reporting is complete because I think it should be reporting the UK as a segment as it clearly has data for the country as a whole.

And the result of all this is that I think my claim is more than justified having spent some more time looking at this today.

And he quotes vast chunks of IFRS 8 to support his claim.

Unfortunately, Ritchie quotes  but fails to appreciate the significance of a part of IFRS 8.2. And that's the fact that all that matters for determining whether something is an operating segment is whether the Chief Operating Decision Maker sees it. If the CODM receives multiple dimensions, say in a matrix structure, then the company must exercise judgement to determine which segmentation best meets the requirements of IFRS 8.

Of course Centrica has data for the UK as a whole. But either the CODM doesn't see it regularly or he's using other data to run the business. Because otherwise there's no way the auditors would have been able to sign off the IFRS 8 disclosures.

You'd expect a chartered accountant to know this, or at least to realise that he doesn't have the expertise to be commenting and therefore to keep quiet about it.

[Edited 9/11 to fix typo in final paragraph. Thanks to MT]

Revisionist history on accounting for stock options

Posted by Christie Malry on November 7, 2013 at 7:43 am

If you're gonna lie, lie big:

Unfortunately, in 2006, FASB responded to political pressure and muddied its previously-correct position. Starting it 2006, FASB required companies to book an expense in calculating profits reported to shareholders for the estimated future value of stock options to their recipients. This new book write-off is calculated when the options are issued, well before the true value at exercise can possibly be known. Not surprisingly (since corporations want to report high profits to their shareholders), these book write-off estimates are always wrong, and are generally much lower than the tax-deductible amount.

This is appalling revisionism. The CTJ is presenting its campaign to abolish the corporate tax deduction for stock options as being "on the side of the FASB".

This is an utter lie. The FASB has wanted expenses for stock options since the mid 1990s (and probably before that too). The FASB's attempt to introduce stock option expensing at fair value (in SFAS No. 123) failed because of lobbying by corporate interests.

It's daft to suggest that the FASB changed its mind only because of "political pressure". It had wanted it for ages, and it was only political pressure that stopped it from happening. In 2006, the IASB was introducing its own version of a standard that would require stock options to be expensed, so the game was truly up for the lobbyists.

For more on the history of stock option expensing and political lobbying, read this excellent article by Stephen Zeff (scroll to 1995 and 2004).

Then put this rubbish from CTJ in the bin, where it belongs.

(By the way, the reason the book and tax amounts differ is because they're calculated on totally different bases. Generally speaking, the book amount is the option value at the date of grant, whereas the tax amount is calculated on the gain realised by the employee. Of course, we only know the latter at the date of exercise, whereas we want to calculate the option value at the date of grant. More fuzzy thinking from the CTJ here).