Country-by-country reporting – a new report

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The Task Force on Financial Integrity and Economic Development has just published a new report on country-by-country reporting. Available for free download, the report details a new system of accounting for multinational corporations (MNCs) designed to increase transparency and curtail tax evasion.

Termed “country-by-country reporting” the new protocol would require MNCs to disclose the full details of their commercial transactions by jurisdiction. As much as 60 percent of global trade currently take place within MNCs, which are not required to disclose many salient details of their trade practices under the existing regulatory framework. Global Financial Integrity director Raymond Baker said in his forward:

Tax evasion by multinational corporations is one of the greatest drivers of illicit capital flight out of the developing world. County-by-country reporting is a low-cost, readily implementable way to ensure better business compliance with tax policy and fair business practices. The Task Force applauds the UK’s announcement earlier this week that it would push for country-by-country reporting at next week’s meeting of the Group of 20 in Berlin.

I make due disclosure: I’m the author of this report. And I’m delighted we’ve been able to get it out at such an important moment.

As the report notes, there are lots of good reasons for country-by-country reporting. Start with these benefits, which demonstrate why we think this is an issue for shareholders as well as stakeholders in the worlds multinational corporations:

• Provide a perspective which is not currently available of the geo-political risk inherent within the companies in which they have invested.
• Let them appraise the governance risks a corporation takes. Almost all major corporate failures in recent times have been associated with intra-group trading, complex group structures and tax haven activity. All of this is disclosed by country-by-country reporting, and as such it would provide a new perspective on governance risk;
• Allow appraisal of the vulnerability inherent in a corporations internal supply chains since these will be reported for the first time under country-by-country reporting. For example, if a supply chain was critically dependent upon a politically unstable state it would be very important that the shareholders are aware of this fact, and that they are able to quantify it. Country-by-country reporting would permit this;
• Allow appraisal of the sustainability of the tax charge within the accounts of the company. At present this is very difficult to do since it is not disclosed where the tax is actually either due or paid. If it became apparent that the tax rate the company was reporting was dependent upon tax haven / secrecy jurisdiction activity then investors might presume that the rate was not sustainable. This has a significant impact on perceptions of share valuation because these are often linked to the ratio of after tax earnings per share to the share price (the so called price / earnings or P /E ratio). Availability of this data is, therefore, important for investors.

Country-by-country reporting really does have the capacity to transform financial reporting for the betterment of all users of financial statements.

That’s why it is time it happened.