Country by country reporting: the debate in Parliament

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The House of Commons held an adjournment debate yesterday to discuss tax avoidance and evasion. The debate was timed to coincide with Christian Aid week – which is focussing on tax avoidance and evasion as a cause of poverty in developing countries.

As David Taylor MP introducing the debate said:

It should be a source of consensus, or a no-brainer as the tedious phrase goes, that tax is the most sustainable source of finance for development work in poor countries. It promotes accountability and allows Governments to generate revenue from their nations’ economic activity to invest in their own infrastructure, health care and education. A broad tax base improves representation and accountability between states and citizens. It encourages good governance, as Governments who depend on their citizens for revenue are more likely to act in the interests of the people.

He added:

The estimable researcher on these matters, Professor Prem Sikka, has pointed out that transfer pricing is used as a “key mechanism” for dodging tax by multinationals all over the world, yet its abuse is scarcely on the political agenda. These are not abstract figures. They represent essential services that the world’s poorest people are being denied by merciless and venal exploitation, not just of individual states but through the lack of regulation applied to the global movement of capital.

And as he noted:

The Government must recognise that automatic tax information exchange between all jurisdictions, including tax havens, is the only system that can deliver rightful tax flows to poor countries. The Minister’s response to that specific point would be immensely helpful and much appreciated.

Of course, some will argue for a bilateral agreement on tax information exchange. Indeed, the Government have argued against automatic TIEAs, saying that developing countries might not have the capacity to use the data that would be transferred and that the information transfer would thus be for nought. That argument is patently absurd and deeply patronising to developing countries. It suggests that they do not have, and could not quickly develop, the ability to deal with large quantities of data of the sort that automatic information exchange would generate. In fact, many developing countries already use international software and data sources to deal with vast quantities of data‚Äîmost obviously, when one’s passport is scanned at any customs point when entering an airport in almost any country at any income level.

I agree. I also agree with his solution:

At present, no one can tell what profits are made by companies operating in developing countries, or what taxes they have paid there, because companies are obliged to provide only a total profit figure for the whole world. That is an open invitation to avoid or evade tax liabilities—an invitation that most companies take, given the $160 billion figure for tax evasion and avoidance that I cited earlier. It is critical that the Government actively try to secure an international accounting standard on country-by-country reporting. That would provide investors, regulators and tax authorities with a powerful indicative tool to assess risks and highlight abuses.

An international accounting standard for all industries that would require companies operating internationally to disclose the profit that they make and the tax that they pay in each country in which they operate would equip developing countries with the information that they need to target corporate tax abuse. To secure an IAS on country-by-country reporting, the Government, acting in alliance with other leading economies, would need to ask the International Accounting Standards Board to create such a standard. It is important to note that the gang of four‚Äîthe four big accountancy firms of Deloitte, Ernst and Young, PricewaterhouseCoopers and KPMG‚Äîare represented on the IASB, so they have a direct say in setting international accounting rules and standards. Interestingly, Christian Aid’s proposals for the country-by-country reporting of corporate profits, which are supported by ActionAid, have been rejected by the big four, and no convincing argument has been posted to date to explain why, although we can draw our own conclusions.

The IASB is little more than a trade association for international accounting firms that is funded largely by the gang of four and other corporate entities. It might be time to relieve it of responsibility for setting international accounting standards. Perhaps that should be passed to a supranational body such as UN so that appropriate mechanisms can be developed. I am not sure whether that idea was floated at the recent G20 summit—perhaps the Minister will tell us—but the current situation is untenable. It demonstrates, once again, that in spheres as important as global accounting, self-regulation does not work—it militates against the public interest and the public in the poorest countries. However, G20 Governments should commit themselves at least to approach the IASB in support of a country-by-country profit reporting system. I hope that we will receive an assurance that such an approach will be made today.

If implemented, the measures would have the potential to deliver a sum that would have a big impact towards eliminating poverty on a scale never seen before and achieving and embedding the millennium development goals. The Minister, who is a highly regarded, efficient and conscientious member of the Administration, might be able to elaborate on the UK’s interpretation of the G20 agreements on the regulation of capital flows to tax havens, and the way in which the impact on developing countries can be reduced.

He’s right: nothing else could deliver more to developing countries. And this is a moral debate:

On 12 May 1789, William Wilberforce made his first major speech in the House of Commons on the abolition of slavery. He argued that slavery was morally reprehensible and a matter of natural justice. Tax evasion on the present massive scale has been described as the most harmful economic condition since slavery, as it contributes to the desperate global poverty endured by millions every day. The financial crisis has presented us with an opportunity to reform the economic system and to address global injustices, which are hugely damaging to the world’s poorest people. Left untouched, the current system will for ever cast doubt on the legitimacy of profits derived from corporate activity in poor countries.

This was a powerful speech. And it rightly set the tone for the debate that followed, of which more will follow.