A new IFRS for tax – a duty to society?

A recent article by Richard Murphy on the Accounting Web site “explains why a new IFRS for tax is necessary, and why accountants have a duty to society to help companies explain their tax payments.”

The article is primarily focused on the lack of country by country reporting for tax matters. It cites various existing initiatives to promote such reporting, but primarily focuses on the IASB’s failure to introduce a disclosure requirement through standard-setting. Murphy identifies two reasons for this failure:

  • The first is that the demand for this data is political. That claim is disingenuous, since all choices about what to disclose in accounts are, inevitably, political.
  • The second is that country-by-country reporting is of no interest to investors and so not accounting’s concern, since the IFRS Foundation deem that what they call ‘general purpose financial statements’, and which the rest of us call accounts, are produced solely for the benefit of the suppliers of capital to a company and then solely to let them decide whether they wish to engage with the company or not.

Murphy believes it’s well-established by now that “whatever has been claimed in the past, it is now indisputable that tax is an issue with which investors think that they have to be engaged. As is now apparent to them, bad tax governance has the power to hit future cash flows in two ways. One is by additional tax being due. The other is by creating reputational risk for the companies that partake of risky tax arrangements.” More broadly, the information would be useful to suppliers of capital and employees and regulators and others. He envisages that a new standard might also address the following:

  • Why a company’s tax bill is the amount it is would have to be explained in much more detail, as would deferred taxation accounting be expanded.
  • A reconciliation between tax provided and paid would be required, as this can rarely be achieved with existing data.
  • And information on VAT paid as well as all taxes paid on behalf of employees would require disclosure, as would all supporting data on turnover and employee pay necessary to make sense of this information.

I’m mostly sympathetic to these ideas. I wrote a few years ago about an ICAEW publication that set out some suggestions for clarifying reporting on tax-related matters. Here’s some of what I said then:

  • By repeatedly focusing on measures such as EBITDA, entities often seem to invite stakeholders to all but ignore their tax expense, as if it were an act-of-God-type appropriation beyond rationally engaging with. At other times, as noted, the whole disclosure just seems like a morass of technicalities. It’s common to come across opinions that users don’t understand IFRS deferred tax accounting and that the whole thing should just be junked. I’ve always thought that’s not really the point though, that deferred tax accounting doesn’t exist to be meaningful in itself, but rather to eliminate the misleading fluctuations in the reported tax rate that would occur if it didn’t exist. Because of that, this is an area of financial reporting where focusing on the numbers is a particularly ineffective way of understanding the underlying strategy and substance.
  • Preoccupation with taxes pushes individuals and entities into strange strategic and ethical contortions…Investors might disdain such manoeuvres, or regard them as a rational exercise of fiduciary duty to stakeholders, or a bit of both. An individual entity’s financial report can’t set out to define the entire complex playing field of actions and perceptions in this area. But it can surely try to explain what game the entity is trying to play…

I’m not entirely convinced though that it’s the IASB’s job to fix this. Maybe in saying this I seem inconsistent with a recent post in which I opined that the IASB should consider entering the field of sustainability reporting, despite the various rational reasons for concluding it shouldn’t. But that’s because consistent sustainability reporting would require constructing a coherent framework capable of unifying a currently fragmented landscape, and I don’t know what other body could take on that task. Issuers and regulators don’t need any help from the IASB on this issue – they just need will and focus. Basically, I’d be more in favour of the IASB prioritizing the things that only the IASB can do (not to mention that, among other things, any standard-setting project would surely respect the prevailing concept of materiality, thereby perhaps failing to guarantee the desired degree of revelation in all cases).

The article concludes: “Accountants have a duty to society to help companies explain their tax payments. It is time they stepped up to the mark and did it.” Fair enough, but there are a lot of accountants out there, stepping up to a lot of different marks…

The opinions expressed are solely those of the author

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