Let’s go for full country-by-country reporting

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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 Steinbr?ºck, 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 ‚Äòon 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.