New thoughts on accounting for tax
By Donald Drysdale for ICAS
3 September 2019
Donald Drysdale comments on a controversial new proposal on accounting for tax, offered by CAN as the first in a series of ‘corporate accountability standards’ to replace IFRS.
Corporate accountability
The Corporate Accountability Network (CAN), established earlier this year to ensure that accountancy fulfils the public purpose for which it was originally intended, may be expected to cause controversy within the profession.
Accountancy and tax justice campaigner Richard Murphy, who chairs CAN, has spoken of “accountancy in crisis” and sees a fundamental problem with existing accounting standards. He wants accounts to play a more effective role in society at large.
It is no accident that these views are emerging at the same time as the accountancy profession has succumbed to a succession of accounting failures – in which not only auditing but also accounting standards have been called into question.
Instead of reporting only to the providers of capital, CAN takes the radical view that accounts should serve all stakeholders of a company – the suppliers of its capital, its trading partners, its employees, regulators, tax authorities and civil society.
It suggests that this wider approach to accounting would make accounting and business responsible to all in society, reflecting the substantial privilege enjoyed by limited liability companies. Furthermore, it would also be appropriate in the case of charities and national, regional and local government.
CAN seeks to promote accounting with a public purpose by proposing Corporate Accountability Standards (CAS) as a direct challenge to standards currently in use as set by the International Financial Reporting Standards (IFRS) Foundation and other regulators.
Accounting for tax
In July CAN published a discussion document entitled ‘Corporate Accountability Standard 1: Taxation’ or CAS1, intended as the first in the series of alternative accounting standards.
CAS1 was produced to facilitate discussion on the need for a Corporate Accountability Standard on taxation. It emphasises that the issues it discusses do not necessarily reflect the Corporate Accountability Standard which might be issued in exposure draft format in due course.
Taking the interests of all stakeholder groups into account, CAN suggests a very different reporting standard. CAS1 contains the following new or innovative features:
- significantly enhanced reporting on tax risk and related governance mechanisms;
- full country-by-country reporting for all multinational reporting entities;
- enhanced reporting for corporate income taxes – particularly the separation of current and deferred tax reporting, enhanced tax reconciliations disclosing effective tax rates paid, accounting proof showing that corporation tax liabilities declared are actually paid, and disclosure of when deferred tax liabilities or assets might result in cash paid or received;
- disclosure (as suggested for corporate income tax) for sales and value-added taxes, employment taxes, and taxes deducted from employees; and
- additional data to explain tax paid in the extractive industries, on a project basis.
The standard would be extended to governments (whether national, state, regional or local), requiring every level of government to account for the taxes it expects to be paid and those it actually receives, and incorporating a standard for tax gap reporting.
CAS1 would apply to all but the very smallest reporting entities. It is suggested that it would apply to all reporting entities, except those with unlimited liability and less than 50 employees and those with limited liability and less than 25 employees.
Materiality would be considered relative to the interests of the various stakeholders – not those of the reporting entity alone. The rationale for this is that the impact on stakeholders (especially employees) can be equivalent whatever the size of the reporting entity.
CAS1 would help civil society to hold both companies and governments to account. All reporting entities, including governments, would be substantially more accountable to their stakeholders for the tax liabilities that they owe, handle or manage in a wide range of capacities.
CAN regards this enhanced focus as essential, given the significance of tax in almost every economy and the fact that very large numbers of companies fail because of their inability to manage and settle their tax liabilities.
It claims that CAS1 would deliver more information to the directors of most companies, on the tax management of the entities for which they are responsible, than many of them would ever have received to date.
The standard would facilitate better-informed political debate on tax issues. It would reassure investors, or worry them, resulting in a better allocation of capital in financial markets. It would help trading partners and employees to make better decisions on their own risks.
Debate
According to CAN, there is “…a fundamental problem with existing accounting standards. The plethora of accounting failures in recent years has not just happened because of poor auditing, although that has contributed. The rules of accounting have also failed society, quite badly. This is because IFRS accounting standards are not fit for purpose.”
It is not for me to predict how ICAS and the other established accountancy bodies may react to the publication of CAN’s proposed Corporate Accountability Standards.
Murphy is a chartered accountant and political economist with a high profile as a seasoned campaigner. He has a track record of raising controversial accounting, tax and economic issues, and a reputation for persistence.
If his radical views on accounting standards succeed in generating useful debate, readers might find it helpful to have studied the approach taken in CAS1.
Article supplied by Taxing Words Ltd