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Comparative Experiences and Multidisciplinary Approaches: Accounting Law Perspective

Kerrie Sadiq

Accounting, Auditing, and Accountability

• Institutional Framework:

– Disclosure regimes under which financial reporting requirements are set. – Requirements vary depending on the type of entity and the level of public interest in the entity.

• Accounting: The accounting

standards (IFRS, AASB, GAAP)

• Auditing: independent opinion to the

shareholders on the truth and fairness of the financial statements

• Accountability (Transparency): sources of

information used by investors, analysts, creditors and the entities themselves

Understanding the Implementation of Tax Standards through Accounting Research

ACCOUNTING MEASURES AND MAKES VISIBLE CERTAIN ECONOMIC EVENTS. ACCOUNTING RESEARCH EXAMINES HOW ACCOUNTING IS USED BY INDIVIDUALS, ORGANIZATIONS AND GOVERNMENT AS WELL AS THE CONSEQUENCES THAT THESE PRACTICES HAVE.

AS A TYPE OF ACCOUNTING RESEARCH, TAXATION RESEARCH EXAMINES TAXATION-RELATED ISSUES SUCH AS MARKET REACTIONS TO TAX DISCLOSURES AND TAXPAYER DECISION MAKING AND THE RELATIONSHIP BETWEEN ACCOUNTING INFORMATION AND TAX AUTHORITIES.

What does Accounting Research have to do with Legal Transplants? It’s about the data!

• Qualitative
• Quantitative

That is, we can look at the data on ‘law in action’:

• Archival data
• Evaluative data
• Statistical data
• Surveys on perceptions
• Data on the quality of

laws/standards

Case Study #1

Sadiq, Kerrie, Sawyer, Adrian & McCredie, Bronwyn (forthcoming) “Jurisdictional responses to base erosion and profit shifting: a study of 19 key domestic tax systems” eJournal of Tax Research

• The objective of this study is to consider the implementation of both

G20/OECD BEPS initiatives and unilateral reforms in 19 jurisdictions.

• A qualitative approach is undertaken in this study alongside an overarching

interdisciplinary socio-legal and accounting-transparency position. This position involves an analysis of theoretical, legal and policy concepts within both a social and current legal and accounting context. The research questions are addressed within the legal and accounting frameworks using current policy discussions to assess domestic developments of the OECD’s global BEPS recommendations.

Objective…

To consider the implementation of both G20/OECD BEPS initiatives and unilateral reforms in 19 countries to advance the knowledge of the profession and the global community. To this end, the following countries are included in this study/preliminary survey:

Australia New Zealand Canada Nigeria China Philippines Hong Kong Singapore India South Africa Indonesia Thailand Japan the United Kingdom Korea The United States Malaysia Vietnam The Netherlands

Preliminary Results – Descriptive Data

• according to the level of

involvement in global tax policies;

• the sophistication in their

ability to implement global recommendations; and

• the degree of base erosion

and profit shifting at a domestic level.

Countries do not operate in similar political, social and economic climates and as such each country varies:

• OECD member status;
• G20 member status;
• region;
• level of development;
• financial complexity; and
• import versus export status of

each country.

We therefore investigate and analyse the economic, political and social aspects

• f each

relevant jurisdiction by discussing:

Preliminary Results – Descriptive Data

1. OECD member status

• The OECD is a key player in the

development of the base erosion and profit shifting (BEPS) program

• OECD is made up of 35 countries and five

key partners

• Biggest criticism of the OECD is its lack of

inclusion of developing nations due to the narrowness of its membership

• OECD members represent:

– 63% of world economy – 75% of world trade –

• ver 50% of world energy

consumption – but only 18% of world population

• Surveyed countries:

– eight (42%) OECD Member countries, – eleven (58%) non-Member countries, four (21%) are OECD Key Partner countries

Preliminary Results – Descriptive Data

• 2. G20 member status
• G20 membership is

much broader and inclusive: China, India, Indonesia, and South Africa are members

• Surveyed countries:

– ten (52%) G20 Member countries, – nine (47%) non- Member countries

Preliminary Results – Descriptive Data

5. Financial complexity

• Measured using TMF Group Financial Complexity Index (2017)

– Parameters: compliance, reporting, bookkeeping and tax – 1 = highest level of complexity, 94 = lowest

• Surveyed countries:

– Vietnam most complex (5), Hong Kong least complex (91) – Developing countries have a greater financial complexity (average 39/94) than developed jurisdictions (67/94). This is statistically significant (t-stat 2.30, p-value 0.03).

Case Study #1

Action 14 Existing legislation deemed sufficient Actions taken Actions in progress Concern expressed / commitment given No action Total 1 5 5 6 2 Developed 4 3 Developing 1 1 2 6 2

Engagement with Action 14

Action 13 Existing legislation deemed sufficient Actions taken Actions in progress Concern expressed / commitment given No action Total 14 3 2 Developed 7 Developing 7 3 2

Engagement with Action 13

Case Study #1

Case Study #1

• To quantify and compare overall

jurisdictional response to these actions and measures, a rank score was determined based on the level

• f engagement. A score of 4 was

given for each action/measure where the jurisdiction’s existing legislation was deemed sufficient. A score of 3 was given where jurisdictions had taken action, 2 where actions were in progress, 1 where commitment was given or concern expressed and 0 if no action was undertaken at all. The results of this ranking exercise are reported as follows:

Case Study #1

Case Study #2

McCredie, B and Sadiq, K “Is Transparency the New Politics of Tax and Corporate Social Responsibility?”

To determine whether corporate attitudes towards tax are changing, representations about the corporate entity by a variety of stakeholders and through numerous channels were analysed using Leximancer software. These representations were in response to four distinct Australian domestic tax reform measures instituted during and subsequent to the Australian Government Senate Inquiry into corporate tax avoidance. The use of Leximancer, a data analysis and mapping software that automates the coding

• f document text,

delineates concepts, and identifies themes, is well-suited to the nature and size of the data employed and ensures the validity and reliability of the results.

Theoretical basis

• 1. Artificial entity view
• 2. Aggregate view
• 3. Real entity view

The corporation is an extension of the State and, as such, simply paying tax fulfils the corporation’s CSR obligations to the State The corporation as the sum of its shareholders and CSR activities are considered excessive as they do not maximise profits and value for those shareholders. The corporation is an individual, which is a separate entity from both State and shareholders, and has a legal responsibility to pay taxes and the social conscience to not engage in overly- aggressive tax planning to minimise its tax obligation. (CSR becoming 4 dimensions: ESGT)

Hypothesis

• In response to domestic tax

reform measures, corporates are transitioning from an ‘aggregate’ to a ‘real entity’ view, instituting tax as an additional dimension of CSR.

Data and methodology

• Examine the impact of domestic

tax reform actions (direct and indirect) on corporate attitudes

• Corporate attitudes are

evidenced by representations about the corporate entity by: – a variety of Individuals: CEO’s, management, public relations etc. – via numerous channels e.g. company disclosures, reports and public appearances

• Tax reform measures are

identified based on an Australian case study

Timeline

29/9/14 "Who pays for our Common Wealth? Tax practices of the ASX 200“ published by TJN and United Voice 2/10/14 Federal Government Senate Inquiry into tax avoidance and aggressive minimisation announced and referred to the Economics References Committee. August 2015 First Senate report: “You cannot tax what you cannot see” April 2016 Second Senate report: “Gaming the system” 17/12/15 Release of first Report of Entity Tax Information by the ATO detailing 1500 public corporations’ Total/Taxable Income and Tax Paid for the 2013/14 FY 11/12/15 Consultation paper on the voluntary tax transparency code (TTC) released by the Board of Taxation 29/1/16 Submissions in relation to the TTC consultation paper are due 15-16/11/14 G20 Brisbane Summit: Australia hosts G20 leaders. Discussion includes tax avoidance and development of the Base Erosion and Profit Shifting (BEPS) Action Plan 27/10/14 Letters sent inviting stakeholders to make a submission to the Senate Economics Reference Committee's inquiry into corporate tax avoidance and minimisation. Senate Inquiry into corporate tax avoidance public hearings: 8/4/15 (Sydney) 9/4/15 (Canberra) 10/4/15 (Melbourne) 22/4/15 (Sydney) 1/7/15 (Sydney) 18/11/15 (Sydney) 21/4/16 Senate Inquiry into corporate tax avoidance public hearings: (Canberra) 3/5/16 Final report on TTC. Companies encouraged to adopt TTC for year ending 30/6/16 … 8/12/16 Second Report of Entity Tax Information for the 2014/15 FY

Data and methodology

• Reform measures selected for analysis:

– 127 corporate submissions to the Senate Economics Reference Committee's inquiry into corporate tax avoidance and minimisation. Sample reduced to 70 corporate representations. – The transcripts to the Senate Inquiry into corporate tax avoidance and minimisation, which comprised 7 public hearings and 120 witnesses (including Google, Microsoft, Apple, Newscorp and Chevron, to name a few). Sample reduced to 52 witnesses representing corporates. – 18 submissions to the tax transparency code (TTC) consultation paper released by the Board

• f Taxation.

– 52 voluntary tax transparency reports adopted in line with the TTC (June 2017).

Data and methodology

Primary analysis of the data was qualitative, with corporate representations thematically analysed to specifically identify corporate attitudes towards tax. To accomplish this the concept of ‘tax’ was flagged as the key concept in each Leximancer project to which the association or proximity of all other concepts were mapped. As a result, major themes were identified for each corporate tax reform measure with the sense and significance of these themes determined via excerpt analysis.

Leximancer

• “Text in - Insight Out”
• Leximancer automatically analyses text

documents to identify the high level concepts in the text documents, delivering the key ideas and actionable insights needed with interactive visualisations and data exports.

Findings

• 1. Submissions to the Senate Economics Reference Committee

Findings

• 1. Submissions to the

Senate Economics Reference Committee

• Overall, corporate attitude in response to the senate

inquiry is one of frustration and disgust.

• The main themes of ‘avoidance’ and ‘Australian’

captures corporate views on the adequacy of extant tax legislation and their adherence to it.

• “Australia’s existing tax system is already

considered to be robust internationally in preventing tax avoidance” Ernst & Young

• “Companies are complying fully with Australia's

tax laws” Pfizer Australia

• The ‘Income’ theme captures corporate disgust at

their treatment in the media and the deficiencies of the TJN report

• “ETR’s are being distorted” Lend Lease
• “The TJN computations and conclusions

drawn, in substance, lack accuracy or reasonableness” Toll

Findings

• 2. Transcripts to the Senate Inquiry into corporate tax avoidance

Findings

• 2. Transcripts to the

Senate Inquiry into corporate tax avoidance

• Overall, the corporate attitude represented in the senate inquiry

transcripts was insolence and brusqueness.

• The main theme of ‘paid’ captures the brusque (and often

vague) explanations submitted by corporations with regard to their tax obligations.

• “It is a large business, and the figures are in the

submission in front of you” BP

• “As we are a private company, I am unable to disclose

the amount of profit that we reported in 2014” Airbnb

• The ‘Australian’ theme captures corporate attitudes towards

Australian laws, declaring either compliance or contempt.

• “The disadvantages that we see are when there is more

risk created for the business because of the uncertainty … of the Australian tax regime.” Origin Energy

• “At any given time in the ordinary course (of business), I

would expect that we would be in discussions with the tax office as regards our interpretation of the law. That is particularly because of the complexity of the Australian tax laws” BHP Billiton

Findings

• 3. Submissions to the Tax Transparency Code (TTC) (Jan 2016)

Findings

• 3. Submissions to the

Tax Transparency Code (TTC) (Jan 2016)

• Overall, the corporate attitude represented in the tax

transparency code submissions is proactive and conciliatory.

• The main themes of ‘affairs’ and ‘public’ captures corporate

willingness to disclose information about their tax affairs.

• “We welcome the introduction of a TTC in Australia as

we believe that transparency is critical for the public to have trust and confidence in the integrity of the Australian tax system ” BHP Billiton

• “Viva Energy recognises the importance of the wider

community having trust in the tax system, and consistent with that, Viva Energy has been, and will continue to be, actively engaged in an open and transparent dialogue with relevant stakeholders” Viva Energy

• The ‘transparency’ and ‘income’ themes capture proactive

corporate attitudes reflecting commitment and counsel, respectively, to develop the TTC.

• “The voluntary TTC code should be developed

progressively, and consistently, with transparency initiatives in other countries” Brambles

Findings

• 4. Voluntary Tax Transparency Reports (May 2016 on)

Findings

• 4. Voluntary

Tax Transparency Reports (May 2016 on)

• Overall, the corporate attitude represented in the

voluntary tax reports is positive and open.

• The main themes of ‘tax’ and ‘paid’ captures the

progressive and transparent explanations submitted by corporations with regard to their tax obligations.

• “On behalf of the Board, I am very pleased to

present the inaugural Tax Contribution Report for Wesfarmers Limited for the 2016 financial year … including transactions with international related parties, along with our approach to tax strategy and governance” Wesfarmers

• “Further information is provided in the tables

below to enhance transparency” BTIM Group

• “This table shows the total of all tax payments

for each of the main countries where the Rio Tinto Group has revenue generating operations

• r projects.” Rio Tinto
• The ‘expense’ theme captures narratives and

reconciliations of income tax expense.

Findings

• Corporate attitudes have changed over the

course of these reforms from: – frustration and disgust – insolence and brusqueness to – proactivity and conciliation – positivity and openness

• Provides evidence of corporations:

– transitioning from:

• an ‘aggregate’ – CSR activities

considered excessive (negative)

• to a ‘real entity’ view – CSR

activities considered socially acceptable (positive) – instituting tax as an additional dimension of CSR

Characteristics of regulatory approaches

Monitoring Standard Elevated Discretion Elevated Empowerment-based approach Mixed approach Standard Pre-regulatory state Compliance-based approach

(Adapted from Figure 1 of Lail et al. 2015)