Liechtenstein concedes in tax battle
Liechtenstein has yielded to international pressure, agreeing to share financial information on non-residents who bank in the principality. Prince Alois – the permanent representative of his father, the head of state – said Liechtenstein’s new approach reflected an international mood towards mutual assistance on tax.
“In the future, we should offer all states comprehensive co-operation if they are willing to find sensible solutions with us for the client relationships we have built up, and if they are interested in fair and constructive co-operation for the future,” said Prince Alois. He indicated a willingness to enter double taxation agreements with other countries – at present it only has an agreement with Austria.
Liechtenstein has been under enormous pressure from other governments, particularly Germany and the United States, because it allows citizens to bank in the country to avoid paying tax. A recent investigation by a US Senate committee concluded that Liechtenstein’s LGT banking group – owned by the ruling royal family – has been actively involved in tax evasion by US citizens.
LGT’s trust office in Liechtenstein holds an estimated $7bn in assets, with about 3,000 offshore accounts, of which about a hundred are for US clients. Other investigations have suggested that a similar number of clients are based in the UK and perhaps as many as 1,500 accounts are for German clients. LGT told the committee that allegations against it referred to past rather than current business practices. While the Senate’s investigation concluded that the cost to the US exchequer of LGT’s activities could not be estimated, it believes that collectively tax havens cost the US about $100bn annually in lost tax.
Substantial sums have been lost because of US citizens use of accounts with UBS, concluded the Senate investigation. A convicted UBS official alleged that his former bank managed about $20bn of undeclared assets for US clients. UBS told the Senate committee that it holds about 19,000 accounts in Switzerland for US clients that have not been declared to US tax authorities. UBS has agreed to no longer provide offshore banking or securities services to US residents. It has also promised to work with US authorities to identify US clients who may have engaged in tax fraud.
ACCA grows even stronger
ACCA has been confirmed as the fastest-growing UK-based accountancy body in the latest edition of the Professional Oversight Board’s annual review of institutes and firms. Members of the ACCA are more likely to be based outside the UK, to be younger, to be female and less likely to be retired than those of any of other UK-based institution.
At the end of last year, ACCA had 122,426 members and 276,057 students worldwide. Membership had grown by 28.3% in the previous five years – a higher rate of growth than that of any other accountancy body. Nearly half – 47.5% – of ACCA members are based outside the UK and Ireland. More than half work in industry and commerce, with 29% in public practice and 10% in the public sector.
Just 4% are retired – a lower proportion than that in any other institution (nearly a quarter of CIPFA’s members are retired). Over 40% of ACCA members are women, compared with an average across the accountancy bodies of just 31%.
The Professional Oversight Board also analysed trends in the accountancy firms. There is a continued fall in the number of practising audit firms, with a reduction of nearly a third in five years. Another trend has been for the Big Four firms to earn non-audit income from non-audit clients in place of earning it from audit clients, reflecting regulatory pressure. PricewaterhouseCoopers remained substantially the largest Big Four firm in 2007, with total fee income in the UK of £2.1bn. The next largest firm was Deloitte with £1.8bn in total fee income, followed by KPMG, with £1.6bn and Ernst & Young, with £1.2bn.
Corruption charges hit Balkans cash
Romania has had €150m of European Commission agricultural support funding suspended, as pressure increases on it and neighbouring Bulgaria to improve government accounting practices and drive out public sector corruption.
Payments to Romania were halted because of complaints about its auditing of spending. Farm subsidies to Bulgaria of €486m were halted earlier this year over worries about how EU money was spent. The European Commission published a highly critical report on corruption and organised crime in the two countries in July.
Bulgaria and Romania joined the EU at the start of last year, despite worries about the extent of organised crime and allegations of its influence within government. This caused the EU to retain ‘safeguard clauses’, enabling the Commission to continue to monitor the governments closely.
There are now suggestions that further economic and political progress in the two countries will slow and moves towards their integration with the rest of the EU put on hold. Specifically, they may not be permitted to join the euro currency, or included in the Schengen area of free movement for citizens. As present, EU aid – worth €32bn to Romania over the next six years and €11bn to Bulgaria – is not at risk.
The EU is particularly concerned about the failure to resolve in the courts allegations of corruption against senior politicians. July’s report on Bulgaria referred to “high level corruption”. There is support for Romania’s creation of a National Integrity Agency to investigate and punish corruption in the public sector – but this has yet to prove its value.
“These reports are a reality check – they show that both the Bulgarian and Romanian governments need to step up their efforts on judicial reform, corruption and in the case of Bulgaria organised crime,” said Commission president José Manuel Barroso.
Yet the EU is reluctant to reveal publicly its full discontent with Romania and Bulgaria. Willem de Pauw, a Belgian prosecutor who advises the EU, wrote a much stronger report which was suppressed and only made public by The Economist. De Pauw concluded that rather than making progress, Romania, in particular, is “regressing on all fronts”. Meanwhile, a high profile corruption legal action has been launched by a UK company, Eastern Duty Free, making serious allegations about the way commerce with the public sector is conducted in Romania.
It could be several years before outside companies and politicians will feel comfortable doing business with the Balkans newcomers.
Siemens seeks damages from former execs
Siemens is claiming damages from former members of its management board for their alleged involvement in paying bribes to win contracts. The decision of Siemens follows the completion of the first of what is expected to be a series of court cases against senior managers in the company on corporate bribery charges.
Reinhard Siekaczek has been given a €108,000 fine and a two year suspended prison sentence after being found guilty of involvement in the making of corrupt payments by Siemens’ telecommunications division. He did not deny the charges and claimed that payments of around €49m were authorised by senior executives. Witnesses in the trial claimed the payments were known about at high levels of the organisation.
Siemens has made a €201m payment to German authorities to settle related claims against the company. An investigation currently being undertaken by the US Securities and Exchange Commission may levy the highest penalties yet on Siemens. Last year Siemens was fined €396m by the European Union for membership of a cartel in the gas insulated switchgear sector, in which Siemens was described by the EU as “a leader”.
Siemens admits that about €1.3bn of corrupt payments were channelled through a corporate slush fund. It has now agreed to seek damages from former members of the corporate executive committee of the managing board of the company. “The eleven former members of the Corporate Executive Committee… will be given an opportunity to state their positions on the accusations before legal action for damages is taken,” said a statement by Siemens.
As the scale of the allegations against Siemens and its executives became clear in recent months, the company began a thorough overhaul of senior management. The company’s chief executive and chairman, who both deny any knowledge of the corruption, were replaced. Subsequently, almost all senior managers were required to leave and a total of 16,750 staff were made redundant as the organisation became substantially reorganised.
VAT cut for local services?
VAT could be reduced on selective goods if European Commission proposals to permit lower VAT for labour-intensive services and locally-supplied services are approved.
The measures address French concerns at the impact of VAT on the restaurant trade and would allow member states to make permanent currently temporary arrangements not to levy VAT on certain products – such as newspapers in the UK. The move would be introduced as part of a small businesses act to help the SME sector, but application of the lower rates of VAT would be optional for member states.
Labour-intensive sectors, such as repairs, maintenance, cleaning and home renovation would be covered by the proposed measures. More comprehensive proposals to use the VAT system to promote environmentally sustainable practices will be published later this year.
László Kovács, Commissioner for Taxation and Customs Union, said the move would allow all member states to apply reduced VAT in sectors where other member states already apply lower rates.
He explained: “I want to provide certainty about the application of reduced rates beyond 2010 for labour intensive sectors and provide all member states with the same options. There is no reason why restaurant services, for example, should be allowed to benefit from a reduced rate in one half of the European Union but not in the other half.”
But the UK’s Institute for Fiscal Studies has proposed moving in the opposite direction by abolishing zero and reduced rates of VAT. This would cut compliance and administration costs for business and government, reduce the distortion of personal spending decisions and raise taxes by £11bn annually, said an IFS report. The extra tax income could be used to improve the living standards of the poor, but would raise the retail price index initially by 3.5%.
Banks make massive pay-outs
Leading global banks are to pay tens of billions of dollars to investors in probably the largest ever settlement of investor claims. Actions by the US Securities and Exchange Commission, the New York Attorney General and the UK’s Financial Services Authority suggest that regulators will take a hard line with banks over investor losses flowing from the global crisis in securities trading.
Banks are having to bail-out investors from the collapse in value of auction rate securities. These are bonds and other securities that are long dated or open-ended and without fixed yields – the yields are set by Dutch auction on settlement dates. They are mostly issued by US municipalities and student loan bodies and have been used for 20 years, with about $263bn of auction rate securities outstanding.
But the market for auction rate securities collapsed in February. Investors believed the securities were highly liquid, but there was no market when auctions ceased to be held. The result, in the case of UBS, was over 40,000 investors forced to hold the securities on a permanent basis. Now a preliminary settlement between the SEC and UBS requires the bank to pay $22bn to over 31,000 investors, of which $10bn will go to institutional investors.
UBS is obliged to buy back auction rate securities at par and must act quickly to provide liquidity to affected investors. It must also fully compensate investors for losses incurred where securities have been sold since the market collapsed.
A preliminary settlement has also been agreed with Citibank, involving the restitution of $7.5bn to individual investors, charities and small businesses and the bank using “its best efforts” to liquidate $12bn for institutional investors by the end of next year. Wachovia, too, has agreed to buy back auction rate securities, at a potential cost of nearly $9bn. UBS, Citibank and Wachovia face subsequent financial penalties from the SEC.
The SEC has been working closely on the investigations with the New York Attorney General, Andrew Cuomo. Under agreements with Cuomo’s office, JP Morgan and Morgan Stanley will together return over $7bn to investors. Morgan Stanley is also to pay $35m in civil penalties under the agreement and JP Morgan will pay $25m.
In the UK, the FSA has fined Credit Suisse £5.6m for systems and control failings in its sale of asset-backed complex high risk securities. Credit Suisse made related revenue write-down of $2.65bn.
News shorts
Transfer pricing cuts US tax take
Foreign-controlled corporations paid billions of dollars less in tax to the Federal Government than their US-controlled equivalents, a report from the Government Accountability Office has found. A larger proportion of foreign-controlled corporations reported no tax liability. The report was undertaken at the request of senators who were concerned that manipulative transfer pricing was denying the Internal Revenue Service large amounts of tax income. Senator Carl Levin, one of those who commissioned the report, responded: “This report makes clear that too many corporations are using tax trickery to send their profits overseas and avoid paying their fair share in the United States.”
FSA closes boiler room
The UK’s Financial Services Authority (FSA) has obtained a permanent injunction against the Treadstone Corporation, a boiler room that had become notorious in newspapers for illegally promoting and selling shares to UK investors. Thedfred Lemont Shepherd, the sole director and owner of Treadstone, has promised not to repeat the activities. Treadstone and Shepherd cold called UK investors to persuade them to buy overpriced shares in a Finnish company Tramigo Oy. There is no statutory compensation available to investors who lost money as a result.
IHT rules ‘cost relatives millions’
Widows and widowers in the UK are failing to utilise their rights to avoid inheritance tax on inherited assets because of the complexity of the rules, says a national law firm. Amended rules, introduced in last year’s Pre-Budget Report, permit married couples and civil partners to transfer the unused part of their inheritance tax nil rate band – the value of the estate not subject to IHT – to their surviving spouse or civil partner when they die. But, says Lewis Hymanson Small, HMRC is “demanding a raft of paperwork” to prove the full IHT allowance was not used by the deceased spouse. The firm adds that HMRC is having difficulty in coping with the number of people claiming the transfer.
Directors warned about ID theft
Company directors and the self-employed are particularly vulnerable to identity theft and related fraud, risk advisers Marsh has warned. The availability of accessible material on the internet has made it much easier to find useable information about them, Marsh believes. “It does not require much effort or detective work on the part of the fraudster to come up with a convincing insight into a victim,” says Adrian Saunders, Marsh’s head of private client services.
HMRC accounts qualified – again
HM Revenue & Customs’ accounts have been qualified for the sixth successive year because of high levels of error and fraud in the payment of tax credits. Between £1.3bn and £1.5bn was overpaid to claimants in 2006/7, a reduction of £700m against 2005/6. As at the end of the 2007/8 financial year, some £4.3bn of overpayments remained outstanding and due for recovery.
Treasury to end travel expenses loophole
The UK’s Treasury intends to close a loophole that enables employment agencies and umbrella companies to obtain tax relief on travel expenses for temporary staff that is not available to other workers. The loophole is widely abused, leading to losses of income tax and National Insurance contributions, says the Treasury. It is consulting on how to change the rules.
Banks’ fraud losses at all-time record
Fraud against banks is at an all-time high and is expected to rise further, according to the latest KPMG Fraud Barometer. In the first six months of this year, over £630m of fraud cases came to court, compared with £421m in the previous half year. More than half of the 128 cases in the first half of 2008 were against financial services firms, including many involving accounting fraud. Over £20m of mortgage fraud came to court.
Pension liabilities put companies at risk
Pension deficits of the FTSE 350 companies have escalated to £47bn at the end of June, compared to a surplus of £14bn in March, according to scheme advisers Mercer. It warns that the risk of default amongst the 10% of most exposed FTSE 100 companies increased four-fold in three months.
Mortgage repossessions up
Mortgage repossessions in the UK rose in the second quarter of 2008 by 24% against the same period last year to 28,658, according to figures released by the Department of Justice. Mortgage repossession claims rose by 17%. Repossession actions are now at their highest levels since the recession of the early 1990s. The most recent statistics on personal insolvencies show a slight fall, but PwC predicts these will rise in coming months. The firm suggests that debts will switch from funding for purchases to improve lifestyles, to loans that keep families afloat. Insolvency levels are already higher than they were during the last recession.
ID fraud service launched
A new service has been launched to enable victims of identity fraud to correct their credit records. The ‘Victims of Fraud’ service has been established jointly by the three main UK credit reference agencies. Anyone contacting any of the three – Experian, Equifax and CallCredit – alleging fraud will automatically have details of their allegations advised to the other two agencies. The service responds to calls from the National Consumer Council to make life easier for people who have had their identity details misused. Identity fraud is one of the fastest-growing crimes and effects over 100,000 people a year in the UK alone.
No more ‘business as usual’
Climate change means there is no more ‘business as usual, says ACCA. Sustainability reporting is affordable and sends positive signals to staff, customers and suppliers, argues the ACCA agenda for action report, Going Concern?. ACCA is calling on the International Education Standards Board of the International Federation of Accountants to include knowledge of sustainable development and corporate social responsibility into its basic education requirements.