Tax Research UK

This is what the Task Force on Financial Integrity and Economic Development has to say on country by country reporting:

Action Item: Country by Country Reporting. Require that all multi-national corporations report sales, profits, and taxes paid in all jurisdictions in their audited annual reports and tax returns.

Background: Tax avoidance is a global problem. It involves the abusive exploitation of gaps and loopholes in domestic and international tax law that allows multinational companies (MNCs) to shift profits from country to country, often to or via tax havens, with the intention of reducing the tax they pay on some
or all of their profits. Tax avoidance on such a large scale is facilitated by a lack of transparency in the way MNCs report and publish their accounts. Making MNC accounts more transparent would help tackle tax avoidance at very low cost.

At present most MNCs publish segmented information that breaks their trade down along product or division lines. However, MNCs are not required to publish geographic data, and there is no requirement to do so on a country-by-country basis. Despite publishing their accounts as if they are unified entities, MNCs are not taxed in this way. Each member company of the group is taxed individually. This makes it difficult to establish an overview of what is happening within a group of companies for tax purposes.

Tax avoidance is facilitated by tax haven structures created to shroud business activity in secrecy. It is often impossible for tax authorities to obtain information or assistance from the government of a tax haven, and companies are not usually under any obligation to disclose what they are doing outside the country
that is making the enquiry. Given this opacity, even proving the existence of a tax avoidance scheme can be difficult.

The European Parliament has already urged the International Accounting Standards Board to move beyond voluntary guidelines and support the development of an appropriate accounting standard requiring country-by-country reporting by extractive companies. While this measure is a sound first step, it is not far-reaching enough.
enough.

G-20 Jurisdiction: Working Group 1 (Enhancing sound regulation and strengthening transparency) and Working Group 2 (Reinforcing international cooperation and promoting integrity in financial markets).

Executing Authority: International Accounting Standards Board.

Benefit: Country-by-country reporting (CCR) would provide information to a wide range of stakeholder groups which will strengthen efforts to monitor corrupt practices, corporate governance and responsibility, tax payments, and world trade flows. CCR would benefit investors by revealing which corporations  operate in politically unstable regimes, tax havens, war zones, and other sensitive areas. CCR would also enable citizens of developing nations to determine who owns the companies that are trading in their countries, what tax is being paid and whether that appears reasonable in relation to the tax rates in the country in question.

Some might say I can bore for England on this issue. But I know of nothing else that can deliver more to solve so many of the problems we now face, at least for civil society, investors, tax authorities and developing countries. Regulators can get data in other ways, I’m sure. But transparency is aboiut making it available to all. Country by country reporting does just that.

Richard Murphy Accounting, Banking, Economics, IFRS 8, Tax Havens, Tax avoidance, Tax evasion

The FT has reported that:

France and Germany on Tuesday proposed a fresh crackdown on tax havens and offshore financial centres, insisting that banks that use them be forced to put aside higher capital to offset the risk to the financial system.

Christine Lagarde, French finance minister, and Peer Steinbrück, her German counterpart, said that they wanted leaders meeting at the G20 summit on April 2 to sign up to the idea that banks and insurers should be forced to disclose their use of tax and regulatory havens in their annual regulatory filings.

They would have to provide regulators with information about the size and nature of their transactions with these jurisdictions – data that could be used to trigger higher capital requirements.

I support that.

Except I’d go further. Full country-by-country accounting makes more sense. Of course I’m biased; I created the concept, but it is one the lead demands of civil society now. I wrote this summary of it a whole back. I think it worth repeating given there are a lot of new readers of this blog:

Country-by-Country (CbC) reporting would require every MNC to declare:

1. In which countries it operates;

2. What it is called in that location;

3. What its financial performance is in every country in which it operates, identifying both third party and intragroup trade as well as labour costs and head count;

4. How much tax (and other benefits) it pays to government locally as a consequence.

This information must be declared for all jurisdictions - without exception – in which a multinational corporation operates. Anything less will not do. This
does not require each country to agree as the requirement would be imposed by an International Financial Reporting Standard.

We support country-by-country reporting for the following reasons:

1. 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 companies there. CbC reporting provides that information.

2. 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.

3. Trade matters. 60% of world trade is intra-group trade. 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.

4. 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, worldwide.

5. Tax matters. MNCs have more opportunity than any other group 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 don’t pay. It’s estimated that if this problem were tackled enough tax could be collected to pay for the Millennium Development Goals.

6. 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 helping cut corruption.

7. Development matters. The developing countries of the world are poor. 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 directly contributes 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.

8. 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.

9. 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.

10. Transparency matters. In many countries a corporation does not have to put its accounts on pubic 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’.

This solution is possible: IFRS 8 requires that companies identify national trading now for their country of incorporation, at least. If it is technically possible to do it for one state it is technically possible to do it for all states.

As a matter of fact it is already done for all states: that is the basis of tax reporting.

The only additional costs are reporting, which we’d suggest be web based only so that would be minimal, and auditing. The auditing costs would be real. Auditors might have to go to places they don’t go now. That means they might accept risk they transfer to shareholders now. I think that would be appropriate.

There is massive potential in this proposal. I sincerely hope it gets to the G20.

Richard Murphy Accounting, Banking, Economics, IFRS 8

The ‘High-level Group on Financial Supervision in the EU’ has published its Report that makes 18 detailed recommendations to strengthen supervision of the EU’s financial institutions and markets. The report addresses:

• how to organise the supervision of financial institutions and markets in the EU
• how to strengthen European cooperation on financial stability oversight, early warning, and crisis mechanisms; and
• how EU supervisors should cooperate globally.

Throughout the Report, accounting is cited as one of the causes of the current global financial crisis. The Report urges that the IASB or supervisors set limits on mark-to-market accounting:

To ensure convergence of accounting practices and a level playing-field at the global level, it should be the role of the International Accounting Standard Board (IASB) to foster the emergence of a consensus as to where and how the mark-to-market principle should apply – and where it should not. The IASB must, to this end, open itself up more to the views of the regulatory, supervisory and business communities. This should be coupled with developing a far more responsive, open, accountable and balanced governance structure. If such a consensus does not emerge, it should be the role of the international community to set limits to the application of the mark-to-market principle.

The following is Recommendation 4 of the Report:

Recommendation 4: With respect to accounting rules the Group considers that a wider reflection on the mark-to-market principle is needed and in particular recommends that:

• expeditious solutions should be found to the remaining accounting issues concerning complex products;
• accounting standards should not bias business models, promote pro-cyclical behaviour or discourage long-term investment;
• the IASB and other accounting standard setters should clarify and agree on a common, transparent methodology for the valuation of assets in illiquid markets where mark-to-market cannot be applied;
• the IASB further opens its standard-setting process to the regulatory, supervisory and business communities;
• the oversight and governance structure of the IASB be strengthened.

There’s only one thing I can argue with: civil society also needs to be represented since the stakeholders they represent are also key users of published financial information and as such should be represented in the regulatory process.

Richard Murphy Accounting, IFRS 8

I have the following article on the Guardian’s Comment is Free site today:

As the Guardian’s tax gap series has progressed, it has become increasingly clear that one of the problems faced by anyone trying to analyse tax payments by major corporations is the absence of any realistic data about the tax that they pay, or where they pay it, in their corporate accounts.

I realised this many years ago. I have been a practising accountant for almost three decades. The first time I met John Christensen, with whom I went on to help form the Tax Justice Network, he asked me how the problem of transfer pricing abuse could be tackled.

My response was simple. I said that if we made major corporations account on a country-by-country basis, without exception, for their sales (both to third parties and to other companies in their group), their costs split in the same way, their payments for their workforce, their profits, their taxes (both provided and paid) and for the value of their physical assets, then we would know just exactly which corporations were working where, how much they made in each location that they operated in, and who was likely to be avoiding tax. A summary of the proposal is here.

The logic is simple. Suppose a major corporation discloses that it has subsidiaries in the Cayman Islands. Under country-by-country reporting, it would have to report the names of all those subsidiaries and their total sales in aggregate, both to third parties and within the group of companies of which they are a member. Their purchases will be reported on the same basis. Evidence suggests that the vast majority of transactions that are routed through the Cayman Islands are intra-group transactions undertaken for the benefit of saving tax. And as we all know, the vast majority of corporations located in the Cayman Islands have no employees there. It is also highly likely that a profit will be recorded, but no tax will be paid. In that case, publication of country-by-country accounting data will provide all the red flags that tax inspectors all over the world and civil society will require to suggest that tax abuse is going on.

More than that, though, this data will also tell investors that the company in which they are placing their faith is undertaking corporate tax shenanigans. There is a risk in that activity. In particular, if the structure that is in use is subject to challenge, it is highly likely that future tax charges will be higher than those currently declared. That means that the company in which they are invested might be overvalued. This is vital information for any investor. In this context, we should be under no illusion that tax abuse is for the benefit of shareholders: it is not. That is just a temporary illusion promoted by transient directors in pursuit of share-based incentive payments.

So, the question is, can country-by-country reporting be delivered? The answer is a straightforward yes. After five years of NGO campaigning, the European parliament has now demanded that the International Accounting Standards Board, which is responsible for accounting standards almost worldwide, introduce country-by-country reporting for the extractive industries. The IASB is now considering its response, but in the course of hearings that have taken place in connection with its considerations, and at which I have been present, major corporations have agreed that the delivery of reports on this basis is entirely technically feasible, although it will increase audit costs because those major firms of auditors which review the accounts of these companies will actually have to visit all the countries in which they operate. Since this will significantly reduce shareholder risk, that must also be of benefit.

Asking whether this form of accounting can be delivered is, however, not the same as asking whether it will be delivered. Major corporations are resisting providing this information because it will show the abuse that they undertake. That means that the time has now come for civil society, tax authorities the world over, and all users of accounts, including investment fund managers, to demand that they can have the information on where our major corporations work, where they make a profit, and where they hide their tax liabilities. If we are to appraise risk, this information is essential. We are seeing the consequence of major corporations failing to disclose the risk they hide on their balance sheets right now. This must not happen again. This form of accounting could, to some quite considerable degree, prevent that recurrence.

And if, at the same time, it stopped the enormous transfer pricing abuse that is happening out of the developed world, it would also deliver more funds for development than the entire aid programme of all the nations of the world combined at this point of time.

Accountancy has never had so much to offer the world. Will it rise to the challenge?

Richard Murphy Accounting, IFRS 8

I was discussing the International Accounting Standards Board and International Financial Reporting Standards projects with an accountant of high repute this morning. Our discussion was framed within the context of the current economic crisis.

We agreed that the IASB project had the supposed goal of facilitating globalisation and of reducing the cost of capital.

We agreed that it has failed in these aims. In fact we went further. We agreed it was positively harmful to those objectives.

As I put it: I believe in globalisation in the sense that trade on the basis of comparative advantage makes sense. I am a believer in the Ricardian economics of trade. But to deliver the benefits of Ricardian economics I have to understand what is happening locally or I can’t spot the local differences that justify trade.

IFRS 8 requires that a group of companies report segment information in its financial statements on the same basis that data is supplied to its board of directors. It provides a perverse incentive to undermine provision of the necessary information to pursue Ricardian advantage as a consequence. Whilst country-by-country reporting is not mandatory the boards of major corporations have gutted the financial reporting submitted to their boards of directors of any geographic content to avoid the need for information on that basis to also be submitted to their shareholders. As a result we have, for example, the perverse notion claim that Google, which relies very heavily on local content, considers itself to be just one operating segment without any local differentiation.

This is absurd. To allocate capital efficiently in a differentiated world where the potential returns upon it will vary it is essential that boards of directors and the shareholders to whom they report have local data on how that capital is used. If not that capital will, beyond a shadow of a doubt, be misallocated. The result will be sub-optimal economic performance. Worse, it might be deliberately sub-optimal as inappropriate goals are pursued.

The message on which we agreed was simple, but blunt: in a global world we have to account locally or we harm the well-being of all people, companies and governments.

It’s time the International Accounting Standards Board took real notice.

Richard Murphy Accounting, IFRS 8

This is Goldman Sachs unaudited result for the year to 30 November 2008 published 16 December:

There’s a line to note: provisions for taxes. $6,005 million in 2007, $14 million in 2008. The 2007 result shows that most of that $6,005m was current tax.

Sure, profit went down by 86% but taxes fell by ,ore than 99%. The effective declared tax rate fell from 34% to 0.6%. The reason, per the statement, is this:

There’s an explanation in the 8K:

GS has had a $6 billion bail out from the US government. This is how it responds.

The messages are unambiguous: first of all we need country by country reporting. It is absurd that a company can say that it has reduced its tax liability as a result of a change in its geographic earnings mix and not explain precisely where those earnings have moved to and why the change in such a key variable has been so dramatic as a consequence.

Second, it is wholly unacceptable that at a time when banks are utterly dependent upon the state for the provision of their equity that they should show such contempt for the state by avoiding their obligation to pay tax.

The time for change has arrived. We are all equity holders in these enterprises now, whether in the USA or not. Businesses have to account to the world’s population wherever they are for what they do in whichever place they locate.

Richard Murphy Accounting, Banking, IFRS 8

Transparency International has issued a policy note, in the context of the latest Doha conference on financing for development, backing action against tax havens and supporting the notion of country-by-country reporting. It said

Developed countries must break with business as usual and clamp down on illicit activity enabled by off-shore financial centres and tax havens. Current practices are unacceptable and criminal.

Strong stuff! The key point here is that the focus is put on developed countries, whereas in the past the focus was badly skewed towards getting developing countries to change, and giving the developed nations and tax havens a free pass. In this context their comments on accounting are as important:

Companies, particularly when operating in resource-rich countries, must ensure transparent reporting and information disclosure. This includes country-by-country reporting of operating results.

Quite so. They’re a welcome addition to the support team.

Richard Murphy Accounting, Corruption, Development, IFRS 8, Tax Havens

The FT has reported:

Some of the largest companies in the US, including General Electric, Wal-Mart and PepsiCo, were expected on Monday to launch a drive to improve ethical standards in business in an attempt to stem the decline in corporate America’s public standing. The move by 17 companies, with nearly $1,000bn in sales, to commit to key principles of good business conduct comes as the financial crisis and recession are fuelling a political and public backlash against the corporate world.

The huge problems faced by companies, such as banks and carmakers, that are run by highly paid executives have exacerbated anger among ordinary Americans who have seen their living standards deteriorate due to the economic slowdown.

Under the agreement, from the Ethisphere Institute, companies will sign up to four principles of ethical behaviour: legal compliance, including not paying bribes; transparency; avoiding conflict of interests and increasing accountability.

I’ve searched the Ethisphere site and I’m struggling: I can’t find any serious mention of tax, and I can’t find it as a criteria for ethical behaviour.

These compnaies had better believe it: don;t pay your tax and people won’t take your ethics seriously. It’s just not possible.

And unless you report country by country that you’ve paid your tax they won’t believe you either. This is what corporate responsibility is really about: making the payments you owe to the communities in which you work.

Richard Murphy Accounting, CSR, Ethics, IFRS 8

Time was when submissions to the International Accounting Standards Board on an exposure draft would come form accounting institues and large companies.

Not any longer. The closing date for submissions on the key first two chapters of the new conceptual framework for accounting was on 29 September. There were 112 submissions. Of course the usual suspects were all there. But so too were The Tax Justice Network, Christian Aid, Action Aid, Publish What You Pay, Oxfam, Save the Children, even Tax Research LLP.

Why? Because we all think the IASB has missed the point. We agree with them: in future it makes no sense for multinational companies to account as if they have owners when it is, very often, almost impossible to identify who they are. These organisations are entities in their own right. But if that is the case then it is absurd to assume, as the IASB does, that present and potential capital providers as the primary user group for general purpose financial reporting. That is very obviously wrong.

As the TJN submission says in response to the IASB question on this issue:

The IASC Foundation Constitution [the IASB's governing body] says that

“The objectives of the IASC Foundation are:

(a) to develop, in the public interest, a single set of high quality, understandable and enforceable global accounting standards that require high quality, transparent and comparable information in financial statements and other financial reporting to help participants in the world’s capital markets and other users make economic decisions;

(b) to promote the use and rigorous application of those standards;

(c) in fulfilling the objectives associated with (a) and (b), to take account of, as appropriate, the special needs of small and medium-sized entities and emerging economies; and

(d) to bring about convergence of national accounting standards and International Accounting Standards and International Financial Reporting Standards to high quality solutions.”

We note that in the Exposure Draft the IASB says that its duty is (Para OB3):

The boards’ mandate is to assist in the efficient functioning of economies and the efficient allocation of resources in capital markets by developing high quality financial reporting standards.

We do not think that the statement in paragraph OB3, which is that on which the boards appears to have reached their conclusions, can be reconciled with the
requirements of the IASC Foundation Constitution, which is the superior document that must prevail if any dispute is to arise on this issue since the IASC
is the governing body of the IASB.

We submit that if the IASB’s conclusion that the accounts of MNC’s must be prepared on an entity basis (with which we concur) is correct then it follows that:

i. The interests of all users of financial statements must be given equal weighting when considering the IASC and IASB obligation to create global accounting standards in the public interest. We suggest that to confuse the public interest with the interests of present and potential capital providers is a category error.

ii. If, as the IASC constitution makes clear, there is no order of priority between the needs of users of the world’s capital markets and other users then each must be given at least equal weighting in determining the needs of users of financial statements, and consequently in determining the information that those statements should supply, and as such the identification of one group as having priority in reporting to the exclusion of all others is contrary to the constitutional requirement of the IASC;

iii. By assuming that the world capital markets (which are primarily, and by value almost entirely located in the developed economies of the world, and where by definition the vast majority of capital traded is owned by those resident in the developed economies of the world) as its primary focus of concern the IASB has ignored its obligation to consider the special needs of the emerging economies of the world and as such is acting in contravention of the requirements of the IASC Foundation Constitution.

As such we are of the opinion that the IASB is by suggesting that present and potential capital providers be considered the primary user group for general purpose financial reporting acting contrary to the requirement that it act in accordance with the public interest in promoting global accounting standards.

Others build their arguments in different ways.

All make these points:

1) The IASB argument on who the primary users of accounts are makes no sense;

2) If all users are considered, as seems essential, and if an entity approach is adopted, then that can only meet users needs if country by country data is included.

Richard Murphy Accounting, IFRS 8

On September 23rd, the European Parliament adopted a report on the follow-up of the Monterrey conference on Financing for Development. Amongst the resolutions adopted is one saying that the Parliament:

Regrets that the Commission does not place more emphasis on the mobilisation of internal resources to finance development, as these are sources of greater autonomy for developing countries; encourages Member States to be fully involved in the extractive industries transparency initiative and to call for it to be strengthened; calls on the Commission to ask the International Accounting Standards Board (IASB) to include among these international accounting standards a country-by-country reporting requirement on the activities of multinational companies in all sectors;

This is another step forward in our campaign: the EU Parliament has previosuly supported this call for the Extractive Industries. Now they are calling for it for all sectors.

It is an essential part of the regulatory reform that will resolve the credit crunch.

Richard Murphy Accounting, Europe, IFRS 8