Dispatch (UK/ROW edition)
| by Paul Gosling 07 Apr 2008 Topic: News |
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IFRS 'causing global financial crisis' International Financial Reporting Standards (IFRS) have been a key factor in the global financial crisis, according to AXA and AIG, two of the world's three largest insurers. IFRS have increased market volatility by their use of fair value accounting, the insurers claimed. Henri de Castries, chief executive of AXA, said that valuing assets being held for the long term at mark-to-market and mark-to-model levels is a 'conceptual mistake'. He was quoted in the Financial Times as saying they were like saying that because your next door neighbour was selling his house at a distressed price, your house was worth less. It was not, he said, if you had no intention of selling. AIG echoed the criticisms after reducing its asset valuations in line with fair value, leading to US$11.5bn of write-downs on collateralised debt obligations. Martin Sullivan, chief executive of AIG, was also quoted in the Financial Times arguing that a reduced valuation is not a loss if there should be no intention of crystallising it. AIG has now proposed to regulators and standard setters that fair value accounting is abandoned. With new pressures being applied on IFRS and fair values, the International Accounting Standards Board (IASB) has published a discussion paper, Reducing Complexity in Reporting Financial Instruments, designed to simplify valuations. ACCA welcomed the IASB's proposals, saying it had concerns about the use of fair values where these are not based on quoted market prices. 'We have had particular concerns over the treatment of fair value changes in a company's liabilities, when a falling credit rating could give rise as a gain in the accounts,' it said in a statement. 'More broadly, where there is a realistic choice between an historical cost and a current exit value, there should not be an automatic assumption that exit values will always be the best answer.' But, it added, 'with the current situation in the financial markets, the key issue is the recoverable amount of financial assets - and the same fair values would have to be used whether in a mark-to-market accounting model or when considering the impairment of the cost of the assets'. HM Revenue & Customs (HMRC) is writing to about 5,000 people it believes are offshore account holders. The move coincides with moves in the Budget to strengthen HMRC powers in tackling tax avoidance, intended to raise £600m next year. The latest letters from HMRC are to people who failed to respond last year to its enquiries regarding offshore accounts. ACCA advised taxpayers to co-operate and answer honestly. Chas Roy-Chowdhury, ACCA's head of tax, said that people who failed to provide full answers would find that HMRC obtained the information by other means, including from their banks and financial providers. But John Cassidy, tax investigations partner at PKF, argued that HMRC was breaching the UK's legal principle of assuming that a person is innocent until proved guilty. 'HMRC is demanding confirmation and an explanation as to why tax is not due on funds about which it knows little,' said Cassidy. 'In many cases, HMRC only knows that someone has an offshore bank account and the funds it contains at a few specific dates. It has little idea how much interest was earned on the deposits, where the money came from or the key question of whether there is an undeclared UK tax liability at all.' However, Cassidy also advised taxpayers to co-operate. Tax advisers expressed concern too at new powers to be given to HMRC to make unannounced visits to taxpayers, demanding access to all relevant papers. John Whiting, tax partner at PwC, said that he understood why HMRC needed these powers to tackle fraudsters and that it was necessary, as part of the merger of the former Revenue and Customs departments, to harmonise the approach across the merged department, but it was essential that the powers were used fairly. 'We need to have proper checks and balances,' he said. Tax havens are profiting from globalisation by allowing high earners to dodge taxes in other countries, says the Organisation of Economic Co-operation and Development (OECD). The OECD was responding to disclosures that Liechtenstein banks and trusts may have been used by about 750 German citizens to evade paying tax. It has subsequently emerged that hundreds more residents of other European countries also used the small Alpine state. 'This is a fundamental issue in our increasingly interdependent world,' said OECD secretary-general, Angel Gurría. The OECD accused Liechtenstein, Andorra and Monaco of failing to work with it to improve transparency and tackle tax evasion. 'As long as there are financial centres that refuse to co-operate in bilateral tax information exchange and that fail to meet international transparency standards, residents in other countries will continue to be tempted to continue to evade their tax obligations,' said Gurría. 'The openness of the global economy can only be sustained if participants assume mutual responsibilities, as well as sharing benefits. Excessive bank secrecy rules and a failure to exchange information on foreign tax evaders are relics of a different time and have no role to play in the relations between democratic societies.' The German Government led the attack on Liechtenstein after allegations of tax avoidance led to the resignation of Klaus Zumwinkel as chief executive of Deutsche Post and chairman of Deutsche Telekom. Chancellor Angela Merkel said that it was 'inevitable' that Zumwinkel had resigned. She said that there would now be much closer scrutiny of the use by German nationals of Liechtenstein's banks and trusts. Following the disclosures of Liechtenstein's involvement in tax evasion - facilitated by the €4m purchase of private banking data by the German secret service - EU finance ministers agreed to step up their attacks on the tax havens. There is to be a review of the savings taxation directive, which may lead to a new directive that imposes sanctions on tax havens that fail to co-operate. While Liechtenstein and Switzerland have apparently complied with the savings taxation directive - which requires banks to levy a withholding tax on savings under bilateral agreements with EU member countries - several of their banks have been accused of defying its spirit by encouraging EU citizens to set up trusts to avoid the imposition of withholding taxes. Finance ministers also expressed concern that the existing savings directive did not cover all forms of investments and deposits. The EU's Tax Commissioner, Laszlo Kovacs, said he favoured new international requirements on countries and banks to exchange personal information on account holders. The UK Government has delayed implementation of IFRS in public sector accounts until the 2009-2010 year, following advice from its specialist Financial Reporting Advisory Board (FRAB). IFRS were to have been adopted for government accounts from this year. They will still be adopted for local government accounts in 2010-2011. Both the Department of Health and the Ministry of Defence had told the Treasury they were unable to meet the previous deadline. Both departments have large numbers of Private Finance Initiative (PFI) contracts, each of which has to be reviewed under IFRS to determine whether their accounting treatment needs to change. About £29bn of PFI liabilities are currently off-balance sheet - more than half the total value of assets procured through the PFI. Where risk is regarded as lying with the public sector, the assets and liabilities will need to move on to the public sector books. Yet the Treasury's Budget papers predict that public sector net debt will increase by a mere 0.9% in 2009-2010. This suggests either that the Treasury assumes that only a negligible amount of PFI debt will be moved on-balance sheet by the move to IFRS, or else that the Treasury will ignore PFI debt when it comes to assessing the size of public sector net debt. The Treasury says that it cannot be assumed that all PFI liabilities will go on-balance sheet. Even with an assumption of a very small transfer of PFI liabilities on to public sector net debt, the Government is moving dangerously close to breaching its sustainable investment rule that borrowing should not exceed 40% of GDP. The Budget papers predict it will reach 39.8% in 2010-2011. Mark Williams of Deloitte's government accounting advisory team said: 'The private sector had five years to make the transition to IFRS and while nobody missed the deadline in the private sector, this was not always assured. Our experience of IFRS transition is that the “devil is in the detail”. It is only once IFRS transition is under way that the scale of the challenge becomes clear. Considerable progress has already been made, but a year delay does not mean that public bodies can park the issue; it is paramount that public bodies keep up the momentum.' Credit and debit card fraud rose by a quarter last year, with a big increase in overseas and card-not-present frauds, reports the Association of Payment Clearing Services (APACS). Within the UK, there has been a fall of two-thirds in the volume of card fraud in face-to-face transactions, falling from £219m in 2004 to £73m last year. Chip and PIN has made the use of lost and stolen cards - including cards stolen from mail boxes - much harder to carry out, and APACS urged banks to accelerate plans to roll out the technology globally. But the growth of online retailing has contributed to losses of £290m last year on card-not-present transactions. Another £190m of frauds were carried out in other countries, using stolen, lost, not received or counterfeit credit and debit cards. But there has been a fall of a third in online banking frauds, despite a doubling in the number of attempts at e-mailed 'phishing' frauds. There was also a big increase in mortgage frauds, rising to £700m last year, according to the Association of Chief Police Officers (ACPO). ACPO claimed that mortgage fraud is attractive to organised crime as it carries a low risk of detection, high profit opportunities and can finance other criminal activities, such as drug supply, human trafficking and prostitution. ACPO says that mortgage frauds have involved the complicity of brokers, surveyors and solicitors. The Financial Services Authority (FSA) is investigating about 70 firms over allegations of involvement in mortgage fraud. The FSA is particularly concerned about the use of fraud in obtaining buy-to-let mortgages. HMRC is conducting its own investigation of the buy-to-let sector over suspicions of widespread failure to declare income in tax declarations. Amid a global financial crisis, the UK Chancellor of the Exchequer, Alistair Darling, presented a low-key Budget. He confirmed the implementation, with some amendments, of reforms to the treatment of non-domiciles and to the capital gains tax regime. But he surprised observers by delaying the implementation of action against income splitting arrangements in family businesses. The Chancellor had previously announced a £30,000 flat fee for non-domiciles who have been resident in the UK for over seven years and who want to keep overseas income and gains outside the UK tax net. Despite widespread criticisms, Darling confirmed the charges will be applied from April. There are changes to the original proposals: children will not pay the charge; income and gains in offshore trusts will only be taxed when they are remitted to the UK; and the charge will be creditable against foreign tax. Darling also confirmed the withdrawal of capital gains tax (CGT) indexation and taper relief, in return for cutting CGT from 20% to 18%. The Chancellor announced in January a partial climbdown through an entrepreneur's relief, with a 10% CGT rate for the first million pounds of capital gains realised by owners of trading businesses. Chas Roy-Chowdhury, ACCA's head of tax, said that he feared the changes to CGT would 'impact adversely on economic activity by encouraging short-termism'. Corporation tax, income tax and national insurance rates were unchanged. But capital allowances were subject to numerous detailed amendments. The main surprise was a delay until 2009- 2010 in adopting measures to tackle 'income splitting' in family businesses. The measures will mean that husband and wife firms will be unable to allocate profits via dividend payments to the lower taxed partner, without considering their contribution to the firm's profits. This will reverse the House of Lords' judgment in the Arctic Systems case, which HMRC lost. The measures were to have been implemented for 2008-2009. The delay was welcomed by Patrick King, tax principal at MacIntyre Hudson, who described the proposal as 'unworkable'. 'As this legislation stood, it posed a huge administrative headache, not least because it demanded each party's commercial activity be calculated every year, as their level of involvement might change from one year to the next,' he said. King urged the Chancellor to drop the plans. However, the Chancellor announced his intention to clamp down on 'umbrella companies' that enable freelance and sub-contract workers to falsely represent themselves as employees to increase their entitlement to expenses. in brief...
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