One of the key Tax Justice Network campaigns calls for country-by-country financial reporting by multinational corporations (MNCs). It wants this to be enforced through an International Financial reporting Standard. Arguments for this can be found here.
Particular benefits would be that there would be transparency on the trading and tax paid by MNCs in every country in the world in which they operate. This would help:
1. The adoption and transparency of the Extractive Industries Transparency Initiative, so reducing corruption worldwide;
2. Developing countries better understand the affairs of the companies they deal with, and so relieve poverty;
3. Expose which corporations work where and so improve transparency;
4. Highlight those corporations that use tax havens and so reduce the risk of capital flight and tax abuse;
5. Provide information on trade flows, currently unavailable and so improve prospects for international co-operation in the interests of human well-being.
Despite extensive lobbying the International Accounting Standards Board did not adopt this suggestion when considering new approaches to what it calls segment reporting (that would cover this issue) last year. Instead they adopted a US accounting standard (SFAS 131) almost word-for-word for use throughout Europe and in more than thirty other countries. They did so to assist what they call the convergence of US and international accounting standards. Their objective in this respect was completely undermined in May this year when the US announced that SFAS 131 is likely to be significantly revised in the near future.
For a variety of reasons members of the European Parliament have also raised concern about IFRS 8 and its usability. In consequence the European Commission is now undertaking a review of that standard, to which review submissions must be made by 29 June 2007.
The Tax Justice Network submission to that review (which I wrote) is available here. Our key messages are:
1. IFRS 8 will not produce reliable or useful information because:
a. The disclosure it requires is not complete;
b. It reduces the already low level of mandatory geographic disclosure;
c. The data it requires is not comparable between companies or even in the same company over time;
d. The required disclosure could discourage good governance.
2. IFRS 8 has been shown to weaken the financial performance of companies that adopt it, so it is not in shareholder's best interests;
3. IFRS 8 data can be produced on a different basis to the rest of the accounts and as such may not be auditable or auditors could be required to certify two profit figures for one company for one period, and this cannot happen;
4. IFRS 8 does not provide the country-by-country geographic data that the following might reasonably require in any set of accounts if they are to be useful:
b. Other providers of capital to a company;
c. Management of the entities concerned;
d. Employees and other directly engaged stakeholders;
f. Tax authorities;
g. Regulatory agencies;
h. The local populations of countries in which the reporting entity trades;
i. Those with social concern.
5. The process used by the IASB in adopting IFRS 8 was flawed;
6. The claim that IFRS 8 must be adopted by the EU to ensure that convergence with US accounting policies takes place is fundamentally flawed: in May 2007 the US announced that they are to fundamentally revise their standard that is identical (bar one or two words) to IFRS8.
7. As such there is opportunity to fundamentally review segment reporting now and to introduce country-by-country reporting.
8. In the meantime IFRS 8 should be rejected by the EC as it is not fit for purpose and the existing IAS 14 on segment reporting should be retained (as it includes a much stronger emphasis oh geographic reporting that IFRS 8) until country-by-country reporting can be adopted.
If it is possible it would be of considerable use if you could mail any comments you might have on IFRS 8, the need for country-by-country reporting, and the benefits it might provide to the European Commission by 29 June. Send them to Piotr.Madziar (at)ec.europa.eu. If you have little time a simple note saying that you support the submission by the Tax Justice Network would be appreciated. Alternatively, the text of this mail provides some ideas for comments. So that we can monitor comments please send me a copy your mails richard.murphy (at) taxresearch.org.uk
We proved that submitting comment was of great benefit when dealing with the International Accounting Standards Board. It would be fantastic if we could repeat that process now. This issue might seem technical but let's be clear about one simple fact. Commercial abuse of transfer mispricing costs the developing world hundreds of billions of dollars a year in lost income. That is many times the level of aid they receive. The standard we propose would not stop that abuse, but it would massively curtail it, whilst providing campaigners on trade, the arms trade and the environment with enormously valuable information to support their campaigns at the same time.
Please support this cause now. We can make the world a better place, even if by changing the way we account for it.