Country-by-country » Tax Research UK

Transparency International, big oil and country-by-country reporting

Accounting, Corruption, Country-by-country, Development Comments Off

Feb 232012

Transparency International had this letter in the FT today:

The position expressed by the large oil companies (“Shell joins push to dilute EU’s proposed anti-corruption rules”, February 20) that disclosing information on a country-by-country basis of their operations will not “help combat corruption” is counter-intuitive at best and misrepresentative at worst.

Citizens, investors and civil society, especially those in developing countries, must have relevant information in order to determine the full extent of the activities of these companies. Multinational businesses generate revenues and profits in resource-rich countries and so should contribute to the public coffers through royalties, taxation and the like. In the absence of country-by-country reporting by companies or disclosure of this information by countries, it is impossible to know how much profit is generated and what, if any, special arrangements governments may have entered into.

You duly report that there is investor support for transparent country-by-country reporting by some high-profile investors. It is a position for which Transparency International has campaigned for many years. We encourage investors, civil society and lawmakers (particularly in the European Union and in the US, where relevant legislation is being considered) to come to the aid of the millions of people who live in poverty in resource-rich countries and contribute to the fight against corruption by demanding country-by-country reporting.

The importance of full and transparent disclosure on a country-by-country basis is apparent throughout the developing world. For example, in resource-rich Mozambique, multinational companies that engage in large mining projects are often exempt from corporate tax, import and export duties, and sometimes even income tax payments. The failure of multinational companies to report fully on all their operations in Mozambique, one of the world’s poorest countries, makes it difficult, if not impossible, for the people of Mozambique to demand accountability from the multinationals and their government.

Karen Egger, Transparency International, Berlin, Germany

Ia gree 100%.

But then, TI and Tax Research UK are both members of the Task Force on Financial Integrity and Economic Development.

Former South African President to take on new role tackling capital flight

Country-by-country, Development, Tax avoidance, Tax evasion, Tax Havens, Transfer Pricing 6 Responses »

Feb 222012

The New Age in South Africa has reported:

Former South African president Thabo Mbeki has been given the responsibility of leading a high-level team to stem the illegal outflow of about $50bn (R384bn) yearly of African resources out of the continent.

Mbeki, who was recently appointed chairperson of the UN Economic Commission on Africa (Uneca) panel, is determined to put a stop to marauding foreign companies, individuals and governments draining the continent’s resources and wealth with impunity and thereby undermining the prospects of Africa’s development.

“About $50bn is exported out of Africa illegally every year,” Mbeki has said. “Almost $25bn comes into the continent.

“That means (Africa) loses twice the capital it receives in financial assistance.”

The Tax Justice Network has long argued this, of course, and as a result many aid agencies now agree with us. They also agree with Mbeki and TJN on how it happens. As the report continues:

The losses came about through means including over-invoicing and underpricing of exports, and money-laundering strategies, media reports said.“People will import an item into South Africa and it is supposed to be sold for R10, but instead South Africans pay R30 for it – this is one of the ways to suck capital out of the continent,” Mbeki said. “In some instances mining companies will export platinum (but) in the customs records say they are exporting tin, which has a lower price.”
Thabo Mbeki Foundation spokesperson Mukoni Ratshitanga said yesterday that the panel had a wide ranging brief. “The panel has a mandate to look at various forms of illegal and illicit transfers of money out of the continent.

“This will involve monitoring and investigating all forms of illegal financial activity.”

Mbeki’s appointment to head a top UN panel is a big achievement for South Africa and for Africa as a whole. It also represents a turning point in Africa taking charge of its own affairs as a result of intensive lobbying by African members of the UN.

Uneca will monitor various illegal activities which could range from money laundering and the sale of blood diamonds to human trafficking. It will not be able to take legal action against companies and individuals pilfering the continent’s riches but will be able to advise the relevant bodies and organisations which can take legal action.

Ngombane said one of the biggest problems was European corporations involved in the oil and mining industries taking advantage of Africa’s plentiful supply of natural resources.

“A lot of the oil, gold and minerals are moved to Europe for refining and polishing.

“Africa is seen as an easy solution to big profits where relevant legislation can be bypassed. Even in South Africa we have this problem with illegal mines which are difficult to close down,” said Ngombane.

“But the problems go further than the European corporations and include the lack of efficacy on the part of African governments. There are weak states in Africa which lack the requisite administrative capacity to take charge and implement the necessary action against the exploitative companies.

“Their governance is also undermined by bribery and corruption which further complicates transparency.”

All of which is true.

I sincerely hope country-by-country reporting is on his agenda. It needs to be.

Why country-by-country reporting by multinational corporations matters

Accounting, Country-by-country 5 Responses »

Feb 202012

I wrote earlier today about the arguments now going on in the EU about introducing country-by-country reporting for the extractive industries.

I have to say I am not objective on this issue since I created the concept of country-by-country reporting in 2003, but I maintain - and thousands of others who have campaigned tirelessly for country-by-country reporting in all of Europe’s major development NGOs maintain that country-by-country reporting (CbC) is important for the following reasons:

1. Transparency matters. In many countries a corporation does not have to put its accounts on public record. That means that what an MNC does in that country is not a matter of public record. That matters. What MNCs do has enormous implication for the wellbeing of the world: CbC overcomes this problem. It puts all MNC activity ‘on the record’. Many investors appreciate this.

2. Corporate social responsibility (CSR) matters. CSR is about the relationship between a company and its host community. But this does require that the host community knows the company is there. CbC reporting provides that information.

3. Accountability matters. A company cannot be accountable unless it can be identified. This means that the names an MNC uses locally must be on public record. Too often they are not. CbC reporting names local subsidiaries.

4. Trade matters. At least 60% (and maybe more) of world trade is intra-group. In other words it takes place across national boundaries but between companies under common ownership or control. Existing MNC accounts completely eliminate all of this trade from public view. CbC shows it all. This is vital if trade relationships are to be understood, and made fair.

5. People matter. MNC accounts include statements on the number of employees a company has and their aggregate remuneration. CbC would require this statement for every country in which an MNC operates. This would provide invaluable information on labour conditions.

6. Tax matters. MNCs have more opportunity than any other group in a society to plan their tax affairs. They can seek to shift their profits from state to state to find the lowest overall bill. CbC discloses the profits that companies record in each country in which they operate and the taxes that they pay on them. This means they can be held accountable for what they do and do not pay. It’s estimated that if this problem were
tackled enough tax could be collected to pay for the Millennium Development Goals.

7. Corruption matters. The Extractive Industries are dominated by MNCs. The Extractive Industries Transparency Initiative seeks to hold those companies to account for the tax payments they make, and the governments that receive those payments to account for what they do with them. Many MNCs resist disclosure of information on what they pay because of competitive pressure, contractual obligations and local political
opposition. CbC would overcome these objections, significantly enhancing transparency in this sector, and help cut corruption.

8. Development matters. Developing countries lack revenue to finance public goods and services. Aid helps alleviate this problem but creates a dependency, harms the democratic accountability of developing country governments because they aren’t accountable to their electorates for what they spend and aid can itself directly contribute to corruption. Local declaration of economic activity by MNCs with the resulting accountability for taxes paid could break this cycle and help create fully independent, accountable governments capable of raising their own taxation revenues.

9. Governance matters. Many of the major corporate scandals of recent times have involved extensive use of offshore subsidiary companies. These are becomingly increasingly common throughout the MNC world, but it is recognised that the problem of managing them creates severe governance issues for MNCs. This results in increased risk for shareholders and others who need to understand the risk inherent in an MNC’s
activity.

10. Where you are matters. Some countries are politically unstable. If a company trades there shareholders should know. Some are politically unacceptable. If an MNC trades there civil society wants to know. Some countries are subject to sanction. Trading there is illegal. Where you are matters. CbC holds a company to account for where it is.

The EU is now considering the implementation of country-by-country reporting: please support the campaign to introduce it. You can do so by supporting Publish What You Pay and many of its members who are committed to the campaign, including Christian Aid and Action Aid.

What is country-by-country reporting?

Country-by-country, Uncategorized 5 Responses »

Feb 202012

I guess I should explain what country-by-country reporting as I’m writing about it today.

It’s explained in more depth here and its benefits are explained here. For those wanting more it’s explained most comprehensively here.

What country-by-country reporting demands is, however, easily summarised. It is that each multinational corporations discloses in its annual financial statements:

1. The name of each country in which it operates;
2. The names of all its companies trading in each country in which it operates;
3. What its financial performance is in every country in which it operates, without exception, including:

 It sales, both third party and with other group companies;
 Purchases, split between third parties and intra-group transactions;
 Labour costs and employee numbers;
 Financing costs split between those paid to third parties and to other group members;
 Its pre-tax profit;
4. The tax charge included in its accounts for the country in question split as noted in more detail below;
5. Details of the cost and net book value of its physical fixed assets located in each country;
6. Details of its gross and net assets in total for each country in which operates.

Tax information would need to be analysed by country in more depth requiring disclosure of the following for each country in which the corporation operates:

1. The tax charge for the year split between current and deferred tax;
2. The actual tax payments made to the government of the country in the period;
3. The liabilities (and assets, if relevant) owing for tax and equivalent charges at the beginning and end of each accounting period;
4. Deferred taxation liabilities for the country at the start and close of each accounting period.

If sales on an arising and destination basis from any jurisdiction were more than 10% different then both figures would also need to be disclosed to deal with issues such as the billing of worldwide sales from tax havens like Ireland that would otherwise completely distort understanding of a multinational corporation’s activities.

In addition, if the company operated within the extractive industries we would also expect to see a full breakdown of all those benefits paid to the government of each country in which a multinational corporation operates broken down between these categories of reporting required in the Extractive Industries Transparency Initiative.

The proposal requires this information be disclosed for all jurisdictions – without exception - in which a multinational corporation operates. Anything less will not do or transactions might be lost to view. Importantly, this does not require each country to agree to this Country-by-country reporting disclosure since it is suggested that the requirement should be imposed by an International Financial Reporting Standard.

Now let’s be clear about this:

a) Multinational corporations have this data. If they don’t then they are failing to keep proper books and records. Preparing this data should therefore have minimal cost;

b) This data can be audited, but as has become apparent, much of it is not audited now under the 80 / 20 rule – maybe 80% of the locations where a multinational corporations operates contribute only 20% of activity so auditors ignore them – but that’s where for government and stakeholders the risk is usually highest;

c) This data can be published at low cost – we only want it on the web.

But if we get it our view of multinational corporations will change forever – and that’s precisely why they don’t want to give it. The last thing the senior management of those multinational corporations want is that accountability. And that’s where the fault-line on this issue lies. It’s all about holding the new elite – those who have captured large companies for personal gain – to account. Which is precisely why it is so important.

Country-by-country reporting: the multinational corporations are conceding the case

Accounting, Country-by-country, Uncategorized 2 Responses »

Feb 202012

As the FT reports this morning:

Royal Dutch Shell and other natural resources companies have stepped up efforts to counteract planned anti-corruption rules that would force them to disclose payments to governments in countries where they operate.

The Anglo-Dutch group, Europe’s largest oil and gas company by market capitalisation, has put forward a series of alternatives, arguing that the current proposals will have “limited impact and unclear benefits”.

The new requirements for US and EU quoted businesses are designed to highlight regimes that receive large sums from selling oil, gas, minerals and forests but then siphon off the proceeds rather than reinvest locally for public benefit. The EU has proposed a series of amendments to existing rules on transparency, including detailing payments on a project-by-project basis. The union’s Competitiveness Council meets this week to agree a general approach.

George Soros, the billionaire hedge fund investor who has supported the “publish what you pay” campaign, told the Financial Times: “I want to know that the companies I invest in have an open and transparent relationship with governments, so that contracts are not at risk of being torn up.”

As I am the creator of the country-by-country reporting concept it is hardly surprising that I agree with George Soros on this one.

I, of course, argue for a broader definition of country-by-country reporting than that currently under consideration, and am pleased that I know some MEPs will be tabling amendments in an effort to secure full country-by-country reporting, but what’s curious in this FT report is the continuing desire of multinational corporations to act against the interests of their members, let alone anyone else.

Soros argues that shareholders win from this data by knowing the risks companies impose on them. And let’s be clear – at its core the only counter argument is that the companies want to take that risk unaccountably. There is no other real counter argument.

Those fighting corruption also clearly gain from this data – but the companies don’t want to disclose what they do. Most particularly, by arguing for an absolute threshold below which they say they should not need to report (which they would set at a high level, of course) they also want to hide some of the most interesting data of all on tax payments – which are those occasions when nothing at all is paid. We need to know just as much about those cases as the ones where tax is paid, and that, no doubt is one reason why they’re wanting to hide their behaviour.

And it’s also curious how they cling desperately to straws which are actually straw men. As the FT notes:

Companies have been lobbying to remove a series of conditions that they claim are onerous, unfair or in contravention of local laws and which campaigners say would undermine their value. Executives have attacked the thresholds above which they must disclose and argued that they should not be required to violate laws in countries, such as Qatar, which deem information on resource payments to be confidential for reasons of national security.

There’s only one problem with this, and that is the Qatar law simply does not apply to multinational corporation accounts, as Publish What You Pay have shown.

What is good to note though is that because Publish What You Pay have asked for disclosure at both the country and what is called the project level (i.e. by oilfield, mine, etc., each of which usually has its own exploitation contract) Shell have now conceded that:

it supports the introduction of the EU disclosure rules, but wants payments broken down into those made at the national, regional and local levels of government. Other companies have taken a similar line.

I support project reporting, but want country-by-country reporting even more. The fact that it looks like the case for country-by-country reporting for the extractive industries has been conceded is good news. Maybe another campaign win is within sight now.

But let me also be clear: I don’t just want country-by-country reporting for the states where oil, gas and minerals are taken out of the ground. I want it for every country in which a multinational corporations works, whatever industry they’re in. Because that will deliver real wins for all investors, governments and people in the world.

Which leaves the question of, bar self interest and the desire to continue hiding the risk they create from their shareholders and host governments, why do the directors of multinational corporations oppose this?

Say you want country-by-country reporting

Country-by-country 4 Responses »

Feb 102012

ONE have launched a petition calling on European leaders to stand up to extractive industry pressure and support a strong country-by-country reporting law the petition is available – in English, French and German – it’s started well with over 30,000 signatories, there is an live tally of how many people have signed so you can check it .

Please boost that number even further, and put real pressure on Ministers in Europe ahead of the Council meeting on the 20^th February when they are going to consider country-by-country reporting.

Thanks

Tackling global tax evasion

Country-by-country, Economics, Task Force on Financial Integrity and Economic Developm, Tax Havens Comments Off

Jan 242012

It’s Davos week. Appropriate growth has to be on the agenda of all present. But so too does something else, and that’s tax evasion.

Tax evasion costs the world US$3.1 trillion a year in my estimation - at least 5% of world GDP. and we could stop some of it. I never pretend all of it: that’s impossible. But stopping some of it would radically restructure the economies of the world with special benefit for the poor.

In that case it’s good to see my Task Force on Financial Integrity and Economic Development colleague Nick Mathiason in the Guardian today explaining five ways to tackle global tax evasion. Please read what he has to say, here.

Ernst & Young are confused

Accountancy, Country-by-country, Ernst & Young 23 Responses »

Nov 222011

A representative from Ernst & Young came to the meeting I spoke at in the European Parliament last night on country-by-country reporting.

He was a very confused chap. I concentrated on EU related issues: Eurodad, as a development agency, unsurprisingly concentrated on developing country issues. And then up popped E & Y (and I paraphrase, but I hope accurately):

“I’m confused.” he said, “You want to tackle corruption is developing countries and you want to help EU countries collect tax. What is it you really want?” The poor chap sounded so confused as if reconciling such aims was beyond his no doubt highly paid ken.

But is it really that hard? We want accounts that simply say where a multinational corporation operates, what it is called in each country it operates and a profit and loss account, limited balance sheet and even more limited cash flow data for each country (almost without exception) on a basis that also reveals intra-group trading and that therefore holds global capital to account locally, wherever local might be.

Is that so hard to understand? I beg to suggest it isn’t, unless of course you’re wilfully blind and a major representative of the 1%. Not that I’m suggesting such a thing of E & Y, of course.

Eurodad and the need for transparency in Europe

Country-by-country Comments Off

Nov 222011

I was delighted to talk at the launch of Eurodad’s new report – ‘Exposing the lost billions: How financial transparency by multinationals on a country by country basis can aid development‘ – last evening in the European Parliament.

The report is on country-by-country reporting and is another major contribution to the debate now going on in Europe on this issue, and how far such reporting should go.

The EU has conceded the case for country-by-country reporting, but only so far with regard to the extractive industries and forestry, and only with regard to payments to be made to host countries by companies extracting such resources.

Don’t get me wrong: I welcome this disclosure, but it’s far short of what is needed. As the representative of the Commission speaking at the event conceded, at a time when a deficit of tax revenue is at the core of the crisis facing Europe to concentrate solely on how accounting may be used to tackle corruption, but not financial disclosure or even tax due in developing countries does seem to be an ambition remarkably short of that required.

I argued the case for country-by-country reporting that I make in summary here and highlighted three things. First, if the EU really believes in the free movement of capital then it has to believe that movement must be accountable – and only country-by-country reporting can do that.

Second, if it really believes, as it says it does, in a single market then it has to believe in the integration of EU corporate tax systems and country-by-country reporting is designed to help provide the data to make that integration work.

Third, if the EU thinks that markets deliver well-being (and there’s no doubt they help do so) then they must also believe that openness, transparency accountability are all essential to ensuring a proper allocation of resources within markets. Preserving the status quo where 60% of world trade is hidden from view, and much of it is routed through tax havens, by the combination of consolidated accounts and secrecy jurisdiction subsidiaries within multinational corporations does not demonstrate commitment to that ideal.

There’s a long way to go in this debate as yet, with every chance the Commission proposals can be extended to embrace full country-by-country reporting. I’m up for the fight to achieve just that.