Words matter. History is full of examples where the wrong choice of words can have catastrophic consequences. One of the saddest stories was in the Korean war, when the British brigadier leading the Gloucester Regiment told his American commander that ‘things are a bit sticky’. The understatement was misunderstood and no reinforcements arrived, with tragic consequences.
For some reason, this story came to mind when I was reading the International Accounting Standards Board’s (IASB) exposure draft on Provisions – Targeted Improvements. In classic IASB fashion, this is not really about provisions but about levies. And it’s not really about levies, either; it’s about tax.
According to the OECD, the annual tax burden for OECD countries reached a record high in 2024, as a percentage of GDP. The UK is an exception, but only because the burden was even higher in the aftermath of the Second World War.
I started wondering why levies are called levies and not taxes
This has become a huge problem for OECD members as they strive to avoid excessive debt while providing ever higher levels of public spending. The short-term fix has been to raise taxes, often through stealthy means, while pretending that headline rates haven’t changed. I don’t think it’s an overstatement to say that this is one of the biggest economic and political problems that we face today.
Call it a tax
Being at heart still an engineer, I started wondering why levies are called levies and not taxes. Levies may come in various forms but they are all legally enforceable ways that governments use to extract money from companies. To me, that is a tax.
There are other examples of the taxes that companies pay that aren’t called taxes. Employers’ national insurance contributions are a payroll tax. Business rates are a local tax. Licences to operate are a tax. These taxes are also not usually visible to investors.
Unfortunately, the relevant standard – IAS 12, Income Taxes – as the name suggests, only covers income tax, ie tax on chargeable profits. All other government taxes are excluded. This means that other taxes have to be somehow shoehorned into places that don’t make much logical sense. I don’t know why the authors decided to exclude all other taxes, but this seems to me to be fundamentally misguided.
Taxes are borne not just by shareholders but also by customers
Coming back to levies, it makes no sense at all to treat these as provisions. The basis of calculation may not be taxable profits but, to anyone with vestigial common sense, this is just a tax by another name. It’s a spade, not a manually operated earth-moving implement.
The fix
I am a big believer in transparency and, by implication, effective communication. Transparency is almost always a good thing, and one big benefit is that we can have informed debates while being aware of all the relevant facts. This observation applies especially to tax. We urgently need to talk about taxes, how they are raised and who bears the biggest burden. We can’t develop solutions if we don’t know what the problem is.
Possibly for the first time in my life, I started thinking about this through the eyes of an economist. If I were to be ordained as an economist, I would be very interested in knowing how much tax companies really pay. These taxes are borne not just by shareholders but also by customers through higher prices and reduced competition as the burden deters new entrants. Under current IASB standards, such an analysis would be almost impossible.
The IASB’s conceptual framework states that standards should ‘contribute to transparency by enhancing the international comparability and quality of financial information, enabling investors and other market participants to make informed economic decisions’. Tax reporting fails this test. It’s time for a complete rethink, not tinkering with obfuscatory words.
