Background
I had a recent chat with another christian when this question came up as part of the conversation. Anyone who knows me or reads this blog will know that I am distinctively left-leaning. One of the main reasons for this is because I am a christian. I have a lot of difficulty understanding the idea of the “christian right” as I consider it to be an oxymoron.
Subsequently, I have quite strong views when it comes to money. So I wanted to lay out my reasoning for why I think the answer to the question ought to be “no,” though I wanted to understand the counter-argument. As a result, I asked around a little bit, which is laid out below. I have also attempted to play devil’s advocate.
Of course, I am not judging christians who do accept bonuses as part of their remuneration. If you do, all I’d like to do is make you think and question your motivation for accepting it.
Why I think the answer ought to be “no”
The fundamental reason why I would not be happy to accept it is one of motivation. Without giving too much confidential information away, employees in my company are given a choice. They can accept a fixed salary of £x per year, or else they could take a lower salary with a bonus which, when combined is greater than £x. So let’s say someone might be offered a basic pay of £30k, or they might be offered £28k with a £4k bonus. Of course the bonus is tied to their meeting certain conditions. If they meet their targets, they will obtain their bonus; if they get part-way they will be awarded part of their bonus. If they don’t meet the minimum target, they won’t get anything.
To my way of thinking, this creates a danger that we then work, our motivation becomes the creation of personal wealth. Following on from my recent post on worship, this would indicate that we are worshipping money. Of course, we may to rationalise this by claiming that we are accepting the bonus structure in order to pay our rent, fund the train fares, feed the family, etc. What I do not like about this view is that it creates the false impression that we would not be able to make ends meet without the bonus.
I would rather my motivation to work be because I want to do a good job. As I touched on briefly recently, there are many ways we can worship. To me, trying to do a good job at work is a part (though by no means all) of my worship. There is the very famous warning in 1 Timothy, where Paul writes “if we have food and clothing, we will be content with these. But those who want to be rich fall into temptation and are trapped by senseless and harmful desires that plunge people into ruin and destruction. For the love of money is a root of all kinds of evil, and in their eagerness to be rich some have wandered away from the faith and pierced themselves with many pains.” (1 Tim 6:8-10, NRSV) Often only a part of that is quoted, but I wanted to include the lot.
Having worked in financial services for several years, and subsequently working in the finance side of a different type of business, I am surrounded by those who are obsessed with money. It would be very easy to get sucked into that world, where I’d care about profit and trying to boost my own pay, quite possibly at the expense of others. That’s not someone I’d ever want to become. I want to be someone who is content with what I have.
Another passage in my thinking (though I recognise that money is not the primary purpose of this particular discourse) is Romans 4, where Paul writes, “Now to the one who works, wages are not credited as a gift but as an obligation.” (Romans 4:4, NIV) This is as close as I can find to anything about bonuses. I hope you don’t think I’m stretching scripture too much; that’s not my intention.
The devil’s advocate argument (why it might be OK)
You have to recognise that the pay culture we have in modern society would be totally alien to those living in the 18th century, let alone anyone before then. So the people of the bible wouldn’t have known enough to either speak in favour or against company bonuses.
There are various people in the bible who had great wealth and who were not condemned for it. Abraham was a bit of a Richard Branson-type figure of his day, and in terms of a single individual owning a high proportion of the world’s wealth, Solomon was probably one of the richest men in history. Yet neither of them were condemned for their wealth. It was incidental to them. This brings us on to the so-called ‘prosperity gospel.’
Proponents of this view often cite Psalm 37 as a justification for not only claiming that wealth is acceptable, but that it is a sign of reward for faithfulness: “Trust in the LORD, and do good; Dwell in the land, and feed on His faithfulness. Delight yourself also in the LORD, And He shall give you the desires of your heart.” (Psalm 37:3,4, NKJV) I interpret this quite differently. Given the preamble of verse 3, I think what constitutes the “desires of [our] hearts” will be changed so that we no longer will be desiring of wealth, but rather we will be desiring the riches of God. (c.f. Romans 12).
Given the balance of the number of times wealth and money are referred to in the bible, I think that prosperity advocates must have a hard time defending their position. For brevity, I’ve omitted most references I could use to back this up; maybe another day.
Some practical considerations
Of course, not everyone is given a choice to not have a bonus as part of their pay packet. You have to be in a particularly high-end job to be able to change the terms of your employment contract. Given that I have only ever taken jobs whilst unemployed, I never had much bargaining power, so I simply wouldn’t do anything to jeopardise the prospect of employment.
Then you have the choice of what to do with it. I asked on Twitter what people thought about it, though I only got 1 reply which was that it’s OK to accept a bonus, so long as it is donated to charity. More widely, there are a number of good things you could do with additional money, of which giving to charity is but one. However, I think christians always have to keep a tight reign on their motives. For example, if you donate via a Just Giving page (or similar) do you disclose your name and the amount you are donating, or do you go by the principle of "But when you give to the needy, do not let your left hand know what your right hand is doing." (Matt 6:3)?
Conclusion
For my conscience, I am happier to not take a bonus. I do not think it is inherently wrong to do so. What is important is what you do with it. In this, I probably ought to be honest about my own pay packet. I contribute to a pension scheme which removes from my pay packet 10% of my gross pay. This pushes me down into the “basic rate” tax band. Had I opted not to do this, I would be higher rate tax payer, having a marginal rate of 40% on a small portion of my salary. As it stands, my effective rate (total tax+NI/total pay) is 26.7%. From this, you can tell that I am paid significantly more than the average salary. This is slightly tempered by my train fares of £87.50 a week. Once you take tax into account, this means that if I got a job within walking distance of home, I could take a gross pay cut of just over £6,000 per year and it would have no effect on my take-home pay.
Given that I am such a highly paid job, putting me amongst the top few percent of UK workers, I think that to demand any extra would be selfish and immature. When I work long hours, I don’t complain about a lack of overtime, in spite of pressure to do so. When I think of all the millions in this country alone (let alone the billions elsewhere in the world) who do not have the material riches that I have, it is very humbling. “From everyone who has been given much, much will be demanded; and from the one who has been entrusted with much, much more will be asked.” (Luke 12:48b, NIV) It is a huge responsibility and one that has to be taken seriously. Personally, I find those who have abundant material wealth, and yet who complain about a lack of it, to be repugnant; it’s one of the biggest intolerances I have. Maybe I’m being harsh and lacking grace; I don’t know.
So that’s my choice. What’s your take on the matter?
Showing posts with label tax. Show all posts
Showing posts with label tax. Show all posts
22 November 2011
4 August 2011
Book Review: Treasure Islands by Nicholas Shaxson
I became interested in this book after reading an endorsement from it by the writer and columnist, George Monbiot, who I have some time for, even if I don’t agree with him in all things. The subtitle of the book, Tax Havens And The Men Who Stole The World, gives a better impression of what the book is about. This also impinges on my own area of professional expertise: accountancy. I have often been struck by how poorly tax related issues are reported in the news, particularly issues of tax avoidance and evasion. So while most people are aware that the former is legal and the latter is not, the “common knowledge” of such matters goes no further than this. Even amongst people who are more politically aware, I still hear and read comments such as “companies try to avoid capital gains tax by….” which demonstrate an ignorance that companies are not liable for capital gains tax. It is purely a tax levied on individuals. Or similarly, the term non-domiciled (non-dom, for short) as a shorthand for people who don’t pay income tax, when the truth is that a person’s domicility is irrelevant as far as income tax is related; as that is entirely dependent on their residency status.
Anyway, I digress. My hope was that Shaxson would be more financially literate than the vast majority of most journalists. In the first chapter, I seemed set for disappointment, due to a lack of clarity in his terminology and a very clumsy attempted sleight of hand in order to make an erroneous point of rhetoric. The particular point in question was on page 12 when he mentions some companies “did nearly $750m of business in Britain but paid only $235,000 in tax…” Now the phrase “did x amount of business” is not particularly precise or helpful, though in more careful wording, one might say that $750m is the revenue. However, his implication is that this inherently unfair. But what he doesn’t state until the following chapter is that tax is based on profit, not revenue.
From this shaky start, the book massively improves. Shaxson’s main thrust is that a tax haven is about secrecy and being able to hide income behind layers of silence. He then goes about giving a history of how these structures have arisen. He begins with a look at probably the most famous tax haven in the world: Switzerland. The notion of this being a tax haven is not so much the fact that they have generally low taxes (which is still true) but more to do with the code of banking in that country and the laws surrounding it. For Shaxson, the term he uses constantly is secrecy, although the term confidentiality may equally be used. The difference is merely the connotations each word has, depending on your political leanings.
Given my introduction above as a recommendation from George Monbiot, there is little room for doubt as to Shaxson’s own left-of-centre leanings. His broad approach is to give the historical story of how tax havens have come into being along with the key lobbyist who have sought their existence and protection as a proxy for the protection of their own wealth.
The book is quite wide-ranging in its scope, though I found the most interesting sections to be those on the Caymen Islands, Jersey and the City of London. Ironically, it was while I was reading the chapter on the square mile that I was on a tube train on the Northern Line going from London Bridge, through Bank and Moorgate, up to Old Street, thus traversing the City and passing almost (if not actually) directly underneath the Bank of England. It gave a wonderful sense of irony, and though a few people glanced at the cover with interest (I do not have a Kindle, nor do I wish to own one). It reminded me that I would still like, at some point, to sit outside 1 Canada Square whilst reading a copy of Das Kapital.
As mentioned earlier, Shaxson does write about some topics that I know quite a bit about, having worked in those areas for some years. Specifically, he talks about accountants, auditors, LLPs and the International Accounting Standards Board (IASB). It is here that he woefully falls short of anything resembling understanding, which leads me to question the integrity of the rest of the book, where I rely on his word to provide an accurate picture.
Audit
To be specific, he refers to auditors as “the private police force of capitalism” and “audits are the main tool through which societies know about, and regulate, the world’s biggest corporations.” This is pushing a widespread misconception that leads to much misunderstanding and unnecessary vilification. An auditor is not a regulator. Their job is only to provide an opinion on whether or not the financial statements give a “true and fair view” of the company’s position at the period end and the activities during the period being audited.
When I worked as an auditor, one of the jobs I was given was to make notes on the 2006 Companies Act, and present it to one of the partners. This was immediately after it was published, so no one really outside of Parliament had had a chance to read it in full. At the time it was (and I think it still is) the largest single piece of legislation ever passed by the UK Parliament. The role and duties of an auditor are very clearly laid out in the Act, though they take up a tiny amount of space, as deference is effectively given to those who make the accounting standards. For publically listed groups of companies (which make up less than 1% of the total number of companies in the UK) these standards are set by the aforementioned IASB. The standards are known as the International Financial Reporting Standards (IFRS).
Financial Reporting Standards
Now I do not agree with 100% of the IFRS standards. When I was studying them, there did appear to be some level of obfuscation, where the standards are derived from a set of principles laid out in what is known as The Framework. What we end up though are standards like IFRS 9, which is a labyrinthine standard relating to exotic financial instruments which are very seldom used in the vast majority of companies. Though it makes sense in a step-by-step logic derived from the Framework, when looked at as a whole, it just seems devoid of common sense. One of the principles is to make financial statements understandable to the ordinary reader, unversed in accountancy and reporting standards. I have tested this on a small scale by giving some accounts to some non-accountants to have a read to see how well they understand them. I must add, that these were from publically available accounts published online by the companies in question, all of which were audited by different firms from the one I worked for, so there is no hint of any potential breach of confidentiality. Shaxson’t beef though is not with the standards that tend to baffle. Instead, he is not happy about segmental reporting, where a company breaks down its figures into the different segments that are used to report to management. He would rather make all companies disclose all cross-border transactions.
Transfer pricing
The basis of this is transfer-pricing, which he misleadingly states is a method by which companies move costs into high tax areas and profits into low tax areas. The reason I call this misleading is that in a short space, the author has misdirected in several different ways, which is quite an impressive feat. The first is in financial literacy. He treats costs and profits as though they are unrelated. It is like saying I’ll move my apples to Germany and my oranges to Switzerland. If you move costs to a higher tax jurisdiction then you do not then move your profits. Your profits are your total income minus your costs; yet Shaxson seems to be unaware of this most simple of equations. The other is to pretend that transfer-pricing is a tax dodge mechanism, when it is the precise opposite. Transfer pricing is the mechanism by which to avoid the unfair transfer of costs for tax minimalisation purposes. These agreements have to be presented to the auditors (who will usually bring a tax specialist onto the team for this purpose) and the agreements are subject to inspection by HMRC, who can prosecute if they think a given company is trying to avoid paying taxes by such methods.
LLPs
The last point which I think needs addressing is that of limited liability partnerships (LLPs). LLPs are portrayed by Shaxson as a tax-dodge vehicle which the big 4 accounting firms (PWC, Deloitte, KPMG and Ernst & Young) pressured the UK government into adopting. What he fails to mention is that the reason they were set up was to recognise the growing corporate nature of professional service firms such accountancy firms and law firms, which had historically been for the most part plain old partnerships. These would be governed by partnership agreements, but the English Law (I cannot speak for Scottish law or that of any other jurisdiction, as I have never studied, nor taken any exams in it) that governs partnerships was not designed for firms that had grown to the size of large corporates, where company law was more apt for this. So the LLPs were set up as a half-way house whereby large swathes of the Companies Act were adopted by the LLPs, whilst allowing them to retain their partnership structure, thus not destroying the heritage and ethos that allowed them to flourish; along with the many mergers that happened along the way to give the weird and wonderful compound names and acronyms that govern the largest firms in the marketplace.
Conclusion
OK, so that was an extremely length aside. But if you’d read this far (or seen the word ‘conclusion’ and skipped straight to it – tut tut to you for your laziness), then you show the level of patience needed to get through Shaxson’s book. As demonstrated above, it is not factually correct in all places, which does undermine slightly the credibility of the rest of the book. That said, I do not think it is entirely erroneous and would recommend it as an introduction to the history of tax havens and how they operate. There are some incredibly powerful testimonies included; most notably for me were those of William Taylor’s battle with the Corporation of London, the secrecy laws that are in place in the Cayman Islands and the subculture that pervades Jersey.
Read it with due scepticism, and learn what you may never have realised was going on right outside (or even inside) your office.
Anyway, I digress. My hope was that Shaxson would be more financially literate than the vast majority of most journalists. In the first chapter, I seemed set for disappointment, due to a lack of clarity in his terminology and a very clumsy attempted sleight of hand in order to make an erroneous point of rhetoric. The particular point in question was on page 12 when he mentions some companies “did nearly $750m of business in Britain but paid only $235,000 in tax…” Now the phrase “did x amount of business” is not particularly precise or helpful, though in more careful wording, one might say that $750m is the revenue. However, his implication is that this inherently unfair. But what he doesn’t state until the following chapter is that tax is based on profit, not revenue.
From this shaky start, the book massively improves. Shaxson’s main thrust is that a tax haven is about secrecy and being able to hide income behind layers of silence. He then goes about giving a history of how these structures have arisen. He begins with a look at probably the most famous tax haven in the world: Switzerland. The notion of this being a tax haven is not so much the fact that they have generally low taxes (which is still true) but more to do with the code of banking in that country and the laws surrounding it. For Shaxson, the term he uses constantly is secrecy, although the term confidentiality may equally be used. The difference is merely the connotations each word has, depending on your political leanings.
Given my introduction above as a recommendation from George Monbiot, there is little room for doubt as to Shaxson’s own left-of-centre leanings. His broad approach is to give the historical story of how tax havens have come into being along with the key lobbyist who have sought their existence and protection as a proxy for the protection of their own wealth.
The book is quite wide-ranging in its scope, though I found the most interesting sections to be those on the Caymen Islands, Jersey and the City of London. Ironically, it was while I was reading the chapter on the square mile that I was on a tube train on the Northern Line going from London Bridge, through Bank and Moorgate, up to Old Street, thus traversing the City and passing almost (if not actually) directly underneath the Bank of England. It gave a wonderful sense of irony, and though a few people glanced at the cover with interest (I do not have a Kindle, nor do I wish to own one). It reminded me that I would still like, at some point, to sit outside 1 Canada Square whilst reading a copy of Das Kapital.
As mentioned earlier, Shaxson does write about some topics that I know quite a bit about, having worked in those areas for some years. Specifically, he talks about accountants, auditors, LLPs and the International Accounting Standards Board (IASB). It is here that he woefully falls short of anything resembling understanding, which leads me to question the integrity of the rest of the book, where I rely on his word to provide an accurate picture.
Audit
To be specific, he refers to auditors as “the private police force of capitalism” and “audits are the main tool through which societies know about, and regulate, the world’s biggest corporations.” This is pushing a widespread misconception that leads to much misunderstanding and unnecessary vilification. An auditor is not a regulator. Their job is only to provide an opinion on whether or not the financial statements give a “true and fair view” of the company’s position at the period end and the activities during the period being audited.
When I worked as an auditor, one of the jobs I was given was to make notes on the 2006 Companies Act, and present it to one of the partners. This was immediately after it was published, so no one really outside of Parliament had had a chance to read it in full. At the time it was (and I think it still is) the largest single piece of legislation ever passed by the UK Parliament. The role and duties of an auditor are very clearly laid out in the Act, though they take up a tiny amount of space, as deference is effectively given to those who make the accounting standards. For publically listed groups of companies (which make up less than 1% of the total number of companies in the UK) these standards are set by the aforementioned IASB. The standards are known as the International Financial Reporting Standards (IFRS).
Financial Reporting Standards
Now I do not agree with 100% of the IFRS standards. When I was studying them, there did appear to be some level of obfuscation, where the standards are derived from a set of principles laid out in what is known as The Framework. What we end up though are standards like IFRS 9, which is a labyrinthine standard relating to exotic financial instruments which are very seldom used in the vast majority of companies. Though it makes sense in a step-by-step logic derived from the Framework, when looked at as a whole, it just seems devoid of common sense. One of the principles is to make financial statements understandable to the ordinary reader, unversed in accountancy and reporting standards. I have tested this on a small scale by giving some accounts to some non-accountants to have a read to see how well they understand them. I must add, that these were from publically available accounts published online by the companies in question, all of which were audited by different firms from the one I worked for, so there is no hint of any potential breach of confidentiality. Shaxson’t beef though is not with the standards that tend to baffle. Instead, he is not happy about segmental reporting, where a company breaks down its figures into the different segments that are used to report to management. He would rather make all companies disclose all cross-border transactions.
Transfer pricing
The basis of this is transfer-pricing, which he misleadingly states is a method by which companies move costs into high tax areas and profits into low tax areas. The reason I call this misleading is that in a short space, the author has misdirected in several different ways, which is quite an impressive feat. The first is in financial literacy. He treats costs and profits as though they are unrelated. It is like saying I’ll move my apples to Germany and my oranges to Switzerland. If you move costs to a higher tax jurisdiction then you do not then move your profits. Your profits are your total income minus your costs; yet Shaxson seems to be unaware of this most simple of equations. The other is to pretend that transfer-pricing is a tax dodge mechanism, when it is the precise opposite. Transfer pricing is the mechanism by which to avoid the unfair transfer of costs for tax minimalisation purposes. These agreements have to be presented to the auditors (who will usually bring a tax specialist onto the team for this purpose) and the agreements are subject to inspection by HMRC, who can prosecute if they think a given company is trying to avoid paying taxes by such methods.
LLPs
The last point which I think needs addressing is that of limited liability partnerships (LLPs). LLPs are portrayed by Shaxson as a tax-dodge vehicle which the big 4 accounting firms (PWC, Deloitte, KPMG and Ernst & Young) pressured the UK government into adopting. What he fails to mention is that the reason they were set up was to recognise the growing corporate nature of professional service firms such accountancy firms and law firms, which had historically been for the most part plain old partnerships. These would be governed by partnership agreements, but the English Law (I cannot speak for Scottish law or that of any other jurisdiction, as I have never studied, nor taken any exams in it) that governs partnerships was not designed for firms that had grown to the size of large corporates, where company law was more apt for this. So the LLPs were set up as a half-way house whereby large swathes of the Companies Act were adopted by the LLPs, whilst allowing them to retain their partnership structure, thus not destroying the heritage and ethos that allowed them to flourish; along with the many mergers that happened along the way to give the weird and wonderful compound names and acronyms that govern the largest firms in the marketplace.
Conclusion
OK, so that was an extremely length aside. But if you’d read this far (or seen the word ‘conclusion’ and skipped straight to it – tut tut to you for your laziness), then you show the level of patience needed to get through Shaxson’s book. As demonstrated above, it is not factually correct in all places, which does undermine slightly the credibility of the rest of the book. That said, I do not think it is entirely erroneous and would recommend it as an introduction to the history of tax havens and how they operate. There are some incredibly powerful testimonies included; most notably for me were those of William Taylor’s battle with the Corporation of London, the secrecy laws that are in place in the Cayman Islands and the subculture that pervades Jersey.
Read it with due scepticism, and learn what you may never have realised was going on right outside (or even inside) your office.
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