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Accounting

Bwahahaha

Oh, boy, this Grauniad investigation is indeed fun:

International companies based in the UK may have hundreds of subsidiary companies, which many use to take advantage of differing tax regimes as they move goods, services and intellectual property around the world. It is estimated that more than half of world trade consists of such movements (known as transfer-pricing) within corporations.

No you innumerate little twats.

Some half of global trade is indeed estimated to be intra-company trade. Dell\’s motherboards (to take an example which I have no idea is true or not) are shipped from China to Ireland where they are assembled into a computer and then shipped to Dell\’s UK subsidiary for sale to me sitting in London. Dell owns the plant in China, the one in Ireland and the mail order place in the UK.

That\’s intra-company trade and as I say, on some estimates it\’s half of world trade.

Transfer-pricing is something rather different. OK, at each stage of this process there will indeed be an intra-company price at which the goods are transferred. Transfer-pricing however normally refers to people manipulating those prices to take advantage of tax rules. You see the difference? With global companies and dispersed production, intra-company trade is inevitable. But whether they\’re using transfer-pricing (in the meaning of being naughty about it) is another matter. 

Eh?

The second would be a state-funded programme to build 100,000 houses a year, which would provide homes for those who need them and create 50,000 jobs in the construction industry.

Is John Cruddas seriously trying to say that each house built requires 6 man months of labour?

Serious Farce Office

So, we\’ve got something called the Serious Fraud Office. They investigate financial crimes.

Very important, of course. Stuffed full of the finest forensic accounting brains our nation can produce. Of course.

Serious Fraud Office asks for £15m to cover \’urgent\’ hole in budget

Mhm, hmm. They cannot even manage their own budget. Fills one with confidence at their ability to investigate those of others, no?

Yes, Murphy Again

But the strangest comment was by BAT, which paid no tax in the UK in 2007:

A spokeswoman for BAT, the twelfth-biggest company in the UK by market value and the owner of the cigarette brands Lucky Strike and Pall Mall, said that its head office operated at a loss and that 99 per cent of its profits were earned overseas.

There is only one commercial response to this. If a head office loses money it cannot add value. In that case the group is not worthwhile mainatining and should be broken up on commercial grounds. Shareholder value must be increased in this case if it were.

Snigger.

Bit odd for an accountant to miss that making a profit and adding value are not quite the same thing, isn\’t it? Fire stations don\’t make a profit but we accept that they add value, Parliament doesn\’t make a profit but we accept that (sometimes) it adds value, the courts system doesn\’t make a profit but definitely adds value.

Head Offices are a cost to a business, one that (may) add value to said business, but there\’s no reason on earth to compare that to whether the head office makes a profit or not.

To take it a little futher, does he accept that audting adds value to a company? But does it make a profit? Human Resources? The canteen?

Would the canteen being subsidised (ie, making a loss) mean that the company was therefore ripe for breaking up? Anyone want to tell that to Google?

What worries me is that this man actually has public influence!

The Guardian on Corporate Taxation Again

I\’m not an accounting expert, by any means, but I think The Guardian has the wrong end of the stick again here.

More than 50 PFI schemes have now been included in portfolios held in Channel Islands tax havens by three major PFI investment companies, HSBC Infrastructure, 3i Infrastructure and Babcock and Brown Public Partnerships.

Once the buildings have been completed, up to 90% of the ownership of the UK-registered company running the PFI is transferred to the companies which are based in the tax havens. This means that the income and profits from running the PFIs will be free of UK tax for up to 40 years, depending on the duration of the PFI.

I don\’t see how transferring ownership of a UK registered company offshore reduces a tax bill. Any profit that the UK company makes is taxed here in the UK, before any distribution or earnings to the owners. Now, a capital gain created by selling the shares of the offshore company would be tax free: but any capital gain created before the transfer would lead to a tax bill at the time of transfer, wouldn\’t it?

Now I can think of ways in which an offshore company could be used to dodge tax: use the offshore company as a bank, load up the UK PLC with debt borrowed, and thus convert profits into an interest stream, that interest stream then being untaxed in the haven.

Maybe that is what is going on, but if it is, why doesn\’t The Guardian tell us so? Do they actually know? Or have they just grasped this "offshore" bit and assumed that it\’s all a grand tax cheat?

Prem Sikka, professor of accounting at Essex University, said yesterday that the latest revelations should be the subject of an inquiry at Westminster.

Prem is, as we know, a mate of Richard Murphy. Still the same people behind all of this then.

Richard Murphy Explained!

Look, I think the man has had the odd thing sensible to say, Well, I had:

But the reality is that those who want radical social change that will destroy the concept of walfare(welfare, sic) want to exploit this as an opprtunity to destroy society as we know it.

And I oppose the far Right perception of society. There’s a simple reason. It’s evil. And these comments seem to promote that evil.

"It\’s evil"

So I won\’t talk about it.

Still think of yourself as a liberal?

 

Richie Babbie!

And for all the newspaper furore about the possible loss of some basic pretty data on 25 million people by HM Revenue & Customs I note that,,,

Not many phone about this,

So therefore, it isn\’t important. Yes?

So, how many phone in to R. Murphy\’s line about tax evasion?

Goose and gander.

Missing the Point

Everyone\’s favourite accountant, Richard Murphy, is at it again. Not seeing the wood for the trees.

Now suppose you have debt of $2 billion on your balance sheet, but your rating goes down because it is perceived that you are a risker organisation. The price people will now pay for your debt (and remember, debt is traded) has fallen. Let’s suppose the fall is 5%. That reduces the value of your debt to $1.9 billion. In accounting terms under IFRS this has to be reflected in your balance sheet. The fair value of a liability (what you owe) has fallen. Liabilities are credits on your balance sheet. So you debit your liability account with $100 million. This cuts the value of the debt.

But now you have the job of ‘losing’ the credit in your accounts because in accountancy there is an immutable rule that for every debit there must be a credit. You can’t, of course, put it back on the balance sheet. You’ve just taken it off that. And it’s not cash so it can’t appear in the cash flow. And nor is it a reserves movement because it is a result of current activity. So there’s only one place left to put it, which is in the profit and loss account.

There’s one problem though. On the balance sheet this credit represented a sum owing to someone else. It was a debt. By and large debt is seen as a negative in accounting even though it is a credit because it owed. In the profit and loss account though credits are quite different. Credits are good things in the profit and loss account. They are sales or cost reductions. And that’s exactly how this credit of $100 million behaves when it hits the profit and loss account. It goes straight to the bottom line and increases the profit for the period.

Now, yes, it does indeed seem a little odd, that a deteriorating credit rating should lead to an increase in profits. But that is in fact what has actually happened, isn\’t it? You really have made a profit if you sell something for $1 and buy it back for 90 cents.

But even if that isn\’t enough, look at what\’s happening over on the other side, to those who have bought that debt. They are also marking it to market. And they really have made a loss: what they bought for $1 is now worth 90 cents. Now that number really does have to go into their P&L doesn\’t it? Most especially if they\’re, umm, a bank that trades debt instruments. Sauces for geese and ganders sort of thing.

So, if those who make a loss have to report it, how can those who profit not have to?