Dennis Howlett has posted an interesting piece on IFRS8 and the campaign, of which I am a part, to require that companies disclose trading information on a country by country basis. He does though makes a couple of errors I must correct. First of all, this is not a Tax Justice Network driven campaign. It is promoted by Publish What You Pay, which, as it says on its web site, is
a coalition of over 300 NGOs worldwide calls for the mandatory disclosure of the payments made by oil, gas and mining companies' to all governments for the extraction of natural resources. The coalition also calls on resource-rich developing country governments to publish full details on revenues. This is a necessary first step towards a more accountable system for the management of natural resource revenues.
I would not, however, dispute that it is the Tax Justice Network that is helping promote the wider call for disclosure by all companies.
Second, we do not see this primarily, as Dennis suggests likely, as:
an opportunity to challenge amounts declared as due and paid against the amounts that are at least theoretically due under prevailing rates of tax in the countries concerned.
I won't deny that is a use for the data. And if more effective accountability for taxation is to be part of the appropriate standards for governance that must be on the 21st century accounting agenda then that's appropriate. That question has to be asked, and answered by companies. But there's much more to this than that. At its core this call reflects the fact that good corporate citizenship is impossible if the company is not located in a space and can therefore identify those to whom it is accountable. Likewise, people need to know who is accountable to them. So this is about vastly more than tax at the end of the day. It's about governance, stakeholder relationships, the contribution an entity makes to the locations in which it works and its accountability to governments, employees, stakeholders and (not least) shareholders. The last is very important. Much shareholder abuse is done by companies who undertake complex financial engineering in offshore locations. The proposed standard will indicate the degree to which that is happening. There is clear evidence (noted in the WSJ the other day) that these companies do not perform as well as those who concentrate on making money.
Most important though, this standard will indicate the extent to which companies are seeking to support the countries in which they work, and those who are simply taking their money and fleeing, which is counter to the development culture. The potential gains for society from this standard are, as a result enormous.
But as Dennis rightly notes, there are objections. He correctly quotes this from the semi-official IASBPlus web site:
Legal entities within a consolidated group are often set up to comply with particular legal or regulatory requirements, yet the business can often be run on a cross-border/cross-entity basis. As a result, business performance is often not considered at a legal entity level, since it is a largely artificial distinction. Collecting segmental information for such entities, where it will typically not be readily available, is likely to be costly and of little benefit to users and because the information provided would not reflect how the business is run i.e. it is not conducted within the context of that single entity…the Board agreed to include in the final standard a scope exemption.
I do not buy this argument for one minute, although I hear it often. Apart from the curiously Marxist overtone because it implies, as Marx suggested, that capital roams free without ties, the reality is that transactions do have to be located in a space for reporting purposes. The reason is straightforward. They have to be taxed, and as such the claim made by those who say they neither think or report in this way is wrong. They do. They have to. In other words this is an excuse.
Curiously these comments are almost always made in the same breath as someone mentions transfer pricing to me. I know all the problems inherent in modern transfer pricing (I assure you). But ultimately these issues also have to be resolved, and are. Most tellingly though, at the IASB meeting in September when this issue was discussed and I was present one IASB member said very loudly and on camera (and I admit I now paraphrase):
This looks like transfer price reporting and we've always agreed we don't want to go there
Why not, I ask? Is it because transfer pricing abuse is the main way by which business strips cash out of the developing world? Raymond Baker estimates in Capitalism's Achilles Heel that $500 million of capital flight takes place from the developing world a year, and maybe 80% of this is by way of transfer mis-pricing.
When people ask us why so many NGOs are concerned about this issue, that's the real answer. We're concerned for the poor. They are the stakeholders of these companies. And we think that those companies are accountable for their actions to the poor of the world, those who will never be rich enough to be shareholders in them but who stand as equal citizens of the world with those who are.
Yesterday someone said to me that I should pay more attention to accountants. I try to. I think they're really important people. I am one, after all! But, and I have to be candid, major reforms of any industry are not promoted from within. Sweeps did not stop sending children up chimneys by choice. They were required to stop. Likewise, the world's polluters did not start the green movement, but it's now mainstream. The examples are endless, and stretch over a long history. That is why of course accountants are important when it comes to tax and accountability, but the key audience in this debate is outside the profession, and industry. And it's because of the massive support that this cause has outside accountancy and commerce that I think change will take place.
Oh, and Dennis asks, who will be consulted? A good question. Well one that was noted as being on the list was the UN. UNCTAD is committed to country by country reporting within its own recommendations for accountable reporting. That's one likely supporter. Others are lining up. As the vice-chairman of a major investment bank said to me last week when he'd hear a presentation by me on both tax compliance and this issue:
"You're asking for motherhood and apple pie Richard. No one can refuse that."
But he added the word of caution on which I agree with Dennis: this might take a little while. I'd rather not wait, but if I have to I will.
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I won’t do a ‘nit’ on the TJN thing Richard. Let’s say I see lots of similarities. It might be useful to provide a list of the organisations with which you are involved in the sidebar? Use a text widget and add links?
Another objection I can see *under the current custom, and practice* and one which you almost imply: the degree of disclosure you are requesting means we could end up revealing information that is competitively sensitive. That was the original thought behind early IFRS8 objections. There is some commercial value to that though I personally think it is overblown.
They will similarly argue that it is in the shareholders’ interests as investors in individual companies, that cash is retained to fuel additional growth. If that means working within structures we are legally allowed to use then so be it. It is not for us to transfer to our shareholders the moral dictats of others where there is no basis in law.
Senior management will also say that part of their reward comes from improving value to our stakeholders. Most of that value comes from the people we employ so we can leverage that talent more effectively in structures that allow us to keep capital as liquid as possible.
You’ve hit an interesting one with the reference to Marx though I doubt he would agree with your interpretation: Capital is a concept, ephemeral though it has a value. Places are physical realities. Does capital therefore have to be located? Not necessarily and certinaly not for the efficient operation of global organisations that are constantly managing capital to provide best usage for shareholders. Locations merely provide the conduit through which capital efficiency is achieved. Given todays’ 24×7 electronic markets – which you’re not going to wind back – this kind of disclosure becomes a very real stumbling block. Apart from the economic argument, which has as its backdrop a strong consumerism flavour – at least in developed countries.
As an aside, I can see a GAAR timetable that fits recent announcements. Have you spotted that Richard?
Dennis
Several interesting points:
1) I’ll try to do that list – you’re not the only person who gets confused about which hat I am wearing, when
2) I am sure the ‘commercially sensitive information’ argument will come up. There are reasons for not worrying. a) All companies will be subject to it b) markets work best when everyone knows what is going on c) the reality is that most of this stuff is know by the companies anyway. It’s a charade that suits the companies, and most of all the governments, that it is not. Governments are especially at fault here and have to be brought to book.
3) I’ve no problem with growth. But companies that do it by entrepreneurial activity and by honest means are the ones that should attract capital. This standard will help them get the funds they need at lower cost. How can anyone object to that?
4) Re Marx – I think we agree – I am arguing that the companies are using a Marxist argument, and I am not. But I see no prosect of it being agreed that a trade should not be located in a place. As a matter of fact, the people who drive them are. The current rules of association that we have may not be good enough. But location will continue, I am sure.
Richard
Not clear about the Marx debate going on here. Are you using it as a positive or negative?
It is worth commenting that Marxist economics is often misquoted, and mostly misunderstood. But it should be possible to take an intellectual view without getting bogged down in the politics.