Author Archives: Peter Rogol

The real meat of the document relates to its suggested simplified technique for MNE’s to quantify and allocate low value-added intra-group services.

Part of an international group? – better watch those cross-charges!

Peter Rogol - peter.rogol@goodmanjones.com

Posted on 5th February 2015

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Ever since the financial crash, there’s been increasing pressure on international groups whose tax bills seem too low. The word “morality” has regularly fallen from the splenetic lips of outraged politicians, furious that the tax structures their colleagues have created have been used in a way they’d claim was never intended. Behind the scenes the OECD has been looking at ways to limit the extent to which profits can be shifted from one territory to another without in any way prejudicing the right of sovereign governments to entice business to their territories by way of tax incentives. It’s a hard task, but a start has been made with BEPS Action 10.

BEPS Action 10

An OECD discussion document succinctly titled “BEPS Action 10: PROPOSED MODIFICATIONS TO CHAPTER VII OF THE TRANSFER PRICING GUIDELINES RELATING TO LOW VALUE-ADDING INTRA-GROUP SERVICES” has just been issued. Its 20 pages seek to define low value-adding intra-group services, how they should be documented, and the appropriate margins. Furthermore, it defines what is described as “shareholder activities” which shouldn’t be cross-charged in the first place.

This document raises some interesting points. Its description of Shareholder Activities includes the phrase “an intra-group activity may be performed relating to group members even though those group members do not need the activity (and would not be willing to pay for it were they independent enterprises)”. It goes on to say “This type of activity would not be considered to be an intra-group service, and thus would not justify a charge to the recipient companies”. It lists examples, which include “costs relating to reporting requirements (including financial reporting and audit) of the parent company … and costs relating to the preparation of consolidated financial statements of the MNE (however, in practice costs incurred locally by the subsidiaries may not need to be passed on to the parent … where it is disproportionately onerous to identify and isolate those costs)”

Whilst the logic behind the first phrase is undoubtedly sound, the second one rings alarm bells. A quoted parent company will typically have quarterly reporting requirements that oblige its subsidiaries to undertake work and be subjected to quarterly review by their auditors. Those auditors will bill their client – the subsidiary – for their efforts. Those bills are readily identifiable. The auditor’s client would most certainly, were it independent, be unwilling to pay the charge as it arguably receives no benefit from the service performed. I have never seen such charges recharged to the parent, nor have I seen them disallowed in computations of taxable profits. Yet the implication of the bracketed comment is that these will no longer be allowable expenses of the trade of the subsidiary.

Duplicate Services & Incidental Benefits

The document then discusses duplicate services (if genuinely a duplication of what the group member has already done, no cross-charge), and incidental benefits (where benefits flow to a group member as a by-product of services targeted at another group member or members, again no cross-charge) The latter includes not only the benefit of enhanced credit-worthiness resulting merely from being a member of a substantial group, but also the boost to its trade from group reputation-building achieved by global marketing and PR campaigns.- the implication being that the parent should bear all the costs of brand promotion whilst the beneficiaries (its various subsidiaries) bear none. That seems more than a little draconian.

Centralised Services & “On call” Charges

The document also discusses centralised services and “on call” charges, prohibiting neither, but saying the fact of payment being made or liability recorded for intra-group service provision does not provide evidence that such service has been supplied, any more than their absence is evidence that no such service has been supplied. This would seem to imply that if proof of supply existed even where no cross-charge had been rendered, a tax deduction might still be possible – more likely, however, is the alternative implication that where a supply can be seen to have been made but no charge rendered, the supplier should be deemed for tax purposes to have some level of undisclosed income.

The document then discusses pricing – no surprises there, equivalent arm’s-length is best, but in many cases can’t readily be achieved. The result is indirect-charge methods.

Low value-added Intra-group Services

The real meat of the document relates to its suggested simplified technique for MNE’s to quantify and allocate low value-added intra-group services. The simplified technique should be applied on a consistent group-wide basis across all countries in which the MNE operates. It summarises low value-added services as being supportive in nature, non-core activities, not utilising unique and valuable intangibles, and relatively low-risk. By topic, it suggests these will include:

Accounting and auditing
Budgeting
Accounting processes
HR
Health and safety and other regulatory compliance
IT services
Communications both internal and external including PR support, group legal services group tax services
General admin/clerical services

The simplified technique requires the MNE to calculate on an annual basis a pool of all such costs, by category and by accounting cost centre. The pool should exclude costs benefitting solely the company that incurred them, and costs benefitting solely one other group company.

Having established the pool of low value-added costs, the MNE should then establish appropriate allocation keys per category (payroll provision – staff numbers, IT support– computer expense, accounting services – transaction volumes, and so on).

The MNE should then apply a mark-up. – No less than 2%, no greater than 5%.

These steps should all be documented, and the documentation made available on request to relevant tax authorities. The documentation should explain:

What services are involved and why the MNE considers them to be low value-added
The rationale for pooling service provision across the members of the MNE
Description of expected benefits
Description of the allocation keys used and why those keys should produce outcomes related to benefits received, and confirmation of the mark-up applied.

The documentation should also include:

Written contracts or agreements for the provision of these services from participating group members
Calculations of the pool, and of the application of the allocation keys.

If adopted, the OECD believes BEPS Action 10 should satisfy tax authorities across the world that all such cross-charges have been allocated appropriately and that no profit-shifting has occurred to the detriment of any individual territory.

We can but hope.

The information in this article was correct at the date it was first published.

However it is of a generic nature and cannot constitute advice. Specific advice should be sought before any action taken.

If you would like to discuss how this applies to you, we would be delighted to talk to you. Please make contact with the author on the details shown below.

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The London residential property market responds to two principal drivers – overseas investors who drive the top end of the market, pulling the rest in its wake; and UK residents working in the capital and wanting to live there.

The London Property Market

Peter Rogol - peter.rogol@goodmanjones.com

Posted on 10th November 2014

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For the best part of the last 18 months, it’s been almost impossible to open a UK newspaper that hasn’t had at least one article about the craziness of the London property market. According to the various journalists concerned, the market was overheating back in the spring and summer of 2013, so as prices are now somewhere around 19% higher than they were then, boiling point was reached and passed a while back.

And it’s not just the past 18 months. Back in July 2011 the BBC quoted economist Jonathan Davis talking about the overpricing of London property – he said at the time “London and South East transaction numbers had collapsed and prices were set to follow”. Marvellous punditry – according to the Land Registry the average price of a London property at that time was £335K – it’s not been that low since, and by August 2014 had risen to £467K.

On 23rd October, Foxtons shares tumbled on the back of a poor last quarter, with sales commission down 7.8% on the quarter ended 30 September 2013. In the previous week, RICS reported London prices were beginning to fall. And subsequent to that the FT reported that volumes in the prime Central London market fell by a third in the July to September quarter. So all these journos can pat themselves on the back – they called it right after all. Maybe a bit late, but hey! – they can sit back and bask in self-satisfaction.

Or can they? Aren’t there one or two special factors coming into play?

First and foremost, there’s an upcoming general election, with a strong likelihood of Labour being returned to power. And Labour’s just announced its Mansion Tax, basically a postcode tax on Central London. In the short-term, the threat of this as-yet rather ill-defined tax hits sentiment at the top end of the market. In the longer term, should Labour get in, there’s always the risk that having invented a new tax, they’d expand its reach by lowering the value at which it kicks in. That impacts not only the top end, but also those properties that might be dragged into the net.

Second, we’re about to enter a further period of decline in the Eurozone. Optimism across the continent is on a downward curve. Allied to that, the Chinese economy is slowing, and there’s the build-up of tensions between Russia and the West. Couple that with the strengthening of sterling against both the Euro and the Rouble, add in the Enveloped Dwellings regime, there’ll be fewer non-resident investors in the London property market.

So where’s the market likely to be heading over the medium term?

The London residential property market responds to two principal drivers – overseas investors who drive the top end of the market, pulling the rest in its wake; and UK residents working in the capital and wanting to live there. Currently, both special factors mentioned above are weighing down on the overseas investor market – but they don’t affect the UK residents market. Hence the reduction in volumes at the top end isn’t noticeably affecting either price or volume in the rest of the London market.

For UK residents the core issue underlying property prices is affordability. The vast majority of property acquirers are buying a home to occupy, a few are buying to let to obtain a better return than they can on cash. Affordability is not the headline price. Affordability comprises the following principal ingredients, in descending order of importance:

For occupiers

the size of the required deposit,
the cost of the monthly mortgage,
the cost of renting an equivalent property, and
the possibility of building up personal wealth by way of equity build-up.

For UK investors

the ability to raise sufficient cash to obtain a buy-to-let mortgage at relatively poor Loan to Value ratios
the likelihood of generating sufficient rent not only to cover all ongoing costs including finance but also to provide a return above and beyond what they can earn on their cash
the likelihood that the undersupply of property will continue for the foreseeable future

So yes, the froth may have come off the top end of the market. Fewer foreign buyers, leading to lower volumes and some degree of price adjustment by those who have no option but to sell. But below the top end, that froth doesn’t exist and won’t exist whilst there are more people wishing to live in London than there are properties to accommodate them. It’s good ol’ supply and demand. If people can’t afford the deposit, they have to continue renting … thus sustaining the B2L market.

The medium term outlook? Lower volumes at the top end, with some degree of price correction for those that sell, at least until the General Election in May 2015. Further down the scale, no noticeable change, and none likely until something major happens on the supply side

The information in this article was correct at the date it was first published.

However it is of a generic nature and cannot constitute advice. Specific advice should be sought before any action taken.

If you would like to discuss how this applies to you, we would be delighted to talk to you. Please make contact with the author on the details shown below.

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Another political season’s over

Peter Rogol - peter.rogol@goodmanjones.com

Posted on 10th October 2014

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The conferences are over – the three main party leaders have spoken. As I write just two party leaders’ speeches are available in text form, Miliband’s and Cameron’s. Nick Clegg finished speaking an hour ago, but currently his isn’t.

Being something of a cynic, I tend to rank politicians in inverse proportion to their use of the word “fair” or derivatives of it. Everyone wants “fair”, “fair” is the ultimate Utopia, but as we all know, it’s also completely meaningless. The more a politician relies on it, the less that politician can be relied upon.

I was pleasantly surprised by the infrequent occurrence of the word. Cameron used it just once, Miliband four times. As to Clegg, I didn’t listen to his speech, I’ve no text to hand, just a few tweets to go by – but any politician whose party website includes the term “fairer society” automatically starts with a bonus count of ten, so according to my interpretation Miliband is more reliable than Clegg but ranks below Cameron.

On one level that result surprises me. To me, the extent to which a politician talking about his plans for the country’s future should be believed depends entirely on how well he’s explained the funding for those plans. And as Miliband’s delivered speech made no mention whatsoever of the deficit, he demonstrated, perhaps subconsciously, not only that he regards it to be of no importance, but also that his plans cannot be taken seriously. Because if the existing deficit is of no importance, the implication must be that he’d pursue his agenda until – suddenly, and to his undoubted astonishment – the country was broke. And then it would be cap in hand to the IMF again. And his agenda would be blown out the water.

Nick Clegg’s speech appears to have been an exercise in defensiveness. Yes, there’s a tax give-away, but the man and his party have some credibility based on their years in coalition. It’s undoubtedly arguable the deficit would be significantly lower today had the Tories been in sole charge from 2010, but the LibDems are entitled to some credit for participating in government at a most difficult time economically.

Of course every party has its giveaways. The main one from the Tories, as my colleague has pointed out, is a tax band adjustment by 2020. My colleague regards this giveaway as a cynical ploy to buy votes today for a tax hand-out five years down the line. I disagree with my colleague – cynical it would be were it promised to kick in before the deficit were dealt with. It wasn’t.

Labour doesn’t really do tax give-aways, it just finds new ways of spending money. Miliband identified several of those. And he identified a way to fund a part of it, by means of Vince Cable’s “Mansion Tax” that’s no longer supported by Vince’s own party. Whether or not it’s possible to impose such a tax is open to serious doubt, but were it to be introduced, the concern will be that the threshold will be lowered over time from £2m, to £1.5m, perhaps to £1m. Appealing, perhaps, to Labour’s core vote in Warrington or Bootle, but a worrying prospect indeed for anyone living in their own home within commuting distance of London.

The information in this article was correct at the date it was first published.

However it is of a generic nature and cannot constitute advice. Specific advice should be sought before any action taken.

If you would like to discuss how this applies to you, we would be delighted to talk to you. Please make contact with the author on the details shown below.

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More on the UK as the place to do business

Peter Rogol - peter.rogol@goodmanjones.com

Posted on 29th September 2014

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I’ve commented previously on why the UK is the place to base your European activity.

The World Economic Forum recently issued its 2014-15 Global Competitiveness Report covering 144 economies with just five omissions including Liberia and Ecuador. Its analysis is prepared by locally-based academics and utilises statistical data from international organisations such as UNESCO, WHO and IMF. Its report weights economies according to their comparative rankings under three bands of “Basic Requirements”, “Efficiency Enhancers” and “Innovation and Sophistication Factors”, collectively sub-divided under twelve headings, each of which are further sub-analysed. The twelve headings are Institutions, Infrastructure, Macroeconomic Environment, Health and Primary Education – all under “Basic requirements”, Higher Education and Training, Goods Market Efficiency, Labour Market Efficiency, Financial Market Development, Technological Readiness, Market Size – collectively under “Efficiency Enhancers”, and Business Sophistication and Innovation – forming “Innovation and Sophistication Factors”. As an example of subheadings, Institutions is broken down into no less than twenty one heads, covering amongst others judicial independence, crime, trustworthiness of police, corruption in government, investor protection – the list goes on.

Whilst sub-analysis headings are weighted uniformly for all economies under the three principal bands, the weighting applied to the three principal bands varies according to the state of development of the individual economy. So the importance of “Basic Requirements” to Burundi’s underdeveloped economy has a 60% weighting, but only a 20% weighting to Sweden’s highly developed one. Weightings for principal bands “Efficiency Enhancers” and “Innovation and Sophistication Factors” span from 35% to 50% and from 5% to 30% respectively.

For the second year running, Switzerland and Singapore are numbered one and two in overall rankings. The rest of the top 10 comprise: the USA at third (fifth last year), Japan sixth as against ninth previously, and Hong Kong seventh (again). Remaining places are taken by EU countries – Finland 4^th (3^rd previously), Germany 5^th (as against 4^th), Netherlands 8^th (again), UK 9^th (versus 10^th) and Sweden 10^th (against 6^th). In other words, in terms of its Global Competitiveness Report, the World Economic Forum reckons the top 10 economies this year are the same top 10 economies as last year.

The WEF report includes statistical analysis to demonstrate an impressive correlation between the results of its report and GDP per capita growth from 1990 on.

So how does its analysis contribute to a business decision as to where to base its European operations?

Clearly certain subheadings used by WEF have no relevance to such decisions. The business impact of malaria, for example, is unlikely to influence a decision as to where to headquarter European activity. The number of fixed telephone lines per 1000 people is also unlikely to be a decisive factor. And principal bands weighting for all the major EU economies is uniform (20%, 50%, 30%) – so perhaps the simplest answer is to add the rankings across all 121 subheadings for all relevant economies.

What is meant by relevant economies for this purpose? They need two features – they must be major EU countries with sizeable local populations to facilitate local sales, and they must be sufficiently close to the economic centre of the EU to ease cross-border business. That gives us Germany, France, Italy and the UK.

Because the WEF rankings are best is lowest, the lower the total for the 121 subheadings, the better. And to put the rankings into perspective, these can be compared with the equivalent scores for the US.

The results are:

Germany	3,162.6
France	4,571.0
Italy	8,049.3
UK	2,749.6
US	3,433.5

Say no more!

The information in this article was correct at the date it was first published.

However it is of a generic nature and cannot constitute advice. Specific advice should be sought before any action taken.

If you would like to discuss how this applies to you, we would be delighted to talk to you. Please make contact with the author on the details shown below.

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Corporate Taxation & Multinationals

Peter Rogol - peter.rogol@goodmanjones.com

Posted on 26th July 2014

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Ever since the financial crisis there has been a growing clamour for multi-nationals to pay their “fair share” of taxes. In the UK, targets include Amazon, Google, Starbucks, Vodaphone. In India targets include – wait for it – Vodaphone. In the US, they include, you guessed, Amazon, Google and Starbucks. In France, it’s all the above. And so it goes on.

And today, yet another politician has joined the voices of the dissatisfied. The American President no less, complaining about US Corporations moving their tax base overseas. His speech included two comments I find interesting:

“My attitude is I don’t care if it’s legal – it’s wrong,” and
“Let’s stop rewarding companies that ship jobs overseas; give tax breaks to companies that are bringing jobs back to the United States”

Looking at the first of these comments, I wonder how the President would feel were, say, Amazon to be obliged to pay tax in Germany on profits he believed it earned from its US activities and should therefore be taxed in the US. Would he turn to Amazon and say “I’m the president, and I say you pay your US dues”, and would he then turn to Angela Merkel and say “they’re US profits, they get taxed here, not there”, or would he say nothing at all to Angela, and let Germany tax the same profits? Or would he perhaps turn to Xavier Bettel, Luxembourg’s Prime Minister, and say “you can’t offer your tax structure to Amazon, Amazon’s mine”. Maybe in a conversation with David Cameron, he’d say “we charge our US businesses 35% on their profits, you’re deliberately undercutting us, I’m telling you to stop it – now!”

And when, or if, he invokes the second of his comments, will Angela, or Xavier, or David, start bleating about the damage he’s doing to their tax base?

What rules are multinationals meant to play by, if not those established by law? And who, if not our political masters, is responsible for passing those laws?

Tax arbitrage exists, and will continue to exist, as long as national governments use their tax laws as a device to attract inward investment. It ill behoves the leader of the most powerful nation on earth to cry foul when he bears as much responsibility as anyone for setting the rules.

The information in this article was correct at the date it was first published.

However it is of a generic nature and cannot constitute advice. Specific advice should be sought before any action taken.

If you would like to discuss how this applies to you, we would be delighted to talk to you. Please make contact with the author on the details shown below.

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Whatsapp and Facebook

Peter Rogol - peter.rogol@goodmanjones.com

Posted on 20th February 2014

Categories:

UK Business & Entrepreneurs

The deal size is extraordinary. At today’s exchange rate, Facebook’s $19Bn could have bought out Land Securities in its entirety and still be sitting on almost £3Bn of change – or the whole of M&S and retained another £370M.

What’s Facebook really acquiring? By all accounts, Whatsapp’s offer isn’t unique. I’ve seen mention of WeChat, Viber, Wassup and Tango, all of which – so I read – provide something very similar to Whatsapp, and all of which have a user-base. Not only do they all offer something similar, they’re all free to the end user. So it’s not Whatsapp’s unique offering that values it at $380M per employee.

Is it the fact Whatsapp appears to have 450 million users? Or is it the age profile of the user base?

Some years back, we undertook due diligence for the US acquirer of a UK web-based business. In Facebook terms, it was a miniscule deal – but the price being offered still struck me as staggeringly large for the target business. I raised this with the guy heading up the acquisition. His response – “True, they’ve not got the best technology, but they’ve got traffic. We can buy better technology, or write it ourselves, but what we can’t do is grab their traffic. And whilst their traffic isn’t worth what we’re paying, this isn’t our only acquisition. We’re buying up everyone in the space. We’ll control it all.” And he went on to point out the purity of the business model – a technology platform capable of limitless expansion with almost no human interference, where the customers did all the work and paid a small annual fee for the privilege – “A cash cow. Our only problem is how to spend it.”

I can see two fundamental differences between that scenario and the Facebook / Whatsapp deal. In the deal we worked on, the target had (still has) a proven revenue stream, and the acquirer did indeed end up controlling the space. Facebook needs to find a way to generate revenues from an app that doesn’t, and it cannot hope to control the space.

So what’s the underlying logic behind the deal? I think there are several forces at play:

Facebook’s demographic – Facebook appeal was very much a generational thing. When it was free to use, advert free, and perhaps most importantly, new, it built huge user volumes. But the day it went public it lost much of its appeal. Suddenly it had become part of the mainstream corporate world, users became targets to be exploited. Not only did it lose much of its street-cred, it lost a large part of the next generation of potential users.
Facebook’s investors – investors piled into Facebook stock in the anticipation that all that Big Data must be capable of generating revenues. And they’ve been proved right – it can generate huge revenues. But to continue doing so, it needs constantly to refresh its demographic. Whatsapp’s 450 million users, and growing, are a part of the next generation, the ones Facebook’s traditional offer couldn’t attract.
Facebook is a cash cow. And cash is an unproductive asset – it needs to be used if it’s to generate any kind of return. Buying access to the next generation of internet users is as good a use as Facebook can make of the cash it generates. The Instagram acquisition followed the same logic.

Can this model work in the longer term? The difficulty I have with the Facebook model is that I can’t actually see how payback can be achieved. $19Bn for a database of 450 million users requires income of over $42 per user simply to recover the outlay. Sure, the 450 million might grow, could even double – implying 1 in every 8 people on earth using it – but there’s always competition, existing and new, and as with all technologies, the time one has to generate payback is limited. Facebook itself is just 10 years old, and it’s already joined the Establishment, thus diminishing its attractiveness to new users. Will Whatsapp still have a significant presence in 10 years’ time? Will its current user-base still provide Facebook with Big Data it can exploit in 10 years’ time, even when they’ve moved to new platforms? Will whatever’s left of Whatsapp’s userbase have any value at all in 10 years’ time? And if it doesn’t, what’s the mathematical modelling that tells Facebook this deal is worthwhile? Even at just a 10% Internal Rate of Return, Facebook needs to generate on average over $3bn per annum of additional revenues for the next ten years to make this work.

My guess – this will be one of a series of acquisitions Facebook will be forced to make over the next five to ten years, simply to stay in the game of capturing Big Data that has the potential to be exploited. Further, each time it makes a substantial acquisition it will be speeding up the next generational shift in users – tomorrow’s twenty-somethings simply won’t use the platforms today’s twenty-somethings do. And ultimately investors will realise that social media cannot generate a commercial return commensurate with the capital they’ve thrown at Facebook.

That’s the trouble with cash cows – how’d you spend the money sensibly?

The information in this article was correct at the date it was first published.

However it is of a generic nature and cannot constitute advice. Specific advice should be sought before any action taken.

If you would like to discuss how this applies to you, we would be delighted to talk to you. Please make contact with the author on the details shown below.

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Principal or Agent? [Residential Management Companies]

Peter Rogol - peter.rogol@goodmanjones.com

Posted on 20th December 2013

Categories:

Property & Construction

I recently issued an apology on behalf of my Institute for its determination that Residential Management Companies must produce Statutory Accounts containing completely pointless information. But perhaps, after all, they don’t. The Institute and the Financial Reporting Council issued their edict based on legal counsel’s opinion that RMC’s “always act as principals (not agents) in their residential management transactions with third party suppliers.”

What if the RMC’s contacted all their third party suppliers – typically there aren’t many – and advised them that the RMC was acting as agent for its leaseholders, and that in future all invoices must be addressed to “[Name of RMC] as agent for its Leaseholders”? Could it be that legal counsel’s opinion would need to change?

I’m no lawyer, but my guess is that if all third party suppliers are formally identifying the RMC as an agent, counsel would be hard-pushed to argue to the contrary.

So come on, ICAEW, help us out here. Go back to counsel, and pose the question – if third party suppliers invoice “[Name of RMC] acting as agent for its Leaseholders”, does FRED 50 go west?

The information in this article was correct at the date it was first published.

However it is of a generic nature and cannot constitute advice. Specific advice should be sought before any action taken.

If you would like to discuss how this applies to you, we would be delighted to talk to you. Please make contact with the author on the details shown below.

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Apologies on behalf of my Institute [FRED50 Residential Management Companies]

Peter Rogol - peter.rogol@goodmanjones.com

Posted on 5th December 2013

Categories:

Property & Construction

I sometimes despair of my profession. It has a habit of shooting itself in the foot by bringing forward profoundly wrong-headed solutions to problems that no-one but itself can see.

FRED 50 is a classic example. This Financial Reporting Exposure Draft seeks to address the thorny question of whether or not Residential Management Companies act as agent or principal. Sounds esoteric – unfortunately it isn’t.

Residential Management Companies exist for just one purpose – to enable the collective of leaseholders in a property to take control of the “superior interest” – ie, to become their own landlord. Included in all residential leases are clauses relating to Service Charges – the landlord’s responsibility for ensuring shared services are provided and shared maintenance undertaken, and the tenant’s (ie leaseholder’s) obligation to reimburse their share of costs relating thereto.

Typically when leaseholders take collective control and become their own landlord, they do so to protect their investment in their own home. Disinterested landlords have a nasty habit of providing second-rate services – becoming ones own landlord overcomes that. But nothing changes as regards obligations under the lease. The landlord (now the collective of leaseholders) organises necessary works, the tenants / leaseholders bear the costs by way of Service Charge demands. There are strict rules governing Service Charges and Service Charge accounting, set out in the Landlord & Tenants Acts and allied legislation. Service Charge accounts must provide certain clear information relating both to the nature and quantum of expenses incurred, and to the use of cash received from tenants and cash balances at the end of the Service Charge year. The legislators made no attempt whatsoever to align Service Charge accounts with Companies Act statutory accounts formats, for good reason – the recipients of Service Charge accounts require specific, clearly laid out information relating to their Service Charge costs and their cash contributions, but they cannot be assumed to have sufficient financial literacy to be able to make sense of Companies Act format statutory accounts.

And so to the statutory accounts of Residential Management Companies. Given the companies exist for the sole purpose of enabling a collective of leaseholders to take control of their own affairs, and given the relationship between landlord and leaseholder as set out in the relevant lease, many people have argued persuasively for several years that the company has acted as nothing other than a nominee or agent for the body of leaseholders. And as it does nothing on its own account, there is nothing to report in its statutory accounts. So the companies can meet their Companies Act requirements by filing dormant company accounts at Companies House – quick, and cheap. Costs are inevitably incurred in connection with the generation of Service Charge accounts, but that’s it.

But then the bright chaps at both my Institute and at the Financial Reporting Council decided it was necessary to address the thorny issue of principal or agent. According to FRED 50, they “obtained independent legal counsel’s opinions on this issue. Both legal opinions concurred that RMCs always act as principals (not agents) in their residential management transactions with third party suppliers.” And having obtained said opinions, FRED 50 concludes that “A residential management company shall recognise the relevant service charge expense arising from the management and arrangement of maintenance of a property in proﬁt or loss. A residential management company shall concurrently recognise income in proﬁt or loss by drawing from the service charge monies. This income and expense shall not be offset.” FRED 50 also states that, following Section 42 of the Landlord and Tenant Act 1987 “The cash balance and other assets are not assets of a residential management company and shall not be recognised in a residential management company’s balance sheet.”

Which means that, according to these bright chaps, Residential Management Companies will in future be obliged to produce, at the expense of its leaseholders, a rather odd looking set of statutory accounts for filing at Companies House.

Cui bono? Not the leaseholders, also shareholders, who will face increased administration costs for no good purpose . Not third party suppliers, who can have no possible need for these accounts. Not banks, nor analysts, nor property purchasers. And not accountancy practitioners either, who will have the devil’s own job explaining why they merit recompense for time expended producing this entirely pointless set of accounts.

The information in this article was correct at the date it was first published.

However it is of a generic nature and cannot constitute advice. Specific advice should be sought before any action taken.

If you would like to discuss how this applies to you, we would be delighted to talk to you. Please make contact with the author on the details shown below.

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Transfer Pricing and Recent Pronouncements

Peter Rogol - peter.rogol@goodmanjones.com

Posted on 8th November 2013

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I’ve blogged in the past on Transfer Pricing issues and the public perception that the likes of Starbucks and Google don’t pay their fair share of tax in the UK. I’m out on a limb on this one – I don’t believe business has some moral obligation to pay more tax than is legally required.

So when I heard about the change to the acronym GAAR from General Anti-Avoidance Rule to General Anti-Abuse Rule, I assumed the political class had sought to pay due homage to public angst about multinationals. Quite how it could achieve this by classifying unilaterally as abuse, arrangements covered by OECD guidelines on Transfer Pricing, was beyond my comprehension.

As it happens, Transfer Pricing issues aren’t addressed by GAAR. Google can continue to sign off UK contracts in Eire and declare profits there rather than here, Starbucks can carry on supplying coffee to its UK stores from the coffee-growing republic of Switzerland, Amazon’s delivery operations can remain in exotic locations – GAAR isn’t interested. In the context of GAAR, these structures are quite simply not an abuse.

But whilst they may not be an abuse under GAAR, the OECD has recognised its rule book may well be out of date. It recently published a report, Action Plan on Base Erosion and Profit Shifting which considers the implications and issues arising from the evermore digitalised world and the scope that provides to multinationals from “the increasing sophistication of tax planners in identifying and exploiting the legal arbitrage opportunities and the boundaries of acceptable tax planning”.

Its opening commentary on the background to these issues states “Taxation is at the core of countries’ sovereignty…”. Whilst it goes on to explain that frictions and disparities between different domestic taxing structures create the opportunities for tax arbitrage, at no stage does it seek to challenge the fundamental principle of national sovereignty.

It then goes on to comment on the need for “coherence of corporate income taxation at the international level” – but not specifically mentioning rate differentials; the need for certain territories to tighten their Controlled Foreign Company rules; the need to tighten the regime on interest deductibility; the need to modify rules to address the use of multiple layers of legal entities inserted between the residence country and the source country; tightening definitions of permanent establishment; transfers of intangibles to low-tax regimes at undervalues; excess capitalisation; and perhaps most importantly, the need to increase transparency, in the form of greater disclosure to revenue authorities.

To my untutored eye, the document appears to identify the principal concerns that flow from global trading and profits attribution. By implication, it suggests that if these issues are addressed, then perhaps public concerns that multinationals “get away with it” may be assuaged. But I think this overlooks the elephant in the corner, the statement’s opening words, ““Taxation is at the core of countries’ sovereignty…”. For as long as any one country is able to use fiscal means to achieve politically acceptable outcomes – primarily encouraging economic activity in its territory in preference to its neighbour’s – legitimate planning strategies to limit overall tax burdens will inevitably be exploited by multinationals.

The information in this article was correct at the date it was first published.

However it is of a generic nature and cannot constitute advice. Specific advice should be sought before any action taken.

If you would like to discuss how this applies to you, we would be delighted to talk to you. Please make contact with the author on the details shown below.

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Typical issues facing incoming business

Peter Rogol - peter.rogol@goodmanjones.com

Posted on 3rd October 2013

Categories:

International

Even in today’s interconnected world, businesses tend to start local and expand their geographic reach over time. Initially regulations seem relatively straight forward – everyone in the US knows what’s meant by a 401K, just as everyone in the UK knows what a P45 is – because they’re the ones everyone grew up with. Many of the rules affecting new businesses are ones its management is broadly familiar with. Managers know what they know, the better ones have a good feel for what they don’t.

The problems start to pile up when that geographic reach extends beyond home territory. Initially, there aren’t any – businesses find a third party agent with appropriate territorial expertise and stick to their home markets with little more than gentle forays into foreign lands. But over time, and as those forays become more regular, reliance on third party agents becomes increasingly unsatisfactory. They may not have done anything wrong, their service may be excellent, but they’re not you, their priorities aren’t yours, their flexibility doesn’t match your own, and if you’ve a growing presence in that territory, the day comes when you have to have your own facility. And that’s when the problems start.

A typical example is a US corporation that’s developed a significant and growing activity this side of the pond. Up to now it’s used third party agents to distribute goods to retailers / third party installers to install product / third party maintenance technicians to maintain its equipment / third party sub-contract professionals to help fulfil contracts. They might be in the UK, or Germany, or France – somewhere, anywhere, in Europe or the Middle East, or Asia or further afield.

The decision is taken – “we’ll set up our own support operation”. Easily said – but then the problems start. What form should that operation take? Does every territory require its own operation? Who do we send to set it up, how do we pay them, will they be taxed locally, and on what? Where will they live? Will we be taxed locally? If we are, how will profits be determined?

Over the years we’ve helped many such US businesses get their own European support operation off the ground. The answers to the questions are usually, but not always: a UK limited company, not necessarily, someone you trust, pay locally, yes they will, on what you pay them, London or home counties’ rented accommodation, yes you will, and “cost plus”. But there are variances – a US-owned UK registered branch rather than a UK limited company, everything overseas controlled through the UK establishment with no place of business elsewhere, wages paid in the US with a grossing-up process undertaken in the UK to ensure UK tax compliance, and business taxed on apportioned profits to reflect genuine revenue generation outside the US.

There are all the other issues as well – just how adequate are your US employment contracts when it comes to employing overseas (generally, not very!), are you obliged to register for VAT and how do you account for it (answer – not invariably, though it’s usually in your interest to do so), should your UK operation have authority to contract with third parties or should all third party contracts remain in your control (answer is, apart from contacts for overheads, best if authority vests in the US – the more arms-length activity initiated in the UK, the greater the “plus” in “cost plus” becomes).

Expanding your horizons to foreign climes? – you need the support of those who’ve grown up in them.

The information in this article was correct at the date it was first published.

However it is of a generic nature and cannot constitute advice. Specific advice should be sought before any action taken.

If you would like to discuss how this applies to you, we would be delighted to talk to you. Please make contact with the author on the details shown below.

Comment on this...