IFRS 8 » Tax Research UK

Country by country reporting gets EU Parliament backing

Accounting, Europe, IFRS 8 Comments Off

Sep 262008

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.

Country by country reporting in the news

IFRS 8 Comments Off

Sep 212008

Good news of the weekend, the Observer’s report that:

Giant oil and mining firms could be forced to reveal the precise amounts of tax they pay in each country in which they operate. The move has been heralded as a major breakthrough that could end a widespread culture of corporate secrecy and alleged corruption.

The measure is being seriously considered by the International Accounting Standards Board after a high-level meeting of investors, including George Soros, and campaigners, argued for the introduction of so-called ‘country-by-country reporting’.

It’s time has come. The last week has proved that.

Will we get country by country reporting?

Accounting, IFRS 8 Comments Off

Sep 162008

The Publish What You Pay coalition and others met in a large scale private meeting with the International Accounting Standards Board, investors in the extractive industries sector and representative companies working in that industry yesterday. The meeting was private. All comments were made unattributably. But I do feel able to comment. I was PWYP’s technical lead.

The mood of investors present was unambiguous: they want country by country data, and most want it on revenues, costs, profit, taxes and other benefits paid to individual governments. Most thought an IFRS the only possible delivery mechanism. Few present sought to disagree.

The EI companies represented saw reasons for not supplying data: candidly I think we dealt with all the issues without difficulty. One industry representative ended up concluding that the data we are asking for could be supplied at relatively small cost given enough notice of the change. Of course I wanted to believe that commentator. I also happen to believe their comment accurate.

Some present, whether from civil society or the investor community were shocked when it was made plain that many subsidiaries of at least some of the companies present were never subject to audit inspection. One investor, shocked by this, made clear that by acting in this way the companies in question were transferring risk to the shareholder without their knowledge. She clearly felt our demand would not just provide new information, it would increase the quality of the consolidated data already reported. She had no doubt about the benefit of that for investors everywhere.

The claim by one party that to audit country by country tax information would increase audit and reporting costs by at least 25% was treated with some incredulity: if such limited additional information would cost so much how little data was being validated now was the obvious, and somewhat shocked response of some I spoke to.

But perhaps most interesting was the comment to me from a senior representative of the profession present. He was categoric to me: we have shattered forever the previously accepted belief that regional data is either useful for the purposes of investment appraisal or analysis of this sector.

I, of course, believe that true for all sectors. But less than six years after I wrote the first version of country by country reporting I am pleased to have got this far.

Now we have to see how matters progress: this is for from being a closed case as yet. There is still a long way to go to agree on what needs to be disclosed on a country by country basis and whether, as we and the investors present argued, all countries must be disclosed for fear of what transpires to be material information being lost in aggregation.

But in a very small way I think the world of accounting changed yesterday. The fact that there is risk in multinational corporations that can only be properly appraised if data is reported on a country by country basis has, I think, been clearly recognised. That’s a massive step forward.

Do you want to believe Google?

Accounting, IFRS 8 1 Response »

Sep 032008

I’ve done a lot of work on what accountants call segment reporting over the last few years, largely in connection with the campaign for country by country reporting.

The current IASB approach to segment reporting is found in IFRS 8 which says segments need be reported for the country of incorporation and the rest of the world as a group and on any segmental basis that the key decision makers in the group use, as reflected in internal management reporting.

Many in the investment community argued against IFRS 8 because they said it would harm shareholder well-being by reducing the quality of information provided to key managers. In that context note this form the Google accounts for 2007:

Now ask yourself, would you be confident that this board is really in charge of its operations if it does not ask those sort of questions or hold people accountable for these issues or demand information on them? Do you really think they don’t do this? Either way governance is compromised.

Do not doubt that IFRS can harm shareholder well being. The case has been proven.

So let’s have real segment reporting on real issues, please, and stop this farce.

Another milestone for country-by-country reporting is in place

Accounting, IFRS 8 Comments Off

Sep 012008

I’ll be presenting a paper on Country by Country reporting to a British Accounting Association conference tomorrow.

The slides are here. The TJN summary of what this is all about is here.

The good news is that this whole standard is premised on the idea that IFRS have universal reach and as such can be used as the basis for creating a geographic basis for reporting corporate risk and performance which fills gaps in the current reporting regime identified more than 30 years ago, and which neither historic cost accounting or fair value accounting address.

And now the FT has reported that:

US companies are set to switch to international accounting rules in a move that will, for the first time, see all the world’s most important listed groups reporting according to the same set of standards.

The US Securities and Exchange Commission on Wednesday proposed a “roadmap” to manage the migration of US companies from its rules to the international ones. The plans are open to comment for 60 days.

Another essential milestone to the adoption of country-by-country reporting has been put in place.

Country based reporting reduces risk for just about everyone

Accounting, IFRS 8 Comments Off

Aug 212008

It’s not often I reproduce a KPMG press release, but this one is worth noting:

Taxing authorities seeking to enforce transfer pricing regulations are considering a broader range of company transactions that can result in more detailed investigations, according to a new publication from KPMG International.

Among the “red flags” now seen by tax authorities worldwide as possible reasons to investigate further are:

unusually high profits or losses in a group company,

corporate restructurings involving closures or reductions in operations,

significant inter-company management fees,

dealings with a group company in a tax haven, and

location in a low cost country.

These are among the instances of tightening regulations discussed in “A Meeting of Minds – Resolving Transfer Pricing Controversies,” a publication that focuses on transfer pricing controversy issues and resolution alternatives which incorporates contributions from 39 KPMG authors from 19 countries.

Perhaps the most immediate reaction is “and you didn’t know that already?” My guess is, they didn’t.

There is however a mechanism that is already available that could be implemented that would massively increase the chance of tax authorities identifying abuse, and which at the same time provides a structure for companies to both prove they are not transfer price abusing, are not using tax havens, are allocating profits fairly and are as a result of good corporate citizens. That is country by country reporting.

The original idea is highlighted in this paper but it has developed a bit since then. What we are asking for is that each MNC disclose in its annual financial statements:

1. The name of each country in which countries 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, including:
- Its sales, both third party and with other group companies;
- Purchases, split in the same way;
- Labour costs and employee numbers;
- Financing costs split between those paid to third parties and to other group members;
- Its pre-tax profit;
4. How much it pays in tax and other ways to the government of the country in which it is operating as a consequence (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 is 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 liability for other taxes or equivalent charges due to the government of the country for which the report is being made arising in the period;
3. The actual payments made to the government of the country and its agencies for tax and equivalent charges in the period;
4. The liabilities (and assets, if relevant) owing for tax and equivalent charges at the beginning and end of each accounting period;
5. Deferred taxation liabilities for the country at the start and close of each accounting period.

This disclosure would have the inevitable consequences:

a) transparency of group structures would increase;

b) use of tax havens would decrease;

c) transfer pricing abuse would reduce because obvious disparities in profit rates would be apparent;

d) conduit structures which trade almost entirely on the intragroup basis and are usually located in tax havens would become incredibly obvious;

e) the use and abuse of group financing structures would become clear;

f) locations where profit is high that employment incredibly low would be obvious (this is commonplace in Ireland, by the way);

g) compliance with local tax regimes will become more apparent, and location is being used for tax deferral would become obvious.

But the benefits are much more than that. The FT has this morning reported that:

Private equity groups are taking big legal and financial risks as they invest more in emerging markets to escape the US and European credit crunch, buy-out executives and lawyers warn.

Peter O’Driscoll, a lawyer at Orrick in London, said: “Expropriation of foreign-owned assets is on the rise. Not surprisingly, when an investment has done well, local partners have a greater incentive to try to steal it.”

The geopolitical risks of many groups are similarly high. Just look at the problems BP has encountered. The potential impact of this risk can only be assessed if data is reported on a country by country basis. Shareholders win as a result.

Country by country reporting is essential to good corporate social responsibility accounting because you cannot be responsible to a community if it is not even known that you are there.

Country by country reporting massively reduces tax risk for states and for corporations. It will create a level playing field where those companies that want to the tax compliant get the benefit from being so.

But let’s also remember that country by country reporting is of perhaps greatest benefit of shareholders: their risk is substantially reduced as a result of it, and that has to be good news.

Thankfully, people are noticing. This topic now on a lot of agendas.

Is the penny dropping?

Accounting, IFRS 8 1 Response »

Aug 182008

The FT has reported that:

Britain’s big energy companies should be forced to open their books to show separately how much profit they make from their supply and generation arms, John Hutton, business secretary, has argued.

Mr Hutton has urged Ofgem, the energy regulator, to address the “lack of transparency” in the accounts of Britain’s big companies, which he claims damages the reputation of the industry and confuses the public.

He also believes the failure of some big integrated energy companies to record separately their profits in generation and retail means potential new entrants to the market do not have the data they need, holding back competition.

Wow! At last! The penny is beginning to drop. Consolidated financial statements do not meet the needs of all users of accounts. It’s something I’ve said for a long time, but it’s amazing how long it has taken for the message to get through. But it seems like it has:

Mr Hutton has always argued that energy companies need to make healthy profits in order to invest in new infrastructure, including renewables, and he has opposed the idea of a one-off windfall tax on the sector.

But he believes more transparency in the accounts of [UK energy] companies .. could help competition and improve regulation and policy making.

Some companies argue they are already providing separate information on their generation and retail activities, but Mr Hutton and Ofgem believe it falls short of full unbundling of their accounts.

Eon UK, for example, says its UK annual report strips out key figures – such as sales and profit before tax – for generation and retail, but they are not separate accounts.

Quite so. IFRS 8 data is not good enough. In fact, it’s just about useless for any real decision making purpose – which is, of course, exactly what the IASB intended.

We need real segment reports that are both meaningful as sets of accounts in their own right and that are presented on a segment and country-by-country basis.

In 1975 to UK’s Accounting Standards Steering Committee said in a seminal document called the Corporate Report (no link, sorry) that we needed financial reports to let us appraise the following:

1. the performance of the entity;
2. its effectiveness in achieving stated objectives;
3. evaluating management performance, including on employment, investment and profit distribution;
4. the company’s directors;
5. the economic stability of the entity;
6. the liquidity of the entity;
7. assessing the capacity of the entity to make future reallocations of its resources for either economic or social purposes or both;
8. estimating the future prospects of the entity;
9. assessing the performance of individual companies within a group;
10. evaluating the economic function and performance of the entity in relation to society and the national interest, and the social costs and benefits attributable to the entity;
11. the compliance of the entity with taxation regulations, company law, contractual and other legal obligations and requirements (particularly when independently identified);
12. the entity’s business and products;
13. comparative performance of the entity;
14. the value of the user’s own or other user’s present or prospective interests in or claims on the entity;
15. ascertaining the ownership and control of the entity.

We’re vaguely close to 1, 3, 4, 5, 6, 12 and 13. We’re part way to 2, 7, 8 and 14 (if you think fair value does this). We’re miles away from 9, 10, 11 and 15.

John Hutton is simply reiterating a call for reform with regard to category 9 made 33 years ago. As he said:

“My view is that the lack of transparency as to the accounts of our major energy supply companies is potentially problematic both in terms of the reputation of the industry itself and in terms of good policy making,”

“I would be particularly interested to hear your views on the merits of requiring vertically integrated energy companies to report the accounts of their supply and generation businesses separately.”

It’s time we had the data.

IASB Trustees ducking the issue: stakeholders are their responsibility

Accounting, Ethics, IFRS 8 Comments Off

Jun 202008

I was at the IASB round table discussion on the future governance arrangements of the IASB and its trustees in London yesterday. The paper we were discussing is here.

Perhaps unsurprisingly I was the only representative of civil society to speak during the session I attended. I made these points:

1. The IASC Trustees say (page 2) that “the IASB [must be] appropriately protected from particular national, sectoral or special interest pleading”. Many of the others who spoke, from firms like PWC, KPMG, BDO and UBS stressed the importance to them that the IASB keep its independence and its non-political status. I made the exact opposite point: as far as civil society is concerned the IASB is the captive of a very narrow interest group, and implicit in that is a very narrow political focus. It is its concentration on the interests of those who participate in market trading to the isolation of all others that troubles us.

2. The IASB says it has a duty to a wide range of entities, including SMEs, and to all users of accounts. And yet in the proposals being made no consideration was being made of the interests of SMEs and there was no indication of the acceptance of any duty to any group other than those participating in financial markets. As a result, in my opinion, the IASC Trustees were failing to fulfil their mandate in making the recommendations in the paper.

3. The IASC Trustees recognised the need for wider, and guaranteed, geographic representation in the membership of the IASB in the proposals they have made. But as far as we were concerned giving separate representation to the capital markets of North America, Europe and Asia / Oceania made little odds: they comprised one economic bloc. The other is the developing world. I argued for automatic representation for Africa and Latin America as well, currently ignored by the proposals.

Of course I was out of step with the other commentators: there’s no news in that. But that also gave me the chance to make a fair amount of the running in the subsequent debate.

Several things emerged:

1. The IASC Trustees thought I was asking for disclosure beyond their remit, such as environmental reporting. Quite why was baffling: I had made no mention of them and had made clear I was a chartered accountant. I had, of course, also mentioned country by country reporting, an issue with which they should be familiar since they had met Publish What You Pay. I think it was simply assumed that NGOs couldn’t possibly engage on the issue of financial reporting. They were wrong. I made clear I was asking for financial reporting of use to all stakeholders, not just those actively engaged in markets.

2. They suggested that I was looking in the wrong place and to the wrong body in that case: KPMG supported them in that argument, saying it best the IASB concentrated on meeting the needs of the market before looking to address other issues. But, I stressed that their mandate did extend to others, and I pointed out that the need of stakeholders for reliable financial information has been well recognised since the mid 1970s when the UK’s Accounting Standards Steering Committee issued a document called The Corporate Report (regrettably no copy on the web that I can find) which it could be said argued for much of the information I was now requesting. I happened to have a copy to hand. But the IASB persisted, saying it was for others to deliver that. When I asked who those others might be no suggestions were available.

3. They have conceded that they may have to change their recommendation to include specific requirement that Board members be recruited form both Africa and Latin America in future.

I know that my arguments hit home: in discussion with IASC Trustees after the formal session closed it was clear that they knew and understood my arguments. On the record the comment was different. Why was that, I wonder?

And as interesting, one of the bodies that it is suggested have a seat on the new IASB monitoring group was represented in the room (but as an observer, and as such without speaking rights, in the absurd procedure used by the IASB that ensures only those prior vetted by them can speak). He did know of my work on country-by-country reporting and the work of Publish What You Pay on reporting on that basis for the extractive industries. His comments were direct:

- This type of reporting would help tackle corruption
- It would increase fiscal accountability of governments
- The information would, if universally disclosed, considerably enhance the quality of information available on the operation of the global economy
- It would increase the transparency of markets
- It would reduce volatility in markets
- It would make the operations of markets more accountable
- It would as a result increase shareholder value as well as meet the needs of many other stakeholders.

The arguments I and others present can be appreciated by some but not by the IASB it seems. Why is it that the IASB has no desire to fulfil the mandate it has been given? Could it be that it is not acting in the public interest , as required? Or might it be that its absolute absence of democratic accountability (the words, near enough, of the ICAEW representative present) might in fact allow it to work, as I suggested, in the interests of a very narrow group indeed within society whilst ignoring all others?

If that is so this process is not working. I can hope that the proposed monitoring group might remedy this defect. But as is obvious, what is said in private is not what is said in public. I’m not optimistic. But I’ll continue to work for change, none the less.

Curiously the IASC trustees present wished me good luck in my work. I don’t want luck. I want change. And they can deliver it. It is time they did.

Taxing UK profits

Accounting, Code of Conduct, Economics, IFRS 8, Tax avoidance, Tax Havens, Tax Justice Network Comments Off

Jun 062008

The committee set up by Alastair Darling to consider the future of corporation tax, and in particular the taxation of foreign profits, meets for the first time on Monday 9 June even though the consultation paper that gave rise to the furore that caused its establishment has now been withdrawn.

I admit that this means that if I was on the committee I would now be proposing one thing, which is that the committee should also be put on hold whilst it is reconstituted to include a rather broader representation of interested parties, including the professions, small business and civil society, all of which are excluded right now. But I can’t see that happening and in that case it’s worth thinking about what this committee should be addressing, and doing.

The first point to make is the glaringly obvious one that in the real economy the UK does not compete on tax. Companies don’t leave the UK as such when they go for what they claim are tax reasons. The evidence is that they are moving HQs and related finance and intellectual property functions out of the UK and into the unreal economies of those tax havens called Jersey and Ireland. But they stay firmly in the real UK economy with regard to selling, manufacturing, having people on the ground, doing R & D and so on. They do remain present, therefore.

In that case the foreign taxes debate is an artificial one: the fact is that the existing arrangements for taxing foreign profits raise little for the UK and we know it. The argument is not therefore how to tax foreign profits. What is more, in truth, we should have no claim to foreign profits. We would, I think, prefer that tax was paid on those to the government to whom they are due. That seems fair and appropriate. We should not be purloining what is not ours.

Instead the terms of this debate should actually be about how to make sure that tax is paid in the UK on what companies earn in the UK, and that what is earned in the UK is not taken out of the UK. This will remain an issue whatever arrangement arises on foreign profit, and whether or not the likes of Shire and UBM have Irish tax residence or not. Unless this is appreciated all else that is discussed is irrelevant.

The key issues for debate then relate to why the UK does not collect what it expects is due to it, as is too obviously the case. There are a range of issues here where policy initiatives would radically help the UK protect its tax base in the interest of all its residents (and that seems to me to be the basic duty of the UK government). These are

1) The overly generous UK tax treatment of interest paid where interest is tax relieved in the UK even if used in a foreign enterprise owned by a group has to go. This is simply using the UK tax system to subsidise foreign operations, and that is absurd.We should only give tax relief for funds used to finance UK activity. Of course there are problems of definition that result from this e.g. is buying an overseas subsidiary a UK activity or a foreign activity? I accept that. But it’s universally agreed that our system is more generous than most in the world and we clearly need to review this and develop an unambiguous and robust strategy for changing this rule in the near future.

2) We need to commit to cooperation on bolstering the tax base. So we must work with the EU on the CCCTB and on moving towards methods of unitary apportionment of profits. We must fully commit to methods of stopping tax abuse: for example we should support measures to ensure that companies are brought within the scope of the EU Savings Tax Directive to ensure that information is automatically exchanged on financial earnings of companies earning funds in locations in which they are not resident. At HMRC level I think there is good cooperation on tax: at Treasury level there is resistance. This has to end.

3) We need to know where companies are, and what they are doing in each location in which they operate. This is vital. The UK must back a call for Country-by- Country accounting which can provide enormous benefits by showing just what global companies are doing, and so make them accountable. This accountability of corporations to countries is absent now, and some are claiming it does not exist. That is not true. This is a way of reclaiming it. And it will help show who is, and who is not, paying their taxes, and where. Philosophically this is vital to this process. The argument that capital can roam unfettered and feckless around the world has to be challenged.

4) We need a general anti-avoidance provision in UK law to provide the flexibility to kill the more esoteric forms of tax planning as they happen, and not retrospectively. TJN has proposed this and a change to the way we interpret tax law to use an equitable basis of interpretation so that the will of parliament is respected (as it should be). We’re not alone though. So has Prof Judith Freedman at Oxford University.

5) We need to strengthen transfer pricing provisions on payments to offshore if it cannot be demonstrated that the IPR located there was generated in the place to which payment is made. This is key: IPR is not created offshore, it is relocated there. If IPR cannot be shown to have arisen to the place in which payment is to be made then as a matter of course the UK should not allow tax relief on the payment being made.

6) We need research to be done on the use of formulaic apportionment as either the basis for UK corporation tax, or as the basis for an alternative minimum tax to stop excessive tax avoidance. Mike Devereux at Oxford has shown that the UK will be 8% better off as a result of using formulaic apportionment. This must stimulate more work.

This is just an opening agenda of necessary tax and other ideas that should be pursued. But I stress in suggesting them: we’re not fighting to artificially keep companies here. We win real jobs, real opportunity and real profit by having great infrastructure and well educated people, largely paid for by tax. Our job is to make sure that corporate profits earned here are taxed here and we should leave these corporate profits really earned elsewhere to be taxed in those places. The loss of jobs from HQ relocation will be tiny when purely tax driven, as UBM and Shire have shown. The issue is therefore about UK tax and not artificial relocations.

One final vote winner though: corporation tax should be reformed so that small companies have a quite different, separate tax altogether. These small companies would be those not owned by PLCs or entities registered outside the UK or qualifying as ‘large’ companies as defined in company law. That’s probably 97% of all UK companies and they need their burdens reduced to encourage real economic activity. At present they are being hindered by the rules created for the tiny majority in the small number of large companies who are creating most of our corporate tax problems. By splitting these groups into a quite different types of legal entity we can provide UK companies with separate tax and regulatory solutions that reduce the burden on the growth of those entities that make real contribution to the UK, so making their taxes fairer and more transparent whilst leaving the rules for corporations that are really separate from their owners quite distinct, and appropriate to their needs. I’ve already suggested how this could be done.

Do this lot and there’s not just a vote winning strategy in here: there’s a real tax strategy for the UK and those who really engage with it.