Tax Break

Essential reading: Diamond Foods accounting, Swiss turmoil, GOP budget, uncertainty on Indian taxes, UK bonuses, and more

March 19, 2012

Representative Paul Ryan (R-WI) will submit a GOP budget proposal Tuesday. REUTERS/Joshua Roberts

Welcome to the top tax and accounting headlines from Reuters and other sources.

* Seeds of trouble sown at Diamond Foods years ago. Nanette Byrnes, PJ Huffstutter and Mihir Dalal – Reuters. The accounting scandal at snack maker Diamond Foods in recent months may have shocked shareholders and some California walnut farmers. But a number of accounting and industry experts spotted red flags some time before. A close examination of business practices at Diamond Foods points up a number of warning signs, including unusual timing of payments to growers, a leap in profit margins, and volatile inventories and cash flows. The picture that emerges is of a company that for years seemed to push hard on every lever to meet increasingly ambitious earning targets and allowed top executives to pull in big bonuses, according to interviews with former Diamond employees and board members, rivals, suppliers and consultants, in addition to reviews of public and non-public Diamond records. Link

* Baer chairman steps aside, to deal with U.S. probe. Martin de Sa’Pinto and Emma Thomasson – Reuters. The chairman of Swiss private bank Julius Baer will head a special committee dealing with a U.S. tax probe after leaving his current role, underlining the pressure Swiss banks are feeling from claims they helped wealthy Americans dodge taxes. Raymond Baer, a 52-year-old member of the bank’s founding family who has been at the group almost 25 years and served as chairman for nine, will become honorary chairman of the bank as of its next shareholder meeting in April. As part of that new role, he has been elected to chair a special committee overseeing cooperation with U.S. authorities, the bank said on Monday. Link

* House GOP’s Ryan to unveil new budget. Rosalind Helderman – The Washington Post. Congress is preparing to renew its bitter fight over government spending, as both parties eagerly await the arrival Tuesday of a new budget plan authored by Republican Rep. Paul Ryan. A year ago, embracing Ryan’s budget with its deep spending cuts and a proposal to privatize Medicare, became a badge of loyalty for conservatives. Democrats, meanwhile, used the plan as a political cudgel, accusing the GOP of working to end the retiree health program. Republican leaders believe it is critical to unify the often fractious House GOP around such a document, in part to contrast the Republican-led House with the Democratic-led Senate, which has failed to pass a budget, as required by law, in nearly three years. Link

* India government’s proposed new tax rules reopen raw wounds. Henry Foy – Reuters. India’s proposal to back-date tax claims on overseas deals involving local assets throws foreign investment into fresh uncertainty, experts and industry figures said, potentially reopening old legal battles and clouding business sentiment. In his budget on Friday, Finance Minister Pranab Mukherjee sought a retrospective amendment to 50-year-old tax laws, stirring a legal hornets’ nest and resurrecting a dispute that many hoped had been put to bed. Vodafone prevailed in a January Supreme Court ruling that found it did not have to pay tax in India on its $11 billion deal to enter the country. Business groups hailed the decision as bringing clarity to the country’s investment climate after a year of government scandals, slumping economic growth and policy paralysis eroded investor confidence. Link

* UK’s Osborne will target low earners in budget. Ainsley Thomson – The Wall Street Journal. The bulk of the measures in Wednesday’s budget will be aimed at helping low and middle income earners, UK Chancellor of the Exchequer George Osborne said Sunday, in a move likely to appease junior coalition partners the Liberal Democrats. In recent days there have been a number of reports that Osborne will abolish or reduce the top income-tax rate of 50 percent on earnings over 150,000 pounds ($237,700). Business groups have called on the government to cut the tax, arguing that it doesn’t raise additional revenue and discourages entrepreneurs. Osborne declined to comment on the matter Sunday, saying an assessment from the tax department on what revenue the tax is raising would be published alongside the budget. Link 

* Tax appeals likely after bonus ruling. Jane Croft and Vanessa Houlder – The Financial Times. HM Revenue & Customs is facing a slew of appeals against its decisions after two investment banks fought a ruling that they had used a tax avoidance scheme on bonuses. UBS and Deutsche Bank have just finished an appeal against a first tier tax tribunal ruling, which in the case of UBS found that it had devised schemes in 2003-04 to avoid paying 36.9 million pounds ($58.46 million). In the appeal, HMRC claimed in written arguments obtained by the Financial Times that UBS was “not alone” and its scheme was devised in conjunction with Ernst & Young and Deutsche’s scheme was devised by Deloitte. Link

* Plan to clamp down on flagrant tax abuse. Vanessa Houlder – The Financial Times. A powerful weapon against aggressive tax planning is set to be in Wednesday’s budget, as part of a drive to deter avoidance and demonstrate the wealthy are paying a fair share of revenues. George Osborne, the chancellor, is expected to announce that a general anti-avoidance rule (GAAR) will be introduced in 2013, after a consultation during the summer. The proposed measures will be narrowly focused on curbing the most abusive and contrived schemes, in an effort to allay concerns from business about the uncertainty that could be introduced by a broad-brush anti-avoidance rule. Link

* That wishful thinking about tax rates. Christina Romer – The New York Times. A family’s marginal tax rate is what its members pay to the government if they earn another dollar. In a new study, David Romer and I found that an increase in marginal rates on an income group leads to a decrease in its reported taxable income relative to other groups. Most obviously, the federal budget is on a collision course with reality. Reining in the long-run deficit will have to involve slowing the growth rate of spending. But unless we choose to gut Medicare and Medicaid, additional tax revenue will be needed. This essential truth is the No. 1 factor that should be driving tax policy. Link

* A tax and energy plan to re-elect Obama. Harold Ford Jr. – The Wall Street Journal opinion. President Barack Obama should consider joining virtually every other industrialized nation by moving to a territorial tax system, which would tax income in the country in which it was earned and eliminate the threat of double taxation. This would help U.S. companies compete overseas and bring their profits home. The president kicked off the year with a number of strong initiatives including a plan to cut the corporate tax rate. It was a great start, but it doesn’t go far enough and it could end up costing many American companies. That’s because his plan eliminates many tax deductions on foreign-based income these companies currently receive. Link

* The U.S. is number one. The Wall Street Journal editorial. April 1 is a date that every politician and business executive in America should circle on the calendar. That’s when Japan cuts its corporate tax rate to 36.8 percent from 39.5 percent. The United States will then hold the title of highest corporate tax rate, with average combined federal and state profit levies of 39.2 percent. Now almost everyone – even President Barack Obama – agrees that it’s time to act. Obama unveiled a plan last month to chop the federal rate to 28 percent, but at the same time it would impose such a high penalty on U.S. firms with overseas operations that business groups rightly say the plan would be worse than doing nothing. Link

($1 = 0.6312 British pounds)

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