Dispatch (UK/ROW edition)
| by Paul Gosling 06 Mar 2008 Topic: News |
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half of non-doms 'intend to leave UK' More than half of the non-domiciled super rich currently residing in the UK will leave the country when the Government imposes an annual £30,000 charge on foreigners determined to keep their overseas income out of the UK tax net, according to a survey of tax advisers carried out by the Society of Trust and Estate Practitioners (STEP). About a third of non-doms now have well-advanced plans to sell properties and depart, the survey found. 'For the first time we can confirm that wealth generators are preparing to leave the UK in significant numbers,' said STEP's director of policy, Keith Johnston. 'We now know wealthy foreigners invest between £75bn and £125bn in the UK and pay £7.16bn in tax. Instead of generating more revenue, the Government's proposals will mean jobs, investments and tax revenue going abroad.' The impact of the departure will be underfunding of public services, argues STEP, which says the super rich pay 54 times more tax than the average UK taxpayer, including through indirect taxes such as VAT. As non-doms leave, they will withdraw from UK investments, damaging the broader economy, it predicts. One in six of UK taxpayers earning over £1m are non-doms, according to STEP's figures. Chas Roy-Chowdhury, ACCA's head of taxation, said that the Government's problems in implementing its tax changes on non-doms and capital gains tax illustrate the need for a new approach to setting taxes. ACCA is calling for the creation of a tax policy committee that would operate in a similar independent manner to that of the Bank of England's Monetary Policy Committee and would be tasked with creating certainty and transparency in the system. 'Following changes to non-dom rules announced recently by the Government, this is a wake-up call to radically change the setting of tax policy,' said Roy-Chowdhury. 'The recent to-ing and fro-ing on important tax policy issues is damaging to UK Plc's reputation and creates an uncertain business environment. Government can no longer make decisions in isolation from key players, and a more consultative, open approach on policy is required. The tax policy committee would help to establish a more open, independent style.' The UK Government has breached its sustainable investment rule after nearly £100bn of Northern Rock guarantees were added to the national balance sheet, according to the Institute for Fiscal Studies (IFS). Even before Northern Rock's nationalisation, the Office for National Statistics had reclassified the liabilities of Northern Rock and the Bank of England as part of public sector net debt. This pushed the total net debt figure above the Government's self-imposed ceiling of 40% of GDP to about 45% of GDP. 'It is doubtless embarrassing to the Government that the Northern Rock saga is now likely to add around £100bn to public sector net debt, shattering Gordon Brown's pledge to keep it below 40% of national income,' said Robert Chote, director of the IFS. 'But most, or conceivably all, of the effect is likely to be temporary.' He added: 'Whether or not tax spending plans will need to change in response to this reclassification should depend only on the long-term impact of Northern Rock on public sector net debt, which remains uncertain.' The 40% sustainable investment rule was already under severe pressure, even before the Northern Rock crisis. More than half of Private Finance Initiative projects are off-balance sheet and the use of International Financial Reporting Standards from April is likely to have the effect of putting over £29bn of PFI debt on to the Government's accounts - potentially taking the public sector net debt figure up to 43% of GDP (or 48% now, with the inclusion of Northern Rock). Nor does this include all the Government's liabilities that are not currently included. According to the Treasury, at the end of the 2005 financial year the total figure for public pension liabilities was around £530bn, which is not shown on the Government's accounts - and some pensions analysts have suggested £800bn as a more realistic figure. Public sector net debt has risen significantly in recent years. After peaking at 43.8% of GDP in 1997, it was cut back to 29.8% in early 2002, before increasing steadily to 37.3% in December 2006 and then 37.7% a year later. Societe Generale is not merely the victim of the world's largest ever rogue trading scandal, it is also at the centre of a story that has profoundly shocked the banking world. The collapse of Barings Bank - brought down by a rogue trader portrayed by Ewan McGregor in a film - is arguably no big deal by comparison. It is not merely that Societe Generale lost €4.9bn and that the bank was, apparently, unaware of the scale of its exposure to trades undertaken by a single, not very senior, trader. More astonishing still is the fact that the same trader had apparently accumulated a notional profit of €1.5bn last year on similar deals - and the bank was, it says, similarly unaware of the position. The first and very preliminary investigation into a scandal that rocked French banking has been published by Finance Minister, Christine Lagarde. Perhaps unsurprisingly, the report concluded that the bank's internal controls were lax - as if it could say anything else in the circumstances. But the number of questions confronting the bank go beyond even what might have been assumed when the losses initially came to light. Societe Generale has been accused of failing to act on previous warnings about the adequacies of its internal controls from the Bank of France. It has also emerged that Eurex, a derivatives clearing house, had expressed 'concern' at a position taken by the trader at the end of last year (when the trades were still in profit). The Lagarde investigation found that unauthorised trades have been carried out for over two years. Lagarde's report raised the possibility of increasing sanctions against institutions that suffer fraud. The report also expressed unhappiness that the bank did not inform the French Government about the scandal until after Societe Generale unwound its positions. According to the trader, Jerome Kerviel, the bank had communicated with him on several occasions about his position. Kerviel is accused of disguising his trading activities by seeming to set up hedges that did not really exist. It is not suggested that Kerviel was aiming to directly profit from these false and unauthorised trades. However, prosecutors have raised the theory that the trader may have been motivated in part by trying to increase the size of his annual bonus through activities that got out of hand (a charge Kerviel's lawyers have denied). It seems likely that much more will yet emerge about the near collapse of Societe Generale, which is forcing the bank to launch an emergency €5.5bn rights issue. Christian Noyer, governor of the Banque de France, said the affair was 'unbelievable'. 'Frankly,' he added, 'I can't explain it.' Deficits in defined benefits pension funds could increase substantially under proposals from the UK's Accounting Standards Board (ASB) that funds should use more conservative assumptions to determine the discount rate applied to calculate the size of liabilities. Instead of the high quality corporate bond rate required by current accounting standards, schemes would be required to use a risk-free rate. The change would significantly increase liabilities. Under a second ASB proposal, funds would become unable to smooth changes to the valuations of assets and liabilities, which would in future be recorded in the period in which they arise. The ASB says this would introduce to the accounting of pension funds the same principles used in other accounting standards. The ASB is seeking to influence the IASB as it reviews the IAS 19 pensions standard. John Hawkins, principal at pension fund advisers Mercer, said: 'If accepted, the ASB proposals will fundamentally change what companies do over the longer term. For example, finance directors are going to face a trade-off between the higher return expected from equity investments and the volatility equities will bring - and whether they can justify that to directors and investors. There will be some who can do this, particularly at the larger companies, but it will be a real issue for smaller and medium-sized firms, especially those with large pension schemes.' Hawkins argued that the proposals will add to pressures on companies to close defined benefits schemes, or find other ways of offloading liabilities. 'The recommendations will take a long while to come through in revisions to FRS 17 or IAS 19,' he conceded. 'However, the lower discount rate, if adopted, will push pension liabilities in the balance sheet closer to buy-out, so may further increase the pressure on trustees and sponsors to consider this in future as a relatively "cheap" alternative.' A potential further £75bn in fund liabilities may be created, according to scheme advisers Aon, because of the requirement from the Pensions Regulator to use more cautious mortality assumptions. new pressure on off-balance sheet accounting Incentives that drove banks to move high risk liabilities off-balance sheet have been reduced by Basel II, according to the Bank for International Settlements (BIS). Banks are now encouraged to manage risks appropriately, backed by relevant capital reserves, according to a report from the BIS' Financial Stability Forum. BIS argues 'significant steps' have now been taken by banks to improve their disclosure of off-balance sheet vehicles, though it accepts this has not yet meant that there can be confidence in the total scale of losses associated with bad and fraudulent sub-prime debt in the US. Further work also needs to be carried out to provide greater reliability in the valuation practices for structured products, with a means for conducting useful comparisons. Securities regulators and supervisors are now involved in developing enhanced disclosure regimes, backed by improved information sharing between each other and with central banks. Failures that led to the credit crunch included poor investor due diligence practices, involving excessive reliance on credit ratings agencies; limited understanding of the nature of ratings and the character of complex financial instruments; and inadequate use of information provided, said the Forum. It also criticised the limited nature of banks' public disclosures of off-balance sheet exposures and compensation arrangements that failed to sufficiently discourage risk-taking. The Forum's interim report has now been sent to G7 finance ministers and central bank governors. A final report will be published, with recommendations, in April. Meanwhile, the International Organisation of Securities Regulators has commenced meeting to strengthen its regulation of credit ratings agencies. Concern has been expressed that the move to Basel II banking regulation is increasing the role of agencies in assessing whether banks have met liquidity requirements. The National Audit Office (NAO) faces substantial reform, following a comprehensive review of its corporate governance arrangements conducted by John Tiner, the former chief executive of the Financial Services Authority. The review was conducted for the House of Commons Public Accounts Commission and was sparked by criticism of expenses claims submitted by the now retired Comptroller and Auditor-General, Sir John Bourn. Under the arrangements preceding his retirement, Bourn had almost complete control of the NAO. Tiner's report recommends that the NAO be restructured into a corporate body accountable to a governing board that comprises a majority of independent non-executive directors. The board would not interfere in the audit judgements of the Comptroller and Auditor-General - who would also be NAO chief executive under the new arrangements. Instead, the board would concentrate on ensuring that the NAO fulfils its role in an economic, efficient and effective way, meeting the highest standards of governance and internal controls. The Comptroller and Auditor-General would be appointed for a single fixed term of eight years. This is in stark contrast to Bourn's 20-year term of office, which only ended because he chose to resign when faced with a conflict of interest with another role as chairman of the Financial Reporting Council's Professional Oversight Board. Under the Tiner proposals, NAO non-executive directors, including the chairman, would be appointed for a term of three years that could be renewed once. Tiner also briefly considered the question of whether the NAO, which audits central government, should merge with the Audit Commission, which audits local government (though both are involved with auditing health bodies). He indicated that his preference was not to pursue a merger in the short-term as this 'would slow down the governance reforms necessary at the NAO', but the matter might be reconsidered in six years or so, when the reforms have bedded in. There should be closer collaboration between the two audit bodies, both at working level and through an exchange of board members, said Tiner. A new Comptroller and Auditor-General has now been appointed on an interim basis, at least until the Public Accounts Commission's reforms are put in place. Tim Burr is 57 and had been Deputy Auditor-General for seven years, and with the NAO since 1994. Previously, he was with the Treasury, where he was a public expenditure analyst, and at the Cabinet Office. in brief...
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