My report for the TUC on corporate taxation in the UK, published today, highlights an issue not picked up by the press, but for me of some considerable significance. That is the decline of corporate reporting for activities in the UK — less than 20% of the largest companies in the UK now reporting in this way compared to 50% a decade ago.
As I note in that report:
In 2000, half the sample of companies surveyed published information in their published accounts on their results arising in the UK. Usually this separate geographical information related to turnover, staff numbers, profit, tax and also to gross and net assets employed, although there was some variation from company to company. Then in 2005 companies ceased to publish accounts in accordance with UK Generally Accepted Accounting Principles and instead published them in accordance with International Financial Reporting Standards (IFRS), issued by the International Accounting Standards Board with the backing of the European Union. Under IFRS rules, data on what are called â€šÃ„Ã²business segments’ could be reported on the basis of the major business activities of the reporting company rather than on the basis of geographical location. The result is that many of the surveyed companies ceased providing any data on their UK based activities at all, so that by the end of the survey period just eleven were doing so. Wolseley plc was the only one to take up such reporting over the period surveyed. Some very notable companies, such as Barclays, Lloyds TSB (now Lloyds Banking Group), BP, BT, Glaxo Smith Kline, Centrica and Legal and General were amongst those giving up the practice. Just none companies reported in this way in 2009.
The fact that major corporations are not now reporting their activities (whether it is their sales, number of staff employed, profits or tax paid) in the UK is a cause for considerable concern. It seems that the major companies quoted in the UK no longer think they have any geographical association with this country, or indeed, any other. They do instead report as if they float above the reality of the geographical space in which the rest of us exist as if they belong to some other global space of which only they are a part and which leaves them without attachment to anywhere.
This however, is a denial of corporate responsibility, which we believe to be based on the duty of the company to the state which first grants its limited liability charter and secondly (if different) in which its activities are hosted. This responsibility to that place or those places (for there can be more than one, and in a complex multinational corporation we are aware there may be up to 150, or more)is, we think, at least in part fulfilled by paying the tax that each state asks of the company with regard to its activities in that place. This is part of the culture of tax compliance which we believe is indicative of true corporate responsibility. Tax compliance is seeking to pay the right amount of tax (but no more) in the right place at the right time where right means that the economic substance of the transactions undertaken coincides with the place and form in which they are reported for taxation purposes.
A company may, of course, suggest it is tax compliant, but the right to limited liability also carries with it a responsibility to report how that privilege (for that is what it is) is used, and in that case we view this decline in the reporting of the national activities of multinational corporations as a serious retrograde step in their accountability. The difficulty it gives in estimating the UK tax gap is simply indicative of the problems this causes, and is in turn representative of the lack of accountability that has been created for multinational corporations during the period when the creation of regulation covering such issues has largely been under the control of the accounting profession.
It is for this reason that the TUC called in â€šÃ„Ã²The Missing Billions’ for greater accountability for multinational corporations including a requirement that they account for where they are located and where they pay their tax. This demand is incorporated in the call now made by many in civil society for what is popularly called â€šÃ„Ã²country-by-country reporting’ by multinational corporations.
Country by country reporting would require disclosure of the following information by each multinational corporation in its annual financial statements:
1. The name of each country in which 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, without exception, including:
a. It sales, both third party and with other group companies;
b. Purchases, split between third parties and intra-group transactions;
c. Labour costs and employee numbers;
d. Financing costs split between those paid to third parties and to other group members;
e. Its pre-tax profit;
4. The tax charge included in its accounts for the country in question ;
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.
If this information had been available for each of the companies in the FTSE surveyed as part of this review calculation of the UK tax gap would have been an easy undertaking. It is for this reason, amongst others, that the
accountability that country-by-country reporting cerates is important. Unless companies can be held to account for the tax they pay, an essential component of their accountability is lost, and reform to ensure this is possible, is vital if we are to guarantee that all companies make their fair contribution to the UK economy over the years to come.