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Tax reporting campaign reflects lack of public trust, says PwC

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Calls for a new accounting standard requiring country by country reporting reflect a lack of public trust in corporate behaviour, PwC said as it revealed that Vodafone had been ‘highly commended’ for transparency in tax reporting.

Today’s leaders in tax reporting have decided that the business case for tax transparency ‘outweighs the possible risks’, said Susan Symons, the firm’s Total Tax Contribution Leader.

It is important, she said, that more companies become actively involved in the debate about what makes good tax reporting. PwC has seen ‘a trend towards greater tax transparency’ since 2006.

A minority of companies discuss their tax strategies or policies, but the number is growing, the firm said in its report ‘Tax transparency: Communicating the tax companies pay’.

The potential risks of greater tax transparency, the report suggested, include ‘scope for misunderstanding or misuse of data’.

Vodafone Group plc and Pennon Group plc were this year’s winners of PwC’s ‘Building Public Trust’ tax reporting awards. PwC’s report said many companies, including Vodafone, ‘are going well beyond the required disclosures on tax in reporting standards and talking about different aspects of their tax affairs’.

A Vodafone spokesman told Tax Journal: ‘We are pleased that the work we have been doing toward greater transparency in our reporting has been recognised by this prestigious award.’

Vodafone was forced to close several of its stores when it was targeted by recent protests inspired by allegations, concerning a recent settlement with HMRC, which both Vodafone and HMRC have fiercely denied.

In a letter to The Observer, Simon MacDowall, Director of Communications and Marketing at  HMRC, has said a recent comment piece published in the newspaper painted a picture of HMRC’s approach to the taxation of large business that is ‘a serious and potentially dangerous distortion of the reality’.

He was responding to Nick Cohen’s assertion that the settlement left ‘an estimated £6bn of potential tax revenue’ in Vodafone’s coffers.

MacDowall wrote: ‘In the case of Vodafone [Cohen] suggests the “facts . . . are straightforward” but he gets them wrong. For example Vodafone bought Mannesmann as a shares-for-shares deal – it did not need to raise loans for the purchase. This is a matter of public record and is key to understanding the tax consequences of the deal.

‘Next, HMRC did not and would not pass on a tax liability of £6 billion. HMRC’s litigation strategy is to pursue in full the tax that it can show is due. The article also contains other errors.

‘Large businesses know full well that the less time they spend trying to avoid tax the less time they will have to spend with HMRC working on time consuming and costly tax investigations.’

Last month HMRC said there was ‘no question’ of Vodafone having an outstanding tax liability of £6 billion. ‘That number is an urban myth,’ a spokesman said. It was agreed that Vodafone’s liability was £1.25 billion, and ‘at no point was a liability greater than that established’.

‘Ease of paying taxes’
The UK ranks sixteenth out of 183 economies in terms of the ‘ease of paying taxes’, down from fifteenth a year ago, according to a new report released by PwC, the World Bank and the International Finance Corporation.

‘Paying Taxes 2011’ used a domestic, medium-sized case study company – a hypothetical flower pot maker and retailer – to assess the impact of tax systems on business.

It measured the ease of paying taxes by assessing the administrative burden for companies to comply with tax regulations, and by calculating companies’ total tax liability as a percentage of pre-tax profits.

The report indicated that 60% of the world’s economies have made significant business regulatory changes to ease paying taxes, despite the impact of the downturn.

‘Taxes on company profits have fallen each year as governments around the world have reduced their corporate tax rates in an effort to encourage business investment and stimulate growth,’ Susan Symons said. ‘However, easing the compliance burden is also important for business and there is potential for more focus on this area.’

The firm said a key finding was that ‘on average the case study company pays nearly half of its commercial profit [ie. profit before all taxes borne] in taxes, spends seven weeks dealing with its tax affairs and makes a tax payment every 12 days’. Since 2006, the ‘tax cost’ has fallen on average by 5%, the time needed to comply by a week, and the number of payments by almost four.

Total tax rate
In computing profit before tax, many of the taxes borne by a firm are deductible, the report explained. ‘In computing commercial profit, these taxes are not deductible. Commercial profit therefore presents a clear picture of the actual profit of a business before any of the taxes it bears in the course of the fiscal year.’

The ‘total tax rate’ is designed to provide ‘a comprehensive measure of the cost of all the taxes a business bears’. For a UK company, the rate for 2009 was 37.3% of commercial profit, according to the report. This comprised profit tax 23.2%, labour taxes 10.8% and other taxes 3.3%.

PwC confirmed that the UK tax rate figures exclude employees’ income tax and employees' NICs as well as VAT. ‘Other taxes’ in the case study comprise business rates, fuel duties and vehicle excise duties, landfill tax and insurance premium tax.