Accounting and taxation: Conjoined twins or separate siblings?

Abstract

This paper explores the relationship between accounting and taxation through the recent proposals for curbing corporate tax avoidance advanced by the Organisation for Economic Co-operation and Development (OECD) and the European Union (EU). The OECD is content to tweak pricing and fails to address the faultlines of accounting. The EU is promoting ‘unitary taxation’ and advocates a major reform of the way taxable profits are to be calculated. As IFRSs have reduced the usefulness of accounting numbers for taxation purposes, the EU has sought to recalibrate basic elements of accounting. This has considerable implications for the development of accounting.

Keywords:

• Tax avoidance
• Accounting
• Transfer pricing
• Accounting standards
• Unitary taxation

Notes

1 IRS Releases New Tax Gap Estimates; Compliance Rates Remain Statistically Unchanged From Previous Study, 6 January 2012 (http://www.irs.gov/uac/IRS-Releases-New-Tax-Gap-Estimates;-Compliance-Rates-Remain-Statistically-Unchanged-From-Previous-Study; accessed 5 July 2013).

2 See Harris (1997) for further details.

3 The Daily Telegraph, 'CEOs must keep learning to avoid the five-year axe', 18 May 2013 (http://www.telegraph.co.uk/finance/businessclub/management-advice/10064862/CEOs-must-keep-learning-to-avoid-the-five-year-axe.html; accessed 30 August 2015). Another global study noted that the median tenure for a global CEO is just 2.75 years. (http://www.personneltoday.com/hr/high-ceo-turnover-could-damage-uk-firms/; accessed 30 August 2015). Financial Times reported that 23% of FTSE100 companies replaced their chief executive during the period May 2013 to April 2014 (http://www.ft.com/cms/s/0/b4c51d78-7639-11e4-a777-00144feabdc0.html#axzz41In3CC00; accessed 30 August 2015).

4 Australia’s Tax Commissioner Chris Jordan cited in “ATO chief warns on profit shifting”, Sydney Morning Herald, 27 June 2013 (http://www.smh.com.au/business/ato-chief-warns-on-profit-shifting-20130626-2oxlw.html#ixzz2dOSDWxlk).

5 Banks operate in hundreds of countries, but are supervised on a consolidated basis because their business is integrated (Arnold and Sikka, 2001; Goodhart, 2011).

6 The OECD is a successor to the Organisation for European Economic Co-operation, which was formed in 1948 to promote economic recovery in Western Europe after the Second World War. It originally had 18 western participants and one of its key roles was to implement the Marshall Plan for reconstruction of Western Europe. In the 1990s, following the dissolution of the Soviet bloc, its membership expanded and covers 34 countries Most notably, emerging economic powers such as Brazil, Russia, India, China and South Africa (collectively known as BRICS countries) do not have a direct membership of the OECD.

7 http://www.chinadaily.com.cn/english/doc/2004-11/25/content_394744.htm; accessed 4 January 2014.

8 Accountancy Age, No unitary taxation “any time soon”, Lords told, 13 June 2013 (http://www.accountancyage.com/aa/news/2274520/no-unitary-taxation-any-time-soon-lords-told; accessed 12 February 2014).

9 Accountancy Age, Unitary taxation a “daft” idea, say readers, 30 May 2013 (http://www.accountancyage.com/aa/news/2271524/unitary-taxation-a-daft-idea-say-readers; accessed 23 July 2013).

10 It is used in the domestic context of some states, such as the US, Canada and Switzerland, within an agreed framework of law. It prevents domestic tax havens from depriving other regions of taxes. For example, a company can be registered in Delaware but trades in California. Its profits in California cannot escape taxes because it claims to be resident in Delaware. A formula, mainly related to sales, is used to apportion profits to all US states and then each state can tax it at the appropriate rate.

11 Available at http://caselaw.lp.findlaw.com/scripts/getcase.pl?court=US&vol=439&invol=522; and http://supreme.justia.com/cases/federal/us/439/522/case.html.

12 http://www.hmrc.gov.uk/manuals/bimmanual/bim35210.htm.

13 Her Majesty’s Revenue and Customs, “International Accounting Standards − the UK tax implications” (http://www.hmrc.gov.uk/practitioners/int_accounting.htm; accessed 22 December 2013).

14 http://www.hmrc.gov.uk/manuals/bimmanual/bim35210.htm.

15 Oral evidence on ‘Taxing Corporations in a Global Economy: Is a new approach needed? 11 June 2013; http://www.parliament.uk/documents/lords-committees/economic-affairs/Corporate-Taxation-April-2013/uc%20Transcripts/ucEAC20130611Ev9.pdf.

16 Speech by the US SEC Commissioner Kara M. Stein, “International Cooperation in a New Data-Driven World”, 26 March 2015 (http://www.sec.gov/news/speech/2015-spch032615kms.html#.VRRkpVRFD5o; accessed 29 April 2015).

17 Speech by Chris Cox, 2005–2009 Chairman of the SEC, How America’s Participation in International Financial Reporting Standards Was Lost, 11 June 2014 (http://corpgov.law.harvard.edu/2014/06/11/how-americas-participation-in-international-financial-reporting-standards-was-lost/; accessed 25 April 2015).

18 Reuters, UK watchdog expects progress on global accounting rules, 10 June 2014 (http://www.reuters.com/article/2014/06/10/us-britain-accounts-idUSKBN0EL16P20140610; accessed 26 April 2015)

19 For example see BSC Footwear Ltd v Ridgway [1971] 47TC495 and Symons v Lord Llewelyn Davies [1982] 56TC630.

20 The Financial Express, IFRS system not conducive for taxation purposes, says Mitra, 7 April 2011 (http://www.financialexpress.com/news/ifrs-system-not-conducive-for-taxation-purposes-says-mitra/772775/0; accessed 18 July 2013).

21 EU Commission, Commission company tax strategy − frequently asked questions, 25 November 2003 (http://europa.eu/rapid/press-release_MEMO-03-237_en.htm?locale=en)

22 Following the 2007/08 banking crash, in July 2014, IFRS 9 now permits the qualified use of an expected loss impairment model (http://www.ifrs.org/current-projects/iasb-projects/financial-instruments-a-replacement-of-ias-39-financial-instruments-recognitio/Pages/Financial-Instruments-Replacement-of-IAS-39.aspx; accessed 30 October 2014).

23 An incurred loss model assumes that all loans will be repaid until evidence to the contrary (known as a loss or trigger event) is identified. Only at that point is the impaired loan (or portfolio of loans) written down to a lower value.

24 US IRS press release, IRS Accepts Settlement Offer in Largest Transfer Pricing Dispute, 11 September 2006 (http://www.irs.gov/uac/IRS-Accepts-Settlement-Offer-in-Largest-Transfer-Pricing-Dispute; accessed 15 January 2014).

25 Text is available here http://www.lexisnexis.ca/documents/2012SCC052.pdf.

26 Financial Post, GlaxoSmithKline transfer pricing case settled, 12 January 2015 (http://business.financialpost.com/legal-post/glaxosmithkline-transfer-pricing-case-settled).