Accounting and taxation: Conjoined twins or separate siblings? · Please cite this article in press as: Sikka, P. Accounting and taxation: Conjoined twins or separate siblings? Accounting

G ModelA

As

PE

a

ARAA

KTATAU

1

p(Cht(baH

tFdce

(a

0

ARTICLE IN PRESSCCFOR-356; No. of Pages 16

Accounting Forum xxx (2016) xxx–xxx

Contents lists available at ScienceDirect

Accounting Forum

jo u r n al homep age : www.elsev ier .com/ locate /acc for

ccounting and taxation: Conjoined twins or separateiblings?

rem Sikkassex Business School, University of Essex, Colchester, Essex CO4 3SQ, UK

r t i c l e i n f o

rticle history:eceived 28 November 2016ccepted 9 December 2016vailable online xxx

eywords:ax avoidanceccountingransfer pricingccounting standardsnitary taxation

a b s t r a c t

This paper explores the relationship between accounting and taxation through the recentproposals for curbing corporate tax avoidance advanced by the Organisation for EconomicCo-operation and Development (OECD) and the European Union (EU). The OECD is contentto tweak pricing and fails to address the faultlines of accounting. The EU is promoting ‘uni-tary taxation’ and advocates a major reform of the way taxable profits are to be calculated.As IFRSs have reduced the usefulness of accounting numbers for taxation purposes, the EUhas sought to recalibrate basic elements of accounting. This has considerable implicationsfor the development of accounting.

© 2016 Elsevier Ltd. All rights reserved.

. Introduction

The corporate tax system is in crisis as intensification of economic globalization has enabled corporations to shift theirrofits to low/no tax jurisdictions and avoid paying taxes in countries where their economic activity is primarily locatedUS Senate Permanent Subcommittee on Investigations, 2005, 2008a, 2008b, 2013; UK House of Commons Public Accountsommittee, 2013a, 2013b, 2013c). The revenues lost due to tax avoidance, including those relating to corporate practices, areard to estimate, but the European Union (EU) estimates the “level of tax evasion and avoidance in Europe to be around D 1rillion [£830 billion or US$1.25 trillion]” (European Commission, 2012), equivalent to 7–8% of the gross domestic productGDP) of all EU member states. The US Treasury has estimated its tax gap (tax avoidance, evasion and arrears) to be $385illion.1 A large number of transnational corporations pay little/no tax by using complex organizational structures andccounting techniques to shift profits to little/no tax jurisdictions (US Government Accountability Office, 2008, 2013; UKouse of Commons Public Accounts Committee, 2013a, 2013c).

Faced with the ability of corporations to shift profits and erode the tax base, nation states have sought to attract capi-al by offering lower corporate tax rates (Organisation for Economic Co-operation and Development, 1998; KPMG, 2013).or example, the UK corporation tax rate has declined from 52% in 1982–20% in 2016, the lowest ever and is set further

Please cite this article in press as: Sikka, P. Accounting and taxation: Conjoined twins or separate siblings? AccountingForum (2016), http://dx.doi.org/10.1016/j.accfor.2016.12.003

ecline to 17% by 2017. However, the reduction in the headline corporate tax rate has neither stemmed tax avoidance norhecked the ingenuity of the tax avoidance industry to craft novel schemes (Mitchell and Sikka, 2011). Unsurprisingly, therosion of tax base and profit shifting has become a major international political issue (International Monetary Fund, 2013a,

E-mail address: [email protected] IRS Releases New Tax Gap Estimates; Compliance Rates Remain Statistically Unchanged From Previous Study, 6 January 2012

http://www.irs.gov/uac/IRS-Releases-New-Tax-Gap-Estimates;-Compliance-Rates-Remain-Statistically-Unchanged-From-Previous-Study;ccessed 5 July 2013).

http://dx.doi.org/10.1016/j.accfor.2016.12.003155-9982/© 2016 Elsevier Ltd. All rights reserved.

dx.doi.org/10.1016/j.accfor.2016.12.003


http://www.sciencedirect.com/science/journal/01559982

http://www.elsevier.com/locate/accfor

mailto:[email protected]

http://www.irs.gov/uac/IRS-Releases-New-Tax-Gap-Estimates;-Compliance-Rates-Remain-Statistically-Unchanged-From-Previous-Study


G Model
ARTICLE IN PRESSACCFOR-356; No. of Pages 16
2 P. Sikka / Accounting Forum xxx (2016) xxx–xxx

2013b; Organisation for Economic Co-operation and Development, 2013a, 2013b, 2013c, 2015; United Nations Finance forDevelopment, 2014).

Since corporate taxes are levied on profits, any attempt to address profit shifting needs to pay attention to the role ofaccounting practices in determining taxable profits. Historically, profit/loss as shown by the annual financial accounts hasbeen the starting point for computation of taxable profits, but for a considerable period taxation and accounting practices havefollowed divergent trajectories (Green, 1995; Whittington, 1995) resulting in increased complexity, uncertainty and leakagesof tax revenues (Sikka and Willmott, 2010; European Commission, 2001). The accounting definitions of assets, liabilities,income, and expenses have been unable to prevent corporations from conjuring-up intangibles assets, management fees androyalty programmes and avoid taxes (United States Bankruptcy Court Southern District of New York, 2004). Commentatorshave noted that intragroup transactions “can reduce or even eliminate profits in one place at a stroke of an accountant’s pen”(Action-Aid, 2012: 8); businesses “exploit accounting rules to move money around to reduce or entirely evade tax liabilities”(Christian-Aid, 2009: 4) and “transfer pricing is the leading edge of what is wrong with international taxation” (Sheppard,2012).

The efforts to check erosion of tax base and shifting of profits have resulted in two broad proposals for reform. Thefirst approach advanced by the Organisation for Economic Co-operation and Development (OECD), and supported by manycorporations and accountancy firms, advocates ad hoc reforms to patch-up the current system for taxing corporate profits(OECD, 2013a, 2013b, 2013c, 2014, 2015). Its main aim is to strengthen documentation of transfer pricing practices andrestrict tax relief on interest payments. The OECD does not scrutinise the role of accounting logics in taxation and does notpropose any fundamental changes to the way tax liabilities are calculated. In contrast, a second approach under the heading of‘unitary taxation’ pays attention to the role of accounting and calls for a fundamental reform of the way corporate tax liabilitiesare calculated. It has many similarities with the Common Consolidated Corporate Tax Base (CCCTB), a system advocated bythe European Union (EU) for taxing transnational corporations operating within the EU (European Commission, 2001, 2003,2011, 2015a, 2015b, 2016). The key idea of unitary taxation and CCCTB is to eliminate profits on all intragroup transactionsand treat consolidated profits as the tax base. These profits can then be apportioned to each jurisdiction according to aformula and taxed by the relevant EU member state, in accordance with its democratic mandate (Picciotto, 1992; Weiner,2005; Clausing and Avi-Yonah, 2007; Avi-Yonah, Clausing, & Durst, 2009).

This paper examines the role of accounting in both the OECD proposals for checking tax avoidance, and the calls for adop-tion of unitary taxation. This paper is divided into four further sections. The first of these (Section 2) provides a theoreticalframework for understanding politics of profit shifting by corporations and the consequent erosion of the tax base uponwhich a nation state can levy corporate taxes. It argues that the intensification of neoliberalism in the form of competitionand mobility of capital has created opportunities for tax avoidance. It has also undermined the previously agreed interna-tional rules for calculation of corporate tax liabilities. Section 3 explains that the OECD seeks to manage tensions betweenaccounting and taxation by minimal adjustments to transfer pricing rules for determination of profits that a state can tax.It argues that this strategy cannot adequately address profit shifting and check tax avoidance. Therefore, an alternativeapproach is needed and section sketches the main contours of unitary taxation. Section 4 examines some of the problemsand possibilities of the role of accounting practices in unitary taxation, particularly the variants of CCCTB, a version of unitarytaxation, promoted by the EU. Section 5 concludes the paper with a summary and reflections on the role of accounting inthe tax base debate.

2. Profit shifting and erosion of tax base

Taxation revenues are the basis of the modern state as without them it cannot perform its administrative or redistributivefunctions. The tensions between the state’s willingness to levy taxes and taxpayer’s willingness to pay have encouraged taxavoidance and even resulted in revolts and revolutions (Daunton, 2001; Frecknall-Hughes, 2007). Nevertheless, taxationrevenues remain central to the functioning of the modern state and tensions are managed through policy adjustments andconcessions to powerful segments of society.

The intensification of contemporary corporate tax avoidance has coincided with the rise of neoliberalism, which hasencouraged mobility of capital. Historically, liberalism has been a complex amalgam of contradictory ideas, concepts andphilosophies from the left and the right of the political spectrum. Some elements promoted ideologies about the rule of law,democratic governance, egalitarianism and an antipathy towards unrestricted capitalism (Gray, 1995). It also encompassedprogressive thinkers, such as John Maynard Keynes and William Beveridge,2 who envisaged progressive taxation, constraintson the movement of capital and a key role for the state in redistributing wealth to create a more equitable and just society.However, since the 1970s, under the influence of writers such as Milton Freedman and Friedrich August von Hayek, liberalismhas been rapidly transformed into neoliberalism (Harvey, 2005). The neo or newer elements are strong faith in free markets,pursuit of economic efficiency through cost reductions, global mobility of capital and a restricted economic role for the state.


Competition is a key concept and is to be applied to every sector of society, including corporations, nations, governmentdepartments, schools and hospitals because this somehow secures efficient allocation of resources and opens the door towealth and riches.

2 See Harris (1997) for further details.


G ModelA

tFocppCsoearsoi

Oorebcp1jlpp

acllaaalicpfi

aotpstaCww

amA(

(


P. Sikka / Accounting Forum xxx (2016) xxx–xxx 3

Neoliberalism has been eagerly embraced by governments in the UK and USA and vigorously exported to other countrieshrough foreign direct investment and trade agreements, and by financial institutions, such as the International Monetaryund, the World Bank, and the World Trade Organization. Neoliberalism not only informs the economic and social policiesf governments, but also provides everyday understandings of what it means to be successful. It interpellates individuals asompetitive beings engaged in the endless accumulation of private wealth and consumption. Individuals are expected to meeterformance targets and be rewarded accordingly. One consequence of this has been to institutionalise performance relateday for executives often linked to reported profits (Committee on the Financial aspects of Corporate Governance, 1992;ommittee on Corporate Governance, 1998). The linking of pay to corporate earnings has incentivised executives to developtrategies to shift profits and avoid taxes (Gaertner, 2014; Levine, 2014). With the average tenure of the chief executivesf listed companies at less than five years,3 the temptation is to build high personal rewards in the shortest possible time,ven if that entails avoidance of taxes and erosion of a nation’s tax base. A necessary condition for the operation of marketsnd pursuit of self-interest is that all individuals, including business enterprises, need to be constrained by social norms andegulatory structures. Such constraints induce stability, predictability and a sense of fairness which is essential for any socialystem to work. However, the sense of social cohesiveness is increasingly undermined by uncertainties induced by mobilityf capital and its ability to escape local taxes (McSmith, 2010). Tax authorities now openly state that the “corporate tax base

s under threat. What’s happening is unacceptable to the community, the government, and to regulators”.4

Despite contradictions, the state remains a key site for the congealment of competing social interests (Habermas, 1976;ffe, 1984; Harvey, 2005). Its sovereignty and disciplinary power has been mobilized to promote competition and mobilityf capital, which in turn have consequences for tax revenues and sustainability of social settlements relating to it. Theapid dismantling of currency exchange controls and barriers to cross-border trade, investment and economic flows hasnabled capital to roam the world in search for higher profits. This search is not constrained by any sense of social welfareecause corporations have “no intrinsic commitment to product, to place, to country, or to type of economic activity. Theommitment is to the accumulation of capital. Therefore, the capitalist will shift locus of economic engagement (product,lace, country, type of activity) as shifts occur in the opportunities to maximize revenues from undertaking” (Wallerstein,996: 89). Freed from the limitations of territorial jurisdictions, corporations can easily establish subsidiaries, affiliates,

oint ventures, special purpose entities and trusts in favourable geographical locations to arbitrage global tax systems andower their tax liabilities. Whilst the shifting of physical production functions takes time, intangible assets and intellectualroperty can easily be (re)located to desirable jurisdictions, and transfer pricing practices can be manufactured to shiftrofits (International Monetary Fund, 2013a).

Microstates, often known as tax havens or offshore financial centres, have become key nodes in global mobility of capitalnd have been particularly innovative in using their sovereignty to craft low/no tax laws that offer shelter to footlooseapital in return for company registration fees (Palan, 2002; Sikka, 2003; Smith, 2013). In fact, corporations can exploit theaws of any country, onshore or offshore, to shift profits and avoid taxes in one or more jurisdictions. This is aided by aucrative tax avoidance industry, staffed by accountants, lawyers and finance experts (Sikka and Willmott, 2010; Mitchellnd Sikka, 2011). In neoliberal economies, markets constantly exert pressure for ever higher returns, but do not provideny guidance on upper limits of accumulation, or moral constraints that encourage reflection on social consequences of taxvoidance. Corporate executives are expected to create “systems designed to ensure that the corporation obeys applicableaws, including tax . . .” (OECD, 2004, p. 58), but in contemporary enterprise culture ‘bending the rules’ for personal gains considered to be a sign of business acumen. Novel interpretations of tax laws, regardless of the social consequences, areonsidered to be acceptable as long as they produce private profits, especially where competitive pressures link promotion,restige, status and reward, markets, niches with meeting business targets. Those able to sail close to the wind are seen asnancial wizards, and are much in demand as advisers and consultants (Mitchell and Sikka, 2011).

In 1848, Marx and Engels wrote that with the march of capitalism “All fixed, fast-frozen relations, with their train ofncient and venerable prejudices and opinions, are swept away, all new-formed ones become antiquated before they canssify. All that is solid melts into air, all that is holy is profaned . . .” (Marx and Engels, 1992: 6). So, it is with taxation too ashe neoliberal revolution and the accompanying mobility of capital has destabilized the present system for taxing corporaterofits and with it the state’s ability to collect tax revenues and meet obligations mandate through the ballot-box. The currentystem of taxing corporate profits is the outcome of numerous international treaties, court cases and protocols, some morehan a century old (Picciotto, 1992, 2011), crafted at a time when western colonial powers controlled large parts of the globend were keen to prioritize their local financial interests. Legal cases such as Calcutta Jute Mills v. Nicholson (1876) 1 Tax


as. 83 at 103, enunciated principles which continue to inform international corporate taxation. In this case, the companyas registered in England, but had no property, office or other place of business in the UK. The largest amount of capital, asell as the greatest number of shares, was owned by persons residing in India, at that time a British colony. The company

3 The Daily Telegraph, ’CEOs must keep learning to avoid the five-year axe’, 18 May 2013 (http://www.telegraph.co.uk/finance/businessclub/management-dvice/10064862/CEOs-must-keep-learning-to-avoid-the-five-year-axe.html; accessed 30 August 2015). Another global study noted that theedian tenure for a global CEO is just 2.75 years. (http://www.personneltoday.com/hr/high-ceo-turnover-could-damage-uk-firms/; accessed 30

ugust 2015). Financial Times reported that 23% of FTSE100 companies replaced their chief executive during the period May 2013 to April 2014http://www.ft.com/cms/s/0/b4c51d78-7639-11e4-a777-00144feabdc0.html#axzz41In3CC00; accessed 30 August 2015).

4 Australia’s Tax Commissioner Chris Jordan cited in “ATO chief warns on profit shifting”, Sydney Morning Herald, 27 June 2013http://www.smh.com.au/business/ato-chief-warns-on-profit-shifting-20130626-2oxlw.html#ixzz2dOSDWxlk).


http://www.telegraph.co.uk/finance/businessclub/management-advice/10064862/CEOs-must-keep-learning-to-avoid-the-five-year-axe.html

http://www.telegraph.co.uk/finance/businessclub/management-advice/10064862/CEOs-must-keep-learning-to-avoid-the-five-year-axe.html

http://www.personneltoday.com/hr/high-ceo-turnover-could-damage-uk-firms/

http://www.ft.com/cms/s/0/b4c51d78-7639-11e4-a777-00144feabdc0.html#axzz41In3CC00

http://www.smh.com.au/business/ato-chief-warns-on-profit-shifting-20130626-2oxlw.html#ixzz2dOSDWxlk

G Model

manufactured and sold jute in British India. Its entire property was located in India and all books of accounts, papers, andother documents, as well as its moneys, were kept, received, and dealt with by the management in India. The local controlwas exercised by a director based in India who also executed orders sent from a director in London. The court held that onthis basis, the company was resident in London and liable to pay taxes on its entire profits in the UK rather than India.

In the case of De Beers v. Howe [1906] AC 455, 22 TLR 756, 5 Tax Cas. 198, the company had diamond mines in SouthAfrica and these were managed from its head office in Kimberley. Its general meetings were always held there. Some of thedirectors and life governors lived in South Africa, and there were directors’ meetings at Kimberley as well as in London, butthe majority of directors and life governors lived in England, where its chairman Cecil Rhodes also had an office. The courtdecided that the control was exercised from London and the company was resident and taxable in England. The judges addedthat “The test of residence is not where it is registered, but where it really keeps house and does its real business. The realbusiness is carried on where the central management and control actually abides”. Companies soon began to use the samerules to shift profits and avoid taxes. An early example was the case of Egyptian Delta Land and Investment Co. Ltd v. Todd(1929) 14TC119, where the company was registered in London to develop land in Egypt, but shifted its board of directors toCairo consisting entirely of Egyptian nationals, and thus its profits were not taxable in England. One consequence of the abovecases is that corporate profits are taxed where companies are controlled (or resident) rather than the place where economicactivity for the creation of those profits takes place. The complexities increased with the expansion of international trade,especially as other nations devised competing rules for taxation of profits. Eventually, in 1928, model tax treaties under theauspices of the League of Nations laid the foundations of the present international tax system (Picciotto, 1992, 2011). Toaddress some of the dangers of double taxation, US had adopted the arm’s length model of transfer pricing (for example, seesection 45 of the Revenue Act of 1928) and this was recommended in 1933 as a global standard by the League of Nations. Iteventually became part of international treaties on taxation. These treaties were devised at a time when corporations werepredominantly national and international economic flows were primarily in the form of trade and portfolio investment.

With the dismantling of currency controls and trade barriers, the patterns of international trade and investment havechanged. Corporations are more likely to take direct control of operations through foreign direct investment. Consequently,the established ways of taxing corporate profits have become strained. Pressure for change has also been exerted by emergingeconomies, no longer under the control of colonial masters, as they seek to collect taxes from profits generated in their terri-torial jurisdiction. Additional complications have been created by information technologies which have enabled companiesto create numerous subsidiaries and online operations, often obscuring where exactly the control resides, or a transactiontakes place. Two issues are of particular relevance to this paper. Firstly, various treaties and protocols accepted the principlethat “legal persons could reside concomitantly in a number of jurisdictions” (Palan, 2002: 172). This has severe implications.For example, global technology corporations such as Google, eBay, Microsoft, Starbucks, Apple and others have a commonboard of directors, shareholders and strategy and are thus integrated businesses rather than a loose collection of independentsubsidiaries. In recognition of this, corporate laws in most countries require companies to produce consolidated5 financialstatements to signify that they are integrated entities. Consequently, profits on all intragroup transactions are eliminated.However, for tax purposes each subsidiary, joint venture and affiliate is considered to be a separate independent entity.Various treaties enable each state to collect taxes on the profits of subsidiaries resident within its jurisdiction, but this raisesproblems of allocation, control and co-ordination amongst tax authorities. In a globalised economy, corporations generateprofit through integration of their operations, but each state has to disaggregate it and decide how much of the profit isgenerated within its jurisdiction so that it can tax it. This opens the doors for shifting of profits and tax arbitrage.

Secondly, corporate taxes are generally levied on profits and historically common accounting methods, with some mod-ifications, have generally been acceptable. However, the calculation of profits depends on theories of costs and revenues(Buchanan and Thirlby, 1973; Berry et al., 1985). The inherent malleability of costs and revenues creates considerable dif-ficulties for tax authorities in estimating profits made in any geographical jurisdiction (US Treasury, 2007). In the face ofconsiderable uncertainty, various working methods for allocation of costs began to be used, eventually culminating in themodern day transfer pricing guidelines developed by the OECD (Organisation for Economic Co-operation and Development,2001, 2004, 2009, 2010). Transfer pricing methods can only work as long as arm’s length prices are available, which assumesthat the markets are active, consist of a large number of independent buyers/sellers and can provide objective account-ing numbers. Such assumptions are central to the OECD brokered system of corporate taxation, but have become highlyproblematical.

The next section provides a brief description of the OECD’s preferred approach to checking the shifting of profits.

3. Accounting and taxation: the oecd approach


The Organisation for Economic Co-operation and development6 (OECD) is a key node in the construction of the interna-tional system of corporate taxation. One of its major contributions has been to develop rules for transfer pricing for issues

5 Banks operate in hundreds of countries, but are supervised on a consolidated basis because their business is integrated (Arnold and Sikka, 2001;Goodhart, 2011).

6 The OECD is a successor to the Organisation for European Economic Co-operation, which was formed in 1948 to promote economic recovery in WesternEurope after the Second World War. It originally had 18 western participants and one of its key roles was to implement the Marshall Plan for reconstruction


G ModelA

aDafbarptTac(t

tgtatpSa“tCrtloesac

eA

oe



rising from the intragroup transfer of good/services across national borders (Organisation for Economic Co-operation andevelopment, 1979, 2001, 2009). The rules have become part of a variety of multilateral agreements and form the basis forllocating corporate profits to each country. The rules require companies and tax authorities to use “arm’s length” pricesor calculation of costs and profits. The arm’s length principle requires that “transactions should be valued as if they hadeen carried out between unrelated parties, each acting in his own best interest” (Organisation for Economic Co-operationnd Development, 2006: 176). The OECD framework treats “members of an MNE group as operating as separate entitiesather than as inseparable parts of a single unified business” (OECD, 2010: 5). The absence of arm’s length price is a seriousroblem and the OECD states that when “transfer pricing does not reflect market forces and the arm’s length principle, theax liabilities of the associated enterprises and the tax revenues of the host countries could be distorted” (OECD, 2010: 4).he creation of intellectual property and intangible assets is a major feature of the contemporary economy. These assetsre often very specific to a company (logos, trademarks) and do not have readily ascertainable market prices. Under suchircumstances, tax authorities may resolve disputes by using proxies and making adjustments by using various methodssuch as the Comparable Uncontrolled Price method, Resale Price Method, Cost Plus Method) and/or split of profits (such ashe Transactional Net Margin Method and Comparable Profits Method).

The OECD principle of treating each subsidiary/affiliate as a separate independent entity fails to recognize that corpora-ions have integrated operations so that they can achieve economies of scale and mop-up profits which would otherwiseo to intermediaries. Such economic logics have resulted in corporate domination of the world trade. The top 500 transna-ional corporations control 70% of the worldwide trade, 80% of the foreign investments, 30% of the global GDP, one-third ofll manufacturing exports, 75% of all commodities trade and 80% of the trade in management and technical services; justwenty controlled the coffee trade, four companies control 73% of the global grain trade and just one controlled 98% of theroduction of packed tea, and five companies control around 80% of the global trade in bananas (Fairtrade Foundation, 2009;ikka and Willmott, 2010; Murphy, Burch, & Clapp, 2012). Thus, independent arm’s length prices are not easy to ascertain,nd their absence plays a key role in tax disputes, profit shifting and tax avoidance. Developing countries claim that they arelosing public revenues as a result of tax malpractice, including transfer mispricing, hedging, tax incentive abuse and otherax-planning schemes, committed mainly by multinational enterprises through foreign direct Investment” (United Nationsommittee of Experts on International Cooperation in Tax Matters, 2014: 20). Developing countries, in particular, lack theesources to contest transfer prices used by multinationals and lose considerable revenues. One study estimated that in 2006,he mispricing of trade resulted in annual illicit financial flows from a number of developing countries of between $859 bil-ion and $1.06 trillion, and the countries lost average tax revenues of between US$98 billion and US$106billion annuallyver the years 2002–2006 (Hollingshead, 2010). The Chinese tax authorities claim that “Almost 90 per cent of the foreignnterprises are making money under the table. . . .they use transfer pricing to dodge tax payments.7 In the face of corporatetrategies for avoiding taxes, the international consensus around the arm’s length model is weakening and countries suchs Brazil, India, China and South Africa are applying their own adjustments to transfer prices (United Nations, 2013). Oneonsequence of this is that the same corporate profits may be subjected to taxation in more than one place.

The problems of securing arm’s length prices in a world dominated by global monopolies are well documented. Forxample, Michael Durst, who from 1994 to 1997 served as Director of the US Internal Revenue Service’s Advanced Pricinggreement (APA) Program, has stated that

‘The basic tenet of arm’s-length transfer pricing—the availability of “uncontrolled comparables” for transactionsbetween commonly controlled parties—is based on a fundamental misunderstanding of practical economics. Multi-national groups form because in some industries and markets, it is economically infeasible to operate nonintegratedbusinesses. For example, in large markets, it is not feasible for manufacturers and distributors to be separately owned.That means that for transactions between members of multinational groups—precisely the transactions for whichtransfer pricing rules are important—the uncontrolled comparables on which the current rules try to depend seldomif ever exist’ (Durst, 2011: 443).

In his evidence to the US House Ways and Means Committee, Martin Sullivan, an economist at Tax Analysts, said that

“The arm’s length method is seriously flawed in both theory and practice. The theoretical problem is that because ofsynergies within a large corporations—what economists call ‘economies of scope’—the economic relationship betweenentities within a corporate group are not the same as those between parties. The practical problem is the lack of trulycomparable unrelated transactions that can be used to apply the arm’s-length method to related party transactions. Asmanufacturing and the importance of national borders shrink, cross-border transfers of valuable intellectual propertywithin a single multinational are becoming increasingly common. Unfortunately, this is the type of transfer pricing


issue that poses the greatest challenge to the arm’s-length method. The simple reason is that intangibles by theirnature are unique, and so it is always difficult, and frequently impossible, to identify transactions between unrelatedparties involving the transfer of comparable intangible assets. Administering the arm’s-length method without com-

f Western Europe. In the 1990s, following the dissolution of the Soviet bloc, its membership expanded and covers 34 countries Most notably, emergingconomic powers such as Brazil, Russia, India, China and South Africa (collectively known as BRICS countries) do not have a direct membership of the OECD.7 http://www.chinadaily.com.cn/english/doc/2004-11/25/content 394744.htm; accessed 4 January 2014.


http://www.chinadaily.com.cn/english/doc/2004-11/25/content_394744.htm

G Model

parables is like playing hockey without a puck. Modifying the arm’s length standard will not get the job done. The onlycredible long-term solution is the defenestration of the arm’s length standard and its replacement with formularyapportionment methods” (US House of Representatives Committee on Ways and Means, 2010).

In the face of challenges, the OECD could have revisited its principles of taxation and transfer pricing, but it has notdone so. Its director told a UK parliamentary committee that the “current transfer pricing system ‘works more or less’, withthe exception of some flaws”.8 Its Base Erosion Profit Shifting (BEPS) project (OECD, 2013a, 2013b, 2013c, 2015) remainswedded to the arm’s length and the separate entity approach. It claims that organised tax avoidance can be checked bytweaking transfer pricing practices (OECD, 2015) and “Improved and better-coordinated transfer pricing documentationwill increase the quality of information provided to tax administrations” (OECD, 2015: 17). A number of countries have ‘thincapitalisation’ rules and the OECD recommends severe limits on the tax deductibility of interest payments on intragrouploans (Organisation for Economic Co-operation and Development, 2015), though the current international rules are by nomeans uniform (Blouin, Huizinga, Laeven, & Nicodème, 2014).

The OECD approach is problematical because it fails to address the fault lines identified above. It is challenged by “UnitaryTaxation” which offers an alternative way of calculating taxable profits, tax liabilities and checking shifting of profits. It isoften identified with formulary apportionment methods and Common Consolidated Corporate Tax Base (CCCTB) advocatedby the European Union (Avi-Yonah et al., 2009, 2011; Clausing and Avi-Yonah, 2007; European Commission, 2001, 2003, 2011,2016; Picciotto, 1992; Weiner, 2005; US House of Representatives Committee on Ways and Means, 2010). Nevertheless, theOECD is not keen on unitary taxation and has declared “that moving to a system of formulary apportionment of profits is not aviable way forward; it is also unclear that the behavioural changes companies might adopt in response to the use of a formulawould lead to investment decisions that are more efficient and tax-neutral than under a separate entity approach” (OECD,2013c: 14). A Deloitte partner has referred to concept of unitary taxation as “completely daft9” and the UK government hasopposed the initiative (UK House of Lords Economic Affairs Committee, 2013). In contrast, the International Monetary Fund(2013b) argued that there “is considerable interest among civil society organizations and others in more radical alternativesto the current international tax framework, such as ‘formulary apportionment’ . . . Even if the conclusion is that these areinfeasible or undesirable, such schemes . . . deserve a more thorough and realistic assessment” (p. 14). Therefore, the nextsection examines the contours of unitary taxation and the role of accounting in determining taxable profits and tax liabilities.

4. Accounting and unitary taxation

Unlike the OECD approach, the concept of unitary taxation “does not allow the TNC to be taxed as if it were collection ofseparate entities in different jurisdictions, but instead treats a TNC engaged in a unified business as a single entity, requiring itto submit a single set of worldwide consolidated accounts in each country where it has a business presence, the apportioningthe overall global profit to the various countries according to a weighted formula reflecting its genuine economic presencein each country. Each country involved sees the combined report and can then tax its portion of profits at its own rate”(Picciotto, 2012: 1). In supporting the system, Avi-Yonah et al. (2009) state that

“Under a formulary profit split, tax liabilities would reflect the economic reality of globally integrated businesses, andthey would not vary among businesses based on their relative abilities to shift the ownership of intangible property.Firms would have no incentive to shift income across countries through legal and accounting techniques, as taxliabilities would be based on total world income as well as the share of a firm’s sales that occur in each destination.Moreover, since even the shifting of income involving legal and accounting techniques typically involves moving realactivities to low-tax countries, the tax incentive to locate plant and equipment, as well as employment, in low-taxcountries would also be reduced” (p. 507).

Unitary taxation can be applied globally, regionally (e.g. European Union countries) or unilaterally by nation states.10

Influential commentators have argued that a “Well conceived apportionment is the best – perhaps only – answer to theproblem presented by multiple company tax jurisdictions” (Kay, 2012). A number of leading NGOs have argued that


“A unitary approach for the taxation of MNCs would better reflect how businesses operate in today’s globalised world. Itwould also make the aggressive strategies adopted by MNCs to avoid paying their fair share of tax pointless, especiallyartificial profit-shifting to tax havens” (Christian-Aid, 2013: 5).

8 Accountancy Age, No unitary taxation “any time soon”, Lords told, 13 June 2013 (http://www.accountancyage.com/aa/news/2274520/no-unitary-taxation-any-time-soon-lords-told; accessed 12 February 2014).

9 Accountancy Age, Unitary taxation a “daft” idea, say readers, 30 May 2013 (http://www.accountancyage.com/aa/news/2271524/unitary-taxation-a-daft-idea-say-readers; accessed 23 July 2013).

10 It is used in the domestic context of some states, such as the US, Canada and Switzerland, within an agreed framework of law. It prevents domestic taxhavens from depriving other regions of taxes. For example, a company can be registered in Delaware but trades in California. Its profits in California cannotescape taxes because it claims to be resident in Delaware. A formula, mainly related to sales, is used to apportion profits to all US states and then each statecan tax it at the appropriate rate.


http://www.accountancyage.com/aa/news/2274520/no-unitary-taxation-any-time-soon-lords-told

http://www.accountancyage.com/aa/news/2274520/no-unitary-taxation-any-time-soon-lords-told

http://www.accountancyage.com/aa/news/2271524/unitary-taxation-a-daft-idea-say-readers

http://www.accountancyage.com/aa/news/2271524/unitary-taxation-a-daft-idea-say-readers

G ModelA

vsaaceaBtab

watt

4

eidosn

btedtN2Cf

saT

f



Central to all arguments for unitary taxation is the assumption that intragroup transactions do not add any economicalue to overall wealth creation. Such logic is embedded in the principles for the production of consolidated financialtatements. For example, the UK’s Companies 2006 Act requires that audited group financial statements must comprise

consolidated balance sheet and a consolidated profit and loss account for the whole group. The statutory requirementsre built on the key idea that a group of companies under common control, ownership and strategies is not a disparateollection of entities, but is rather a single integrated economic unit. In this process, the assets, liabilities, equity, income,xpenses and cash flows of the parent and its subsidiaries are presented as those of a single economic entity. All profitsrising from intragroup transactions are eliminated from the consolidated accounts (International Accounting Standardsoard, 2012b). The elimination of intragroup profits/losses is well established in accounting, but not generally applied toaxation. The reason for this is that international rules for corporate taxation (Picciotto, 1992) were crafted at a time whenccounting rules for the production of consolidated financial statements were in their infancy and were often not requiredy law (Bircher, 1988; Edwards, 1991).

A crucial aspect of unitary taxation is the establishment of a tax base. This is generally understood to be the profits uponhich tax can be levied. But which profits? One possibility is that financial accounting and taxation practices are so closely

ligned that accounting numbers can furnish a meaningful tax base. If they diverge then nature of revenue and expenses forax purposes would need to be (re)defined so that a common tax base can be determined and applied across a geographicalrading bloc (such as the European Union), or maybe even across the world. These issues are explored below.

.1. Using financial accounting as a tax base

Accounting practices are a sedimented residue of political negotiations and bargaining amongst economic and politicallites in a dynamic social environment. Thus, sufficiency of social consensus gives accounting numbers, even when they arentellectually impure, the appearance of hardness (Hines, 1988). The accounting numbers are contestable as they are alwaysependent on competing theories. Contemporary financial reporting is increasingly crafted to respond to the assumed needsf shareholders trading in capital markets. In contrast, taxation practices are always a matter of law, and are crafted by thetate to manage social policy objectives and the interests of the state, shareholders and various segments of society are notecessarily aligned.

As financial accounting and taxation are both concerned with profits, a commonsensical view suggests that there shoulde a close relationship between the two. Generally, corporate tax computations begin with accounting profits and these arehen adjusted for a variety of factors, such as capital allowances, accelerated depreciation, charitable donations, disallowablexpenses, grants, credits, capital gains, etc. Depending on local histories and politics, there may be a high, partial or lowependence between accounting and taxation practices. Historically, countries, such as France and Germany were consideredo have a closer relationship between company accounts and taxation, whereas UK. Ireland Czech Republic, Denmark,orway, Poland and the Netherlands had a higher degree of divergence between the two (Hoogendoorn, 1996; Richard,012). In any case, the relationship between accounting and taxation has fluctuated and is not precise (Aisbitt, 2002; Europeanommission, 1992; Porcano and Tran, 1998). Courts have been willing to consider accounting approaches, but have often

ound concepts, such as “depreciation,” “profits,” and “capital” to be too elastic and fuzzy for taxation purposes (Lamb, 2002).The divergence between accounting and taxation practices is shaped by competing economic, market and political pres-

ures. Conventional financial statements based on ‘generally accepted accounting principles’ may not necessarily be entirelycceptable for tax purposes. Some of the tensions are captured by court judgments. For example, in the US case of Thor Powerool Company v Commissioner 439 U.S. 522 (1979),11 the presiding judge said that

“The primary goal of financial accounting is to provide useful information to management, shareholders, creditors, andothers properly interested; the major responsibility of the accountant is to protect these parties from being misled.The primary goal of the income tax system, in contrast, is the equitable collection of revenue; the major responsibilityof the Internal Revenue Service is to protect the public fisc. Consistently with its goals and responsibilities, financialaccounting has as its foundation the principle of conservatism, with its corollary that “possible errors in measurement[should] be in the direction of understatement rather than overstatement of net income and net assets.In view of theTreasury’s markedly different goals and responsibilities, understatement of income is not destined to be its guidinglight. Given this diversity, even contrariety, of objectives, any presumptive equivalency between tax and financialaccounting would be unacceptable.

This difference in objectives is mirrored in numerous differences of treatment. Where the tax law requires that adeduction be deferred until “all the events” have occurred that will make it fixed and certain . . . accounting principles


typically require that a liability be accrued as soon as it can reasonably be estimated. Conversely, where the taxlaw requires that income be recognized currently under “claim of right,” “ability to pay,” and “control” rationales,accounting principles may defer accrual until a later year so that revenues and expenses may be better matched.

11 Available at http://caselaw.lp.findlaw.com/scripts/getcase.pl?court=US&vol=439&invol=522; and http://supreme.justia.com/cases/ederal/us/439/522/case.html.


http://caselaw.lp.findlaw.com/scripts/getcase.pl?court=US&vol=439&invol=522; and http://supreme.justia.com/cases/federal/us/439/522/case.html

http://caselaw.lp.findlaw.com/scripts/getcase.pl?court=US&vol=439&invol=522; and http://supreme.justia.com/cases/federal/us/439/522/case.html

G Model

Financial accounting, in short, is hospitable to estimates, probabilities, and reasonable certainties; the tax law, withits mandate to preserve the revenue, can give no quarter to uncertainty”.

Questions about whether a particular item of expenditure is to be classified as capital or revenue has a major bearing oncalculation of taxable profits. On this, the UK tax authority, Her Majesty’s Revenue and Customs (HMRC) states that

“the question of capital or revenue is a question of law not of accountancy. What matters is the effect of the expenditurein question. Accountancy does not determine that effect but may be informative as to what was the effect”.12

The co-operation and divergence between accounting and taxation is also emphasized in the case of Heather v P EConsulting Group Ltd [1972] 48TC293 to support its position. The judge said that

“The courts have always been assisted greatly by the evidence of accountants. Their practice should be given dueweight; but the courts have never regarded themselves as being bound by it. It would be wrong to do so. The questionof what is capital and what is revenue is a question of law for the courts. They are not to be deflected from their truecourse by the evidence of accountants, however eminent”

In Herbert Smith v Honour [1999] STC 173, the judge said that

“In some cases accounts said to be correctly prepared according to generally accepted principles of commercialaccounting are found to be based on an analysis of the factual position which is wrong in law. In such a case thecorrect legal analysis will override the accounts as prepared . . . In some cases the accounts properly prepared ongenerally accepted principles of commercial accounting have been found to be based on factual assumptions whichare either insufficiently reliable . . . or simply inconsistent with the true facts . . . In either of these cases an approachmore correctly or more reliably based on the facts will be adopted for tax purposes”.

Both taxation and accounting generally recognize that profits can only arise after capital of the enterprise is maintainedor restored, but the practices can diverge and result in a variety of calculations from the same data (Hicks, 1965; Sterling andLemke, 1982; Tweedie and Whittington, 1984). The extant US accounting standards generally advocate the maintenance offinancial (or money) capital, whilst the IASB leaves businesses to select either maintenance of financial and physical capital.Historically, not only these but also proprietary, entity and other varieties of capital maintenance concepts have formed partof accounting standards to provide rough and ready relief for the erosion of capital base by price-level changes (Tweedie andWhittington, 1984). It is hard to discern any clear pattern of capital maintenance in current accounting practices as financialstatements are a mixture of historical costs, fair values, market values, net realisable and present values. In contrast, taxationpractices primarily provide relief for expenditure on the basis of historical costs, sometime adjusted for price level changes,and are closer to maintenance of financial (money) capital. The UK government position is that

“There is merit in further alignment of taxable and commercial (i.e. accounting) profits. But if there are good policyreasons for departing from following accounting rules the Government is prepared to do so”.13

At the same time, it notes that “there is also a growing body of statute law that requires the accounting treatment tobe adopted for tax. . . . for legislation which from 1 April 2002 may require the accounting entries in respect of goodwill,intellectual property and other intangible assets to be followed in computations of income for CT . . .”.14 Therefore, the nextsubsection considers whether international accounting standards can help to align accounting and taxation profits.

4.2. Financial reporting and the Era of markets

The divergence between financial reporting and accounting and taxation practices has accelerated as the state has dele-gated standard setting to private interest groups (e.g. International Accounting Standards Board, Financial Reporting Council).The ideological triumph of neoliberal philosophies have made the assumed needs of capital markets central to accountingstandard setting and further constrained the possibilities of alignment between accounting and taxation prices (Lamb et al.1998). The conceptual framework for financial reporting, initially developed in the USA and subsequently reformulated bythe UK-based Financial Reporting Council and the International Accounting Standards Board, states that the general purposeof

“financial reporting is to provide financial information about the reporting entity that is useful to existing and potentialinvestors, lenders and other creditors in making decisions about providing resources to the entity. Those decisions


involve buying, selling or holding equity and debt instruments, and providing or settling loans and other forms ofcredit” (International Accounting Standards Board, 2013:195).

12 http://www.hmrc.gov.uk/manuals/bimmanual/bim35210.htm.13 Her Majesty’s Revenue and Customs, “International Accounting Standards − the UK tax implications” (http://www.hmrc.gov.uk/practitioners/

int accounting.htm; accessed 22 December 2013).14 http://www.hmrc.gov.uk/manuals/bimmanual/bim35210.htm.


http://www.hmrc.gov.uk/manuals/bimmanual/bim35210.htm

http://www.hmrc.gov.uk/practitioners/int_accounting.htm

http://www.hmrc.gov.uk/practitioners/int_accounting.htm

http://www.hmrc.gov.uk/manuals/bimmanual/bim35210.htm

G ModelA

feww

Tapf

si

4

lctcL

brtadptp3aoGy

e“ofich

h



It further assumes that the primary users need information about the resources of the entity to assess its prospects foruture net cash inflows and how effectively and efficiently management has discharged their responsibilities to use thentity’s existing resources. Thus, there is considerable focus on the use of market/fair values (Ryan, 2008; Power, 2010)hich in the absence of any observable market prices are dependent on models based on assumptions, and can produce aide variety of answers.

As a matter of general principle, tax reliefs are rarely, if ever, based on fluctuating market prices, or mathematical models.he income statements based on fair value accounting recognize unrealized gains as the emphasis is on making investorsware of possible future cash flows. This is in stark contrast to taxation principles where generally taxes are only levied afterrofit/gain from the disposal of an asset or the completion of a transaction has been realized in cash or cash equivalent. The

ocus on markets has

“added up to a weakening of a transactions-based, realisation focused conception of accounting reliability in favourof one aligned with markets and valuation models” (Power, 2010: 197).

Contemporary financial reporting standards do not give any explicit consideration to the interests of the state or broaderociety. They are not directly concerned with enabling the state to collect taxes though elements of accounting continue tonfluence the calculation of taxable profits and liabilities.

.3. The mirage of convergence of accounting standards

Some have argued that the emergence of international accounting standards would somehow displace local histories,inguistic systems, and cultural mediations and lead to convergence around a single-set of accounting rules and by impli-ation to a single unambiguous set of financial accounting numbers for tax purposes. For example, Picciotto (2012) claimshat “Harmonisation of the tax base could be facilitated since many countries accept accounts for tax purposes based onorporate accounting principles, for which international standards now exist” (p. 11). In his evidence to the UK House ofords Committee on Economic Affairs Sol Picciotto argued that

“there has been a high degree of convergence towards international accounting standards . . . it is possible to movetowards greater co-convergence of standards to address the issues posed by multinational companies in a moreintegrated way. If we can do that for financial standards, I do not see why we cannot start working seriously on thatfor tax accounting standards and establish a template for combining country-by-country reporting . . .”.15

Avi-Yonah et al. (2009) state that

“While there are still differences in accounting among countries, those are diminishing due to the spread of Interna-tional Accounting Standards, which have been adopted in the EU and Japan” (p. 552).

The above claims may be persuasive as since January 2005 all EU companies listed on a recognized stock exchange haveeen required to prepare consolidated financial statements in accordance with the requirements of international financialeporting standards (IFRS). However, this does not necessarily provide evidence of convergence within the EU as nationalraditions and ways of making sense of cultural practices are not easily displaced by the recent advent of internationalccounting standards. Instead of convergence, there are varieties of adoptions, adaptations, modifications and recommen-ations; and even then there are a wide range of issues about translation of word/concepts and what they might mean in aarticular cultural setting (Larson and Street, 2004; PricewaterhouseCoopers, 2010, 2012). Items such as goodwill have gonehrough considerable evolution in a number of leading capitalist economies and seem to have converged around “actuarialrinciples” (Ding, Richard, & Stolowy, 2008). However, the accounting treatment still differs. For example, IFRSs (IFRS 3, IAS6, IAS 38) require that goodwill appearing in the balance sheet is not to be amortised. Instead, it is to be subjected to annnual impairment test. The resulting diminution, depending on circumstances, may be offset against revaluation reserver can hit the income statement. In contrast, the German GAAP requires “goodwill to be amortised over its economic life. . .erman GAAP requires an explanation in the notes to the financial statements if the economic life of goodwill exceeds fiveears” (PricewaterhouseCoopers, 2010: 22)

The global convergence of accounting poses questions about the role and survival national institutions and legislators,specially as their powers may be transferred to the IASB. Such political tensions are captured by Kirsch (2012) who asks

What will be the role of the SEC in a world of harmonized financial accounting standards for filing, reporting, and listingn US exchanges? What role will the US Congress perceive to be the proper one for the SEC in a world of converged


nancial reporting standards?” (p. 49). Such considerations may have scuppered possibilities of the US participation in globalonvergence of accounting standards. For example, a Commissioner with the US Securities and Exchange Commission (SEC)as said that

15 Oral evidence on ‘Taxing Corporations in a Global Economy: Is a new approach needed? 11 June 2013;ttp://www.parliament.uk/documents/lords-committees/economic-affairs/Corporate-Taxation-April-2013/uc%20Transcripts/ucEAC20130611Ev9.pdf.


http://www.parliament.uk/documents/lords-committees/economic-affairs/Corporate-Taxation-April-2013/uc Transcripts/ucEAC20130611Ev9.pdf

G Model

“I am not convinced of a need to abandon U.S. GAAP in favor of IFRS . . . In practice and in reality, accounting standardsmay vary between jurisdictions due to legal and cultural factors, as well as differences in perspective. Remember, IFRSis not consistently implemented around the world”.16

In the words of a former chairman of the SEC,

“public companies and investors aren’t saying clearly that they want it [IFRS]. That’s why today there is not even aplan for expanding the voluntary use of IFRS. . . . For those of you who remember Monty Python, I think Michael Palin,in speaking about John Cleese’s parrot, said it best: This parrot is no more. It’s not simply resting, or momentarilystunned. The prospect of full scale IFRS in our lifetimes has ceased to be. It is bereft of life. It rests in peace”.17

The chairman of the UK’s Financial Reporting Council acknowledges that “we won’t get total harmonization, that ishaving one set of accounting rules and standards across the world.18 A major reason for this is that competing histories havepositioned accounting practices in a very distinctive way. For example, valuation of inventories is a crucial component notonly for financial reporting but also of taxable profits. An almost universal doctrine is that inventories should be valued atthe lower of cost and net realizable value. Such rules form part of domestic and international accounting standards (FinancialAccounting Standards Board, 2005; Financial Reporting Council, 1988; International Accounting Standards Board, 2005), andare favourably cited by tax tribunals and courts.19 All accounting norms are based on the principle that cost is the primarybasis for estimating the value of inventory, but this apparent convergence marks differences which are firmly rooted in localpolitics (Parker, 1965; Noguchi, 2007). Companies in the EU and former British colonies generally use a method known asFirst-In-First-Out (FIFO) for determination of costs, whereas companies in the USA use Last-In-First-Out Method (LIFO), apractice that is mandated by law (Davis, 1982; Pincus, 1989). Following the US influence on its post-war reconstruction,Japan also uses LIFO (PricewaterhouseCoopers, 2012).

Even the harmonization of global/regional accounting rules will not necessarily produce practices acceptable for taxpurposes. For example, financial reporting standards define an asset as a ‘resource controlled by the entity as a result of pastevents and from which future economic benefits are expected to flow to the entity’; and a liability is defined as “a presentobligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entityof resources embodying economic benefits” (International Accounting Standards Board, 2012a). Such a definition does notprovide a way of distinguishing sham or artificial assets from the rest. For example, in the UK case of Iliffe News and Media Ltd& Ors v Revenue & Customs [2012] UKFTT 696 (TC), a media company decided to treat newspaper mastheads, which it alreadyowned, as a new asset for the nominal amount of £1. The mastheads were then immediately leased to subsidiaries andcollected over £51 million in royalties, which reduced the reported profits of some subsidiaries. The subsidiary companiesthen sought to secure tax relief for the payment of royalties paid to the parent company. The creation of the asset wasoverseen by Ernst & Young who in their capacity as auditors issued an unqualified audit report, signifying that for accountingpurposes an asset had been created. The court considered the wording of relevant accounting standards and testimony ofaccounting experts, but decided that a valid asset had not been created and rejected the claim for tax relief on intragrouproyalty payments.

The above examples illustrate some of the difficulties in producing uniform consolidated accounts. The relationshipbetween accounting and tax practices is complex, and since the 1970s the two have followed divergent paths. Consequently,the gap between the two has increased as accounting standards seek to meet the assumed needs of capital markets, whereastaxation practices are closely aligned to law and social objectives pursued by the state. A survey of corporate tax systemsin 153 countries shows that no country calculates tax liability by solely relying on profits recorded for financial reportingpurposes (PricewaterhouseCoopers, 2014). They all make adjustments (e.g. depreciation, disallowable expenses), to varyingdegrees, to accounting profits to arrive at taxable profits. Some of the problems for using IFRSs for tax purposes are capturedin the following statement from the Indian tax authority.

“It is our conscious decision not to accept IFRS system for tax purposes. And we are not alone here; most countries inthe world have followed this approach. Even the US does not have IFRS for tax purposes . . . Our system is not ready yetto accept the IFRS system as a recognised system for income-tax purposes . . . When you switch over from a historicalcosting system to a market value system, you can assign valuations which can lead to significant under-reporting


of profits. This could lead to under-reporting of corporate income . . . frequent reassessment of assets and liabilitiesbased on fluctuating market value would raise problems in taxation, which is based on the cost of purchasing the

16 Speech by the US SEC Commissioner Kara M. Stein, “International Cooperation in a New Data-Driven World”, 26 March 2015(http://www.sec.gov/news/speech/2015-spch032615kms.html#.VRRkpVRFD5o; accessed 29 April 2015).

17 Speech by Chris Cox, 2005–2009 Chairman of the SEC, How America’s Participation in International Financial Reporting Standards WasLost, 11 June 2014 (http://corpgov.law.harvard.edu/2014/06/11/how-americas-participation-in-international-financial-reporting-standards-was-lost/;accessed 25 April 2015).

18 Reuters, UK watchdog expects progress on global accounting rules, 10 June 2014 (http://www.reuters.com/article/2014/06/10/us-britain-accounts-idUSKBN0EL16P20140610; accessed 26 April 2015)

19 For example see BSC Footwear Ltd v Ridgway [1971] 47TC495 and Symons v Lord Llewelyn Davies [1982] 56TC630.


http://www.sec.gov/news/speech/2015-spch032615kms.html#

http://corpgov.law.harvard.edu/2014/06/11/how-americas-participation-in-international-financial-reporting-standards-was-lost/

http://www.reuters.com/article/2014/06/10/us-britain-accounts-idUSKBN0EL16P20140610

http://www.reuters.com/article/2014/06/10/us-britain-accounts-idUSKBN0EL16P20140610

G ModelA

4

tpiEB

thtd

e

a(

tCf

att

aparcoet

o

c

2



asset. The tax authorities have serious concerns over the sentiment-driven volatility integral to fair valuation of assetsand liabilities, which could lead to under-reporting of income”.20

.4. Accounting and the European union’s proposals for unitary taxation

The previous sections provided some background for making sense of some of the accounting issues raised by unitaryaxation. Whilst financial reporting and taxation practices remain linked they are not harmonised. Financial accountingractices do not necessarily provide a tax base which is generally driven by state policy and law and courts are able to

gnore or override interpretations of economic events offered by accounting practices. It is against this background that theuropean Union has sought to develop its version of unitary taxation, better known as Common Consolidated Corporate Taxase (CCCTB). This section looks at some of the challenges that it offers to accounting practices

In principle, the EU could have accepted the profits/losses produced by IFRS-based accounts, especially as companies tendo report higher profits to capital markets but prefer to report lower profits to tax authorities. However, there are a number ofurdles. Firstly, though there is EU wide corporate law, there are no equivalent corporate tax laws. So that framework needso be developed, especially if the EU is to function as an effective single market. Secondly, conventional financial accountingefinitions are not always suitable for tax purposes.

The first version of CCCTB developed by the EU envisaged aligning tax base with international accounting standards. Forxample, the Ruding Report said that

“The Committee believes that commercial accounts produced for financial reporting purposes should form the startingpoint for the computation of taxable income in all Member States. However, it draws attention to the fact that financialstatements are not yet fully harmonized within the Community and even then would serve objectives other than tax”(European Commission, 1992: 37).

Since 2005, EU listed companies have been required to comply with IFRSs, but the previous ambition of aligning taxnd accounting practices remained intact. Some difficulties in applying accounting rules for taxation purposes were notedEuropean Commission, 1992, 2003), but a subsequent press release21 said that

“The Commission suggests that if companies will be reporting profits according to a common standard then thiscommon measure of profitability could be used as a starting point for a common EU tax base (i.e. a common definitionof taxable profits)”.

A 2006 paper by the European Commission reiterated the need to develop CCCTB for their EU wide activities, but omit-ed mentioning the use of financial reporting accounting standards, or IFRSs, to provide a uniform tax base (Europeanommission, 2006). The EU seems to have recognized some of the difficulties associated in using financial reporting standards

or tax purposes (see above) and abandoned the first version of CCCTB.The second version of CCCTB said that

“Harmonisation will only involve the computation of the tax base and will not interfere with financial accounts. There-fore, Member States will maintain their national rules on financial accounting and the CCCTB system will introduceautonomous rules for computing the tax base of companies. These rules shall not affect the preparation of annual orconsolidated accounts” (European Commission, 2011: 5).

The above suggested that the EU had embarked on a two-track development. The first track would continue to developccounting standards for financial reporting, and the second would develop a framework for taxation treatment of individualransactions. No immediate convergence between accounting and taxation rules is envisaged though the calculation ofaxable profits, as is the case now, will continue, to some extent, to be influenced by accounting practices.

The EU proposal contained 136 articles which could be considered to be the beginnings of a conceptual framework ofccounting standards for taxation purposes (European Commission, 2011). In sharp contrast to current financial reportingractices, Article 9 stated that “In computing the tax base, profits and losses shall be recognised only when realised. Trans-ctions and taxable events shall be measured individually . . .”. Article 10 stated that “The tax base shall be calculated asevenues less exempt revenues, deductible expenses and other deductible items”. Article 12 explains the principles asso-iated with deductible expenses and Article 14 deals with non-deductible expenses. For example, profits already taxed inther jurisdictions are likely to be excluded as well as expenses which are not fully deductible for tax purposes (for example,ntertainment and hospitality). Article 59 adds that “In calculating the consolidated tax base, profits and losses arising from


ransactions directly carried out between members of a group shall be ignored”.However, it should be added that the EU attaches very different meaning to the word “consolidated” in the context

f CCCTB. It does not mean that all the members of a corporate group will be consolidated for tax purposes because all,

20 The Financial Express, IFRS system not conducive for taxation purposes, says Mitra, 7 April 2011 (http://www.financialexpress.com/news/ifrs-system-not-onducive-for-taxation-purposes-says-mitra/772775/0; accessed 18 July 2013).21 EU Commission, Commission company tax strategy − frequently asked questions, 25 November 2003 (http://europa.eu/rapid/press-release MEMO-03-37 en.htm?locale=en)


http://www.financialexpress.com/news/ifrs-system-not-conducive-for-taxation-purposes-says-mitra/772775/0

http://www.financialexpress.com/news/ifrs-system-not-conducive-for-taxation-purposes-says-mitra/772775/0

http://europa.eu/rapid/press-release_MEMO-03-237_en.htm?locale=en

http://europa.eu/rapid/press-release_MEMO-03-237_en.htm?locale=en

G Model

especially as group members residing outside the EU, may not be subject to EU wide tax laws. Rather, the EU position wasthat only those companies which fall within the EU jurisdiction, or those who choose to become subject to CCCTB, will beconsolidated. For example, if Amazon operates in the EU member states of Luxembourg and Germany, then those operationswill be consolidated and profit/loss on intragroup transactions for those two companies/countries will be eliminated. Ofcourse, Amazon could move contentious transactions to subsidiaries outside the EU. If so, then the member states hopeto secure information about the cost structure, royalty fees, etc. to adjust the tax computation, and they can also restrictthe amount and type of transaction which will count for tax purposes. In short, CCCTB envisages consolidation of selectedtransactions for tax purposes rather than any equivalent of accounting consolidation of the entire group.

A transaction-based approach is central to the EU framework and a number of articles cover the tax aspects of varioustransactions. In contrast to the IASB’s rejection of the concept of prudence,22 Article 27 offers relief for likely bad debts –“reliably estimate the amount of the bad debt receivable on a percentage basis”. In contrast to the IASB’s preference forthe incurred-loss model,23 Article 25 would grant relief for various accounting provisions – “. . .any amount arising fromthat obligation which can be reliably estimated shall be deductible, provided that the eventual settlement of the amount isexpected to result in a deductible expense”. To check state-aid, disguised as generous tax deduction of depreciation of fixedassets, there are proposals (Article 36) to standardise the rates. The residues of historical logics are also evident. For example,Article 29 adds that tax relief for inventories “shall be measured by using the first-in first-out (FIFO) or weighted-averagecost method”.

In 2015, the EU (re)launched its CCCTB project and this time seeking agreement on wider conceptual issues (e.g. whatis permanent establishment) before tackling issues about consolidation with the statement that “the Commission will pro-pose that work on consolidation is postponed until after the common base has been agreed and implemented (EuropeanCommission, 2015a: 8). In the next set of proposals, published in October 2016, Common Consolidated Corporate Tax base(CCCTB) morphed into a Common Corporate Tax base (CCTB) and the EU explained that the ‘CCCTB proposal was not goingto be adopted in a single step. While there was progress and support on some important areas, discussions faltered on moredifficult aspects, notably consolidation. In addition, it became clear that the original proposal needed to be adjusted to betruly effective in tackling tax avoidance and to respond to other challenges such as the need to incentivise R&D’ (EuropeanCommission, 2016). The emphasis is now on agreeing the tax base before moving on to consider the more complex issues ofconsolidation. The intention is, in due course, to make CCCTB compulsory for large companies (turnover of more than 750million Euros).

5. Summary and discussion

This paper has examined the problematic relationship between accounting for financial reporting and for taxation pur-poses through the debates about corporate profit shifting and tax avoidance. Arguably, the two are related (simultaneouslyconjoined and separate) but are also on divergent paths as financial reporting is focused on the assumed interests of investorswhereas taxation is concerned about levying taxes on realized corporate profits in accordance with the law.

For nearly a century transfer pricing has been the basis of the international system of corporate taxation enabling eachstate to levy taxes on corporate profits made in its defined geographical jurisdiction. This system is favoured by the OECDand is under strain because globalization has enabled relatively few corporations to control markets for goods and servicesand as a result arm’s length prices, central to any operation of transfer pricing, cannot easily be ascertained. In addition,capital has been freed from the prison of defined geographical jurisdictions and is able to engage in a variety of strategiesto shift profit to low/no tax jurisdictions and avoid taxes in countries where economic activity takes place. Companiesare able to form numerous subsidiaries and affiliates in low/no tax jurisdictions to avoid taxes. Under the OECD rules,each subsidiary of a transnational corporation is treated as an independent taxable entity and this enables transnationalcorporations to arbitrage the international tax system. For example, the top hundred companies listed on the London StockExchange (FTSE100) have 34,216 subsidiary companies, joint ventures and associates (Action-Aid, 2011). Under the currenttax system, there are up to 34,216 diverse taxable entities even though they are controlled by only 100 corporations. Thisenables transnational corporations to shift profits through transfer pricing schemes and generally play-off one state againstanother. The administration of transfer pricing also entails huge costs, both for tax authorities and taxpayers, especially as thearm’s length model has become difficult to administer. Taxpayers and tax authorities try to make arbitrary adjustments to the


prices put forward by the parties, resulting in considerable paperwork, cost and prolonged disputes as even tiny adjustmentsin prices can lead to large changes in corporate tax liabilities and revenues of nation states (Altman, 2006; Picciotto, 2011).For example, transfer pricing was central to dispute between GlaxoSmithKline (GSK) and the US Internal Revenue Service(IRS). The dispute relating to tax years 1989 through 2005 was eventually resolved in 2006 with the company making a

22 Following the 2007/08 banking crash, in July 2014, IFRS 9 now permits the qualified use of an expected loss impairment model(http://www.ifrs.org/current-projects/iasb-projects/financial-instruments-a-replacement-of-ias-39-financial-instruments-recognitio/Pages/Financial-Instruments-Replacement-of-IAS-39.aspx; accessed 30 October 2014).

23 An incurred loss model assumes that all loans will be repaid until evidence to the contrary (known as a loss or trigger event) is identified. Only at thatpoint is the impaired loan (or portfolio of loans) written down to a lower value.


http://www.ifrs.org/current-projects/iasb-projects/financial-instruments-a-replacement-of-ias-39-financial-instruments-recognitio/Pages/Financial-Instruments-Replacement-of-IAS-39.aspx

http://www.ifrs.org/current-projects/iasb-projects/financial-instruments-a-replacement-of-ias-39-financial-instruments-recognitio/Pages/Financial-Instruments-Replacement-of-IAS-39.aspx

G ModelA

paww

itotrgirf

btnaaea

bbpp2o

tnttsateuBceoo

d2iamoSf

(

p



ayment of $3.4 billion.24 For over 20 years, GSK has also been involved in a transfer pricing dispute with the Canadian taxuthority and after a 2012 Supreme Court hearing (Canada v. GlaxoSmithKline Inc., 2012 SCC 52),25 the matters were settledith an out-of-court agreement26 in 2015. Many developing countries are ill-equipped to negotiate transfer pricing rulesith transnational corporations operating within their jurisdictions.

The OECD principles of ‘independent entity’ and transfer pricing are unlikely to impose a significant check on profit shift-ng, a major reason for leakage of tax revenues. In contrast, despite considerable challenges, unitary taxation has the capacityo check profit shifting (European Commission, 2015a, 2015b, 2016; Picciotto, 2012). In this system the tax base consistsf consolidated profits (on a transactional basis) of the group of companies. Thus, profits on all (or selected) intragroupransactions are eliminated and all (or selected) transactions through tax havens are negated on consolidation. In fact, itemoves economic incentives for transfer pricing games which are a central feature of contemporary tax avoidance strate-ies. Ironically, despite rejecting unitary taxation, the OECD seems to be moving towards some of its elements. For example,ts recommendation that nation states restrict the deductibility of deductibility of interest payments on intragroup loansecognizes the principle that economic value is not added or lost until there is a transaction with third parties (Organisationor Economic Co-operation and Development, 2015).

However, unitary taxation also raises major questions, especially about the base on which tax is to be levied. How is toe calculated? Some hoped that the convergence of global accounting standards would generate the appropriate tax base oraxable profits. However, convergence of accounting practices is a long way away and in any case the resulting accountingumbers are not suitable for tax purposes. Financial reporting is driven primarily by the assumed needs of investors, tradersnd speculators in capital markets. It focuses on fair/market values and recognizes unrealized gains. In contrast, taxation is

matter of law; tax reliefs are primarily based for historical costs and only realized profits are taxable. This paper providedxamples to show that on occasions courts have argued that conventional accounting definitions of asset, liability, incomend expense do not provide the foundations for a tax base. Such tensions have informed the EU’s CCCTB project.

The initial CCCTB proposals from the EU assumed that IFRS based consolidated financial statements could form the taxase for its version of unitary taxation, but it soon retreated from that position. In the second version of CCCTB advancedy the EU, there is an explicit acceptance that financial reporting and accounting for taxation will develop along divergentaths for the foreseeable future. For the CCCTB project the EU has sought to define the meaning of transactions (revenues,rofits, inventory valuation, depreciation, etc.) from a tax perspective. The most recent discussions (European Commission,016) are focused on the construction of a tax base as that is considered to be a necessary requirement for the developmentf a single EU market with uniform rules.

For unitary taxation (or CCCTB) to be effective it may be desirable to have international agreement on the composition ofax base and apportionment formulas used for allocation of profits to each jurisdiction, but that is not essential. In fact, someation states (see above for references to Brazil, India, China) are already tweaking transfer pricing methods and applyingheir own formulas for allocation of costs and profits (United Nations, 2013), though this does create the possibility of doubleaxation. Unitary taxation may be attractive because it can be applied on global, regional (e.g. EU) and even unilaterally by anytate nation, especially an economically powerful state. Unitary taxation does not impinge on the sovereignty of any nations each country can tax its share of corporate profits at any rate consistent with its local social settlements. It constrainshe ability of corporations to concoct intragroup transactions to avoid taxes, but will not inhibit the ability of capital to seekconomies of scale by shifting physical production to more desirable locations. There is some working experience of applyingnitary taxation, albeit in a domestic context, in federal states such as the US, Canada and Switzerland (see Avi-Yonah andenshalom, 2010; Avi-Yonah et al., 2009), and this may help the EU to refine its unitary taxation framework. However, majorhallenges remain in devising suitable formulas for apportionment of consolidated profits across EU member states and thentities which are to be consolidated, especially when they reside outside the EU in a defined national or regional context,r a jurisdiction (e.g. an offshore financial centre) which wishes to protect its interests by not being party to the new worldf unitary taxation.

The debates about accounting and taxation present opportunities for scholarly research. For example, the EU decision toefine the nature of some accounting transactions from taxation perspective (European Commission, 2011, 2015a, 2015b,016) seems to herald the emergence of a possible conceptual framework for accounting for taxation purposes. In due course,

t will probably need to cover tax treatment of diverse topics such as revenue recognition, construction contracts, tangiblessets, intangible assets, borrowing costs, leases, provisions, etc (Sikka and Murphy, 2015). Accounting standards for taxationay make nation states more sensitive to the impact of accounting on public revenues and may well challenge the authority

f the International Accounting Standards Board, and its sponsors, to make accounting rules (Botzem and Quack, 2009).


cholarly research can help us to understand the politics, processes and consequences of developing accounting standardsor taxation purposes.

24 US IRS press release, IRS Accepts Settlement Offer in Largest Transfer Pricing Dispute, 11 September 2006http://www.irs.gov/uac/IRS-Accepts-Settlement-Offer-in-Largest-Transfer-Pricing-Dispute; accessed 15 January 2014).25 Text is available here http://www.lexisnexis.ca/documents/2012SCC052.pdf.26 Financial Post, GlaxoSmithKline transfer pricing case settled, 12 January 2015 (http://business.financialpost.com/legal-post/glaxosmithkline-transfer-ricing-case-settled).


http://www.irs.gov/uac/IRS-Accepts-Settlement-Offer-in-Largest-Transfer-Pricing-Dispute

http://www.lexisnexis.ca/documents/2012SCC052.pdf

http://business.financialpost.com/legal-post/glaxosmithkline-transfer-pricing-case-settled

http://business.financialpost.com/legal-post/glaxosmithkline-transfer-pricing-case-settled

G Model

Some may not be persuaded by the two-track development of accounting standards, one of financial and another fortaxation, and in pursuit of economic efficiency may wish to align financial accounting and taxation practices so that thecosts of producing tax accounts and annual financial reports are reduced. This would require major adjustments to thecurrently dominant conceptual frameworks for financial reporting (International Accounting Standards Board, 2013) andshift the focus away from the assumed needs of investors to other stakeholders. As tax is a matter of law, the revisedconceptual framework would need to be part of law and subject to parliamentary debates. The scholarly community canoffer reflections on possible future trajectories, their implications for the power of the state, corporations, financial reportingand the checking tax avoidance.

References

Action-Aid. (2011). Addicted to tax havens: The secret life of the FTSE 100. London: Action-Aid. http://www.actionaid.org.uk/sites/default/files/doc lib/addicted to tax havens.pdf

Action-Aid. (2012). Calling time. London: Action-Aid. http://www.actionaid.org.uk/sites/default/files/doc lib/calling time on tax avoidance.pdfAisbitt, S. (2002). Tax and accounting rules: Some recent developments. European Business Review, 14(2), 92–97.Altman, Z. D. (2006). Dispute resolution under tax treaties. Amsterdam: IBFD.Arnold, P., & Sikka, P. (2001). Globalization and the state-profession relationship: The case of the bank of credit and commerce international accounting.

Organizations and Society, 26(6), 475–499.Avi-Yonah, R. S., & Benshalom, I. (2010). Working paper 10-029: Formulary apportionment—Myths and prospects. University of Michigan Law School.Avi-Yonah, R. S., Clausing, K. A., & Durst, M. C. (2009). Allocating business profits for tax purposes: A proposal to adopt a formulary profit split. Florida Tax

Review, 9(5), 497–553.Berry, A., Capps, T., Cooper, D., Ferguson, P., Hopper, T., & Lowe, E. A. (1985). Management control in an area of the NCB: Rationalities of accounting practices

in a public enterprise. Accounting Organizations and Society, 10(1), 3–28.Bircher, P. (1988). The adoption of consolidated accounting in great Britain. Accounting and Business Research, 19(73), 3–13.Blouin, J., Huizinga, H., Laeven, L., & Nicodème, G. (2014). IMF working paper WP/14/12: Thin capitalization rules and multinational firm capital structure.

http://www.imf.org/external/pubs/ft/wp/2014/wp1412.pdfBotzem, S., & Quack, S. (2009). (No) limits to Anglo-American accounting? Reconstructing the history of the international accounting standards committee:

A review article. Accounting Organizations and Society, 34, 988–998.Buchanan, J. M., & Thirlby, G. F. (1973). LSE essays on cost. London: Weidenfeld and Nicolson.Christian-Aid. (2009). False profits: Robbing the poor to keep the rich tax-free. London: Christina-Aid. http://www.christianaid.org.uk/images/false-profits.pdfChristian-Aid. (2013). No more shifty business. London: Christina-Aid. http://www.christianaid.org.uk/Images/No-more-shifty-business-response-to-OECD

tcm15-68250.pdfClausing, K. A., & Avi-Yonah, R. S. (2007). Reforming corporate taxation in a global economy: A proposal to adopt formulary apportionment. Washington DC:

Brookings Institution. http://www.brookings.edu/∼/media/research/files/papers/2007/6/corporatetaxes%20clausing/200706clausing aviyonah.pdfCommittee on Corporate Governance. (1998). Committee on corporate governance: Final report (Hampel report). London: Gee.Committee on the Financial aspects of Corporate Governance. (1992). The financial aspects of corporate governance (Cadbury report). London: Gee.Daunton, M. J. (2001). Trusting Leviathan: The politics of taxation in Britain, 1799–1914. Cambridge: Cambridge University Press.Davis, H. Z. (1982). History of LIFO. Accounting Historians Journal, 9(1), 1–23.Ding, Y., Richard, J., & Stolowy, H. (2008). Towards an understanding of the phases of goodwill accounting. Accounting Organisations and Society, 33, 718–755.Durst, M. C. (2011). The two worlds of transfer pricing policymaking. Tax Analysts, 24(January), 443–447.Edwards, J. R. (1991). The process of accounting innovation: The publication of consolidated accounts in Britain in 1910. The Accounting Historians Journal,

18(2), 113–132.European Commission. (1992). Conclusions and recommendations of the committee of independent experts on company taxation (Ruding report). Luxembourg:

EU. http://aei.pitt.edu/1332/1/ruding tax report.pdfEuropean Commission. (2001). Company taxation in the internal market COM (2001) 582. http://ec.europa.eu/taxation customs/resources/documents/

company tax study en.pdfEuropean Commission. (2003). Internal market without company obstacles COM (2003) 726.European Commission. (2006). Co-ordinating member states’ direct tax systems in the internal market. Brussels: EU.

http://ec.europa.eu/taxation customs/resources/documents/taxation/com(2006)823 en.pdfEuropean Commission. (2011). Proposal for a council directive on a common consolidated corporate tax base (CCCTB), COM (2011) 121 final – 2011/0058 (CNS).

http://ec.europa.eu/taxation customs/resources/documents/taxation/company tax/common tax base/com 2011 121 en.pdfEuropean Commission. (2012). Tackling tax fraud and evasion in the EU—Frequently asked questions. Brussels: European Commission.

http://europa.eu/rapid/pressReleasesAction.do?reference=MEMO/12/492&format=HTML&aged=0&language=EN&guiLanguage=enEuropean Commission. (2015a). A fair and efficient corporate tax system in the european union: 5 key areas for action. Brussels: European Commission.

http://ec.europa.eu/taxation customs/resources/documents/taxation/company tax/fairer corporate taxation/com 2015 302 en.pdfEuropean Commission. (2015b). Public consultation on the Re-launch of the common consolidated corporate tax base (CCCTB). Brussels: European Commission.

http://ec.europa.eu/taxation customs/resources/documents/taxation/company tax/fairer corporate taxation/2015-10-08 consult-docmt-ccctb.pdfEuropean Commission. (2016). Questions and answers on the package of corporate tax reforms. Brussels: European Commission.

http://europa.eu/rapid/press-release IP-16-3471 en.htmFairtrade Foundation. (2009). Unpeeling the banana trade. London: Fairtrade Foundation. http://www.fairtrade.org.uk/includes/documents/cm docs/2009/

f/1 ft banana reportweb.pdfFinancial Accounting Standards Board. (2005). Statement of financial accounting standards (SFAS) 151: Inventory costs. Norwalk, Connecticut: FASB.Financial Accounting Standards Board. (1988). SSAP 9: Stocks and long term contracts. London: FRC.Frecknall-Hughes, J. (2007). The concept of taxation and the age of enlightenment. In John Tiley (Ed.), Studies in the history of tax law (vol. 2) (pp. 253–286).

Oxford: Hart Publishing.Gaertner, F. B. (2014). CEO after-tax compensation incentives and corporate tax avoidance. Contemporary Accounting Research, 31(4), 1077–1102.Goodhart, C. (2011). The basel committee on banking supervision: A history of the early years 1974–1997. Cambridge: Cambridge University Press.Gray, J. (1995). Liberalism (2nd ed.). Buckingham: Open University Press.Green, S. (1995). Accounting standards and tax law: Complexity, dynamism and divergence. British Tax Review, 445–451.Habermas, J. (1976). Legitimation crisis. London: Heinemann.Harris, J. (1997). William beveridge: A biography. Oxford: Clarendon Press.


Harvey, D. (2005). A brief history of neoliberalism. Oxford: Oxford University Press.Hicks, J. R. (1965). Capital and growth. Oxford: Oxford University Press.Hines, R. D. (1988). Financial accounting: In communicating reality we construct reality. Accounting, Organizations and Society, 13(3), 251–261.Hollingshead, A. (2010). The implied tax loss from trade mispricing. Washington, DC: Global Financial Integrity.Hoogendoorn, M. N. (1996). Accounting and taxation in Europe—A comparative overview. The European Accounting Review, 5(Supplement), 783–794.


http://www.actionaid.org.uk/sites/default/files/doc_lib/addicted_to_tax_havens.pdf

http://www.actionaid.org.uk/sites/default/files/doc_lib/addicted_to_tax_havens.pdf

http://www.actionaid.org.uk/sites/default/files/doc_lib/calling_time_on_tax_avoidance.pdf

http://refhub.elsevier.com/S0155-9982(16)30235-6/sbref0015



































































































































http://www.imf.org/external/pubs/ft/wp/2014/wp1412.pdf





































http://www.christianaid.org.uk/images/false-profits.pdf

http://www.christianaid.org.uk/Images/No-more-shifty-business-response-to-OECD_tcm15-68250.pdf

http://www.christianaid.org.uk/Images/No-more-shifty-business-response-to-OECD_tcm15-68250.pdf

http://www.brookings.edu/~/media/research/files/papers/2007/6/corporatetaxes clausing/200706clausing_aviyonah.pdf













































































































http://aei.pitt.edu/1332/1/ruding_tax_report.pdf

http://ec.europa.eu/taxation_customs/resources/documents/company_tax_study_en.pdf

http://ec.europa.eu/taxation_customs/resources/documents/company_tax_study_en.pdf










http://ec.europa.eu/taxation_customs/resources/documents/taxation/com(2006)823_en.pdf

http://ec.europa.eu/taxation_customs/resources/documents/taxation/company_tax/common_tax_base/com_2011_121_en.pdf

http://europa.eu/rapid/pressReleasesAction.do?reference=MEMO/12/492&format=HTML&aged=0&language=EN&guiLanguage=en

http://ec.europa.eu/taxation_customs/resources/documents/taxation/company_tax/fairer_corporate_taxation/com_2015_302_en.pdf

http://ec.europa.eu/taxation_customs/resources/documents/taxation/company_tax/fairer_corporate_taxation/2015-10-08_consult-docmt-ccctb.pdf

http://europa.eu/rapid/press-release_IP-16-3471_en.htm

http://www.fairtrade.org.uk/includes/documents/cm_docs/2009/f/1_ft_banana_reportweb.pdf

http://www.fairtrade.org.uk/includes/documents/cm_docs/2009/f/1_ft_banana_reportweb.pdf


































































































































































































G ModelA

II

II

II

K

K

K

L

L

L

L

MMMM

NO

O

OOO

OOO

O

O

OO

O

PPP

PP

PP

PP

PP

R

RSS

S

SSS



nternational Accounting Standards Board. (2005). IAS2—Inventories. London: IASB.nternational Accounting Standards Board. (2012a). The conceptual framework for financial reporting 2011.

http://www.ifrs.org/IFRSs/Documents/English%20Web%20summaries/Conceptual%20Framework.pdfnternational Accounting Standards Board. (2012b). IFRS 10—Consolidated financial statements. London: IASB.nternational Accounting Standards Board. (2013). Discussion paper DP/2013/1: A review of the conceptual framework for financial report-

ing. http://www.ifrs.org/Current-Projects/IASB-Projects/Conceptual-Framework/Discussion-Paper-July-2013/Documents/Discussion-Paper-Conceptual-Framework-July-2013.pdf

nternational Accounting Standards Board. (2013a). Fiscal monitor: Taxing times. Washington, DC: IMF.nternational Accounting Standards Board. (2013b). Issues in international taxation and the role of the IMF, 28 june.

http://www.imf.org/external/np/pp/eng/2013/062813.pdfPMG. (2013). Corporate and indirect tax survey 2012. http://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/Documents/corporate-

indirect-tax-survey.pdfay, J. (2012). Corporate tax should be fair and shared financial times, 27 november 2012. http://www.ft.com/cms/s/0/b6ef8ab4-388f-11e2-981c-

00144feabdc0.html#axzz2a6B2Ir5Mirsch, R. J. (2012). The evolution of the relationship between the US financial accounting standards board and the international accounting standard setters:

1973–2008. Accounting Historian Journal, 39(1), 1–51.amb, M., Nobes, C., & Roberts, A. (1998). International variations in the connections between tax and financial reporting. Accounting and Business Research,

28(3), 173–188.amb, M. (2002). Defining profits for british income tax purposes: A contextual study of the depreciation cases: 1875–1897. Accounting Historians Journal,

29(1), 105–172.arson, R. K., & Street, D. L. (2004). Convergence with IFRS in an expanding Europe: Progress and obstacles identified by large accounting firms’ survey.

Journal of International Accounting Auditing and Taxation, 13, 89–119.evine, M. (2014). Tax-avoiding CEOs successfully avoid tax-avoidance tax, bloomberg view, 27 january 2014.

https://www.bloomberg.com/view/articles/2014-01-27/tax-avoiding-ceos-successfully-avoid-tax-avoidance-taxarx, K., & Engels, F. (1992). The communist manifesto (edited and introduced by David McLellan). Oxford: Oxford University Press.cSmith, A. (2010). No such thing as society: A history of britain in the 1980. London: Constable.itchell, A., & Sikka, P. (2011). The pin-stripe mafia: How accountancy firms destroy societies. Basildon: Association for Accountancy & Business Affairs.urphy, S., Burch, D., & Clapp, J. (2012). Cereal Secrets: The world’s largest grain traders and global agriculture. Oxford: Oxfam.

https://www.oxfam.org/sites/www.oxfam.org/files/rr-cereal-secrets-grain-traders-agriculture-30082012-en.pdfoguchi, M. (2007). Interaction between tax and accounting practice: Accounting for stock-in-trade. Accounting Business & Financial History, 15(1), 1–34.rganisation for Economic Co-operation and Development. (2013a). Addressing base erosion and profit shifting. Paris: OECD.

http://www.oecd.org/tax/beps.htmrganisation for Economic Co-operation and Development. (2013b). A step change in tax transparency. Paris: OECD.

http://www.oecd.org/ctp/exchange-of-tax-information/taxtransparency G8report.pdfrganisation for Economic Co-operation and Development. (2013c). Action plan on base erosion and profit shifting. Paris: OECD.rganisation for Economic Co-operation and Development. (2014). BEPS action 4: Interest deductions and other financial payments. Paris: OECD.rganisation for Economic Co-operation and Development. (2015). OECD/G20 base erosion and profit shifting project explanatory statement: 2015 final reports.

Paris: OECD. http://www.oecd.org/ctp/beps-explanatory-statement-2015.pdfffe, C. (1984). Contradictions of the welfare state. London: Hutchinson.rganisation for Economic Co-operation and Development. (1979). Transfer pricing and multinational enterprises. Geneva: OECD.rganisation for Economic Co-operation and Development. (1989). Harmful tax competition: An emerging global issue. Paris: OECD.

http://www.oecd.org/tax/transparency/44430243.pdfrganisation for Economic Co-operation and Development. (2001). Transfer pricing guidelines for multinational enterprises and tax administrations. Geneva:

OECD.rganisation for Economic Co-operation and Development. (2004). OECD principles of corporate governance. Paris: OECD.

http://www.oecd.org/dataoecd/32/18/31557724.pdfrganisation for Economic Co-operation and Development. (2006). Annual report on the OECD guidelines for multinational enterprises. Paris: OECD.rganisation for Economic Co-operation and Development. (2009). Transfer pricing guidelines for multinational enterprises and tax administrations. Geneva:

OECD.rganisation for Economic Co-operation and Development. (2010). Review of comparability and of profit methods: Revision of chapters I–III of the transfer

pricing guidelines. Paris: OECD. http://www.oecd.org/ctp/transfer-pricing/45763692.pdfalan, R. (2002). Tax havens and the commercialization of state sovereignty. International Organization, 56(1), 151–176.arker, R. H. (1965). Lower of cost and market in britain and the United States: An historical survey. Abacus, 1(2), 156–172.icciotto, S. (1992). International business taxation: A study in the internationalization of business regulation. Cambridge: Cambridge University press [reprinted

in 2013 by Tax Justice Network]. http://www.taxjustice.net/cms/upload/pdf/Picciotto%201992%20International%20Business%20Taxation.pdficciotto, S. (2011). Regulating global capitalism. Cambridge: Cambridge University Press.icciotto, S. (2012). Towards unitary taxation of transnational corporations. Tax justice network. http://www.taxjustice.net/cms/upload/pdf/Towards Unitary

Taxation 1-1.pdfincus, M. (1989). Legislative history of the allowance of LIFO for tax purposes. The Accounting Historians Journal, 16(1), 23–55.orcano, T., & Tran, A. (1998). Relationship of tax and financial accounting rules in Anglo-Saxon countries. The International Journal of Accounting, 33(4),

433–454.ower, M. (2010). Fair value accounting financial economics and the transformation of reliability. Accounting and Business Research, 40(3), 197–210.ricewaterhouseCoopers. (2010). IFRS v german GAAP (revised). https://www.pwc.com/gx/en/ifrs-reporting/pdf/ifrs-vs-german-gaap-similarities-and

-differences final2.pdfricewaterhouseCoopers. (2012). Similarities and differences: A comparison of IFRS and JP GAAP. Japan: PwC.ricewaterhouseCoopers. (2014). Worldwide tax summaries: Corporate taxes 2013/14.. http://www.pwc.com/gx/en/tax/corporate-tax/worldwide-tax-

summaries/assets/pwc-worldwide-tax-summaries-corporate-2013-14.pdf (Accessed 15 03 2014).ichard, J. (2012). The victory of the Prussian railway dynamic accounting over the public finance and patrimonial accounting models (1838–1884): An

early illustration of the appearance of the second stage of capitalist financial accounting and a testimony against the agency and the market for excusestheories. Accounting Historian Journal, 39(1), 91–126.

yan, S. G. (2008). Accounting in and for the subprime crisis. The Accounting Review, 83(6), 1605–1638.heppard, L. A. (2012). Is transfer pricing worth salvaging? Tax Analysts, 467–476, 30 July.ikka, P., & Murphy, R. (2015). ICTD working paper 34—Unitary taxation: Tax base and the role of accounting. Brighton: International Centre for Tax and

Development. http://www.ictd.ac/publication/2-working-papers/27-unitary-taxation-tax-base-and-the-role-of-accounting


ikka, P., & Willmott, H. (2010). The dark side of transfer pricing: Its role in tax avoidance and wealth retentiveness. Critical Perspectives on Accounting,21(4), 342–356.

ikka, P. (2003). The role of offshore financial centres in globalization. Accounting Forum, 27(4), 365–399.mith, D. (2013). Offshore shell games. Washington, DC: U.S. PIRG. http://uspirg.org/sites/pirg/files/reports/Offshore Shell Games USPIRG.pdfterling, R. R., & Lemke, K. W. (1982). Maintenance of capital: Financial versus physical. Houston: Scholars Book Co.








http://www.ifrs.org/IFRSs/Documents/English Web summaries/Conceptual Framework.pdf










http://www.ifrs.org/Current-Projects/IASB-Projects/Conceptual-Framework/Discussion-Paper-July-2013/Documents/Discussion-Paper-Conceptual-Framework-July-2013.pdf

http://www.ifrs.org/Current-Projects/IASB-Projects/Conceptual-Framework/Discussion-Paper-July-2013/Documents/Discussion-Paper-Conceptual-Framework-July-2013.pdf









http://www.imf.org/external/np/pp/eng/2013/062813.pdf

http://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/Documents/corporate-indirect-tax-survey.pdf

http://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/Documents/corporate-indirect-tax-survey.pdf

http://www.ft.com/cms/s/0/b6ef8ab4-388f-11e2-981c-00144feabdc0.html#axzz2a6B2Ir5M

http://www.ft.com/cms/s/0/b6ef8ab4-388f-11e2-981c-00144feabdc0.html#axzz2a6B2Ir5M










































































































https://www.bloomberg.com/view/articles/2014-01-27/tax-avoiding-ceos-successfully-avoid-tax-avoidance-tax














































https://www.oxfam.org/sites/www.oxfam.org/files/rr-cereal-secrets-grain-traders-agriculture-30082012-en.pdf





















http://www.oecd.org/tax/beps.htm

http://www.oecd.org/ctp/exchange-of-tax-information/taxtransparency_G8report.pdf
























http://www.oecd.org/ctp/beps-explanatory-statement-2015.pdf

















http://www.oecd.org/tax/transparency/44430243.pdf













http://www.oecd.org/dataoecd/32/18/31557724.pdf

























http://www.oecd.org/ctp/transfer-pricing/45763692.pdf






































http://www.taxjustice.net/cms/upload/pdf/Picciotto 1992 International Business Taxation.pdf









http://www.taxjustice.net/cms/upload/pdf/Towards_Unitary_Taxation_1-1.pdf

http://www.taxjustice.net/cms/upload/pdf/Towards_Unitary_Taxation_1-1.pdf






























































https://www.pwc.com/gx/en/ifrs-reporting/pdf/ifrs-vs-german-gaap-similarities-and-differences_final2.pdf

https://www.pwc.com/gx/en/ifrs-reporting/pdf/ifrs-vs-german-gaap-similarities-and-differences_final2.pdf














http://www.pwc.com/gx/en/tax/corporate-tax/worldwide-tax-summaries/assets/pwc-worldwide-tax-summaries-corporate-2013-14.pdf

http://www.pwc.com/gx/en/tax/corporate-tax/worldwide-tax-summaries/assets/pwc-worldwide-tax-summaries-corporate-2013-14.pdf




















































































http://www.ictd.ac/publication/2-working-papers/27-unitary-taxation-tax-base-and-the-role-of-accounting









































http://uspirg.org/sites/pirg/files/reports/Offshore_Shell_Games_USPIRG.pdf












G Model

Tweedie, D., & Whittington, G. (1984). The debate on inflation accounting. Cambridge: Cambridge University Press.UK House of Commons Public Accounts Committee. (2013a). Tax avoidance—Google. London: House of Commons.

http://www.publications.parliament.uk/pa/cm201314/cmselect/cmpubacc/112/112.pdfUK House of Commons Public Accounts Committee. (2013b). Tax avoidance: The role of large accountancy firms. London: House of Commons.

http://www.publications.parliament.uk/pa/cm201213/cmselect/cmpubacc/870/870.pdfUK House of Commons Public Accounts Committee. (2013c). Tax avoidance: Tackling. marketed avoidance schemes. London: House of Commons.

http://www.publications.parliament.uk/pa/cm201213/cmselect/cmpubacc/788/788.pdfUK House of Lords Economic Affairs Committee. (2013). Tackling corporate tax avoidance in a global economy: Is a new approach needed? London: the

Stationery Office.US Government Accountability Office. (2008). Comparison of the reported tax liabilities of foreign- and U.S.-Controlled corporations, 1998–2005. Washington,

DC: GAO. http://www.gao.gov/assets/280/278562.pdfUS Government Accountability Office. (2013). Effective tax rates can differ significantly from the statutory rate. Washington, DC: GAO.

http://www.gao.gov/assets/660/654957.pdfUS House of Representatives Committee on Ways and Means. (2010). Hearing on transfer pricing issues in the global economy. Testimony of martin A. sullivan,

Ph.D., economist and contributing editor tax analysts, 22 july. http://waysandmeans.house.gov/media/pdf/111/2010jul22 sullivan testimony.pdfUS Senate Permanent Subcommittee on Investigations. (2005). The role of professional firms in the US tax shelter industry. Washington, DC: GPO.US Senate Permanent Subcommittee on Investigations. (2008a). Dividends tax abuse: How offshore entities dodge taxes on US stock dividends. Washington,

DC: GPO.US Senate Permanent Subcommittee on Investigations. (2008b). Tax haven banks and U.S. tax compliance. Washington, DC: GPO.US Senate Permanent Subcommittee on Investigations. (2013). Offshore profit shifting and the U.S. tax code—Part 2 (Apple inc.). Washington, DC: US Senate.US Treasury. (2007). Report to the congress on earnings stripping, transfer pricing and U.S. income tax treaties. Washington, DC: US Treasury.

http://www.treasury.gov/resource-center/tax-policy/Documents/ajca2007.pdfUnited Nations Committee of Experts on International Cooperation in Tax Matters. (2014). Report on the ninth session (21–25 october 2013). New York: UN.

http://www.un.org/ga/search/view doc.asp?symbol= E/2013/45&Lang=EUnited Nations Finance for Development. (2014). Subcommittee on base erosion and profit shifting issues for developing countries. New York: UN.United Nations. (2013). Practical manual on transfer pricing for developing countries. New York: United Nations.United States Bankruptcy Court Southern District of New York. (2004). In re WorldCom inc., et al.,: Third and final report of dick thornburgh. Washington, DC:

Bankruptcy Examiner.Wallerstein, I. (1996). The interstate structure of the modern world-System. In S. Smith, K. Booth, & M. Zalewski (Eds.), International theory: Positivism and


beyond. Cambridge: Cambridge University Press.Weiner, J. M. (2005). Working papers No. 8: Formulary apportionment and group taxation in the european union: Insights from the United States and Canada.

Luxembourg: European Commission. http://ec.europa.eu/taxation customs/resources/documents/taxation/gen info/economic analysis/tax papers/2004 2073 EN web final version.pdf

Whittington, G. (1995). Tax policy and accounting standards. British Tax Review, 452–456.












http://www.publications.parliament.uk/pa/cm201314/cmselect/cmpubacc/112/112.pdf




















http://www.gao.gov/assets/280/278562.pdf

http://www.gao.gov/assets/660/654957.pdf

http://waysandmeans.house.gov/media/pdf/111/2010jul22_sullivan_testimony.pdf





























































http://www.treasury.gov/resource-center/tax-policy/Documents/ajca2007.pdf

http://www.un.org/ga/search/view_doc.asp?symbol= E/2013/45&Lang=E









































































http://ec.europa.eu/taxation_customs/resources/documents/taxation/gen_info/economic_analysis/tax_papers/2004_2073_EN_web_final_version.pdf

http://ec.europa.eu/taxation_customs/resources/documents/taxation/gen_info/economic_analysis/tax_papers/2004_2073_EN_web_final_version.pdf











