Labour's Tax review, published yesterday, includes the recommendation that:
Tax returns, related computations and documents of all large companies must be made publicly available. The public availability of corporate tax information will improve the quality of information available to parliamentary committees to scrutinise the effectiveness of HMRC in meeting its objectives.
I have to say that I disagree with this suggestion. I believe it inappropriate for a whole range of reasons, even if I am aware that by saying so I disagree with the demands made by Margaret Hodge on this issue, those made by many NGOs and now by Prem Sikka and some Tax Justice Network colleagues. There are two reasons why I do this: firstly because I think that publication of corporation tax returns would come way down the list of additional information that I would seek to be published to deliver tax justice and second because I very much doubt that such information would, in any event, be of much use to anyone, including tax campaigners whilst at the same time putting some quite unjustified information into the public domain. Let me deal with these issues in turn.
The additional information we need before we get to corporation tax returns
Before we ever get near the publication of tax returns by any company I think we need to have reported:
- Public country-by-country reporting for all large companies, without exception (which issue is not mentioned in the report);
- The full accounts as submitted to the shareholders of all companies, whatever their size, because maybe 90% of all companies are exempted from this requirement at present, meaning we have no information on their tax affairs at all, despite tax evasion amongst them being a much bigger problem than that of tax avoidance amongst multinational corporations;
- Verified data on the beneficial ownership of companies;
- Consolidated accounts for the accounts of all the UK trading subsidiaries of a foreign owned parent company whether those UK based companies are themselves directly grouped or not;
- Details of the intra-group trading of group companies (without exception), which is exempted from publication under the terms of IFRS 8 at present.
Improved tax notes to accounts, as we are pioneering in the Fair Tax Mark, would also be a priority.
I say all this for these reasons:
- The volume of data in corporation tax returns is enormous;
- There is no such thing as a group corporate tax return because groups aren't taxed as such, so the demand might actually require the publication of hundreds of separate returns, each of which in itself may make little sense;
- It is not clear whether the demand extends to foreign subsidiaries or not, but if not then it leaves a gaping void that only country-by-country reporting can fill;
- Without explanatory support notes that data would be almost meaningless to a lay user;
- Because of the volume of data the chance that anyone could make use of this information in any meaningful way would, I think, be remote.
In other words, the report makes recommendation of the publication of the wrong additional data at this time, in my opinion.
The right to confidentiality
There is, however, another reason, and I have made the point before. This is that corporation tax returns do include commercially sensitive data. I can see no reason why details of a company's litigation (which may include details of counter-parties and claims) need be published to the extent often required in corporation tax returns and support papers, or a detailed analysis of its capital spending, and a break down of many other items. There is no more reason for this to be in the public domain to understand its tax than for detail of its payroll to be published to understand its accounts. I am no fan of secrecy, and I want vastly improved transparency from companies, but there have to be boundaries and corporate tax returns and computations can include data impacting many other parties as well, some of whose privacy (to which individuals have much stronger entitlement than companies) would be compromised in the process. I think therefore this is a step too far.
But it's also an unnecessary one. The purpose of all reporting is to understand risk: it is not to know every blow by blow detail of what a company does or to to be able to check HMRC's workings. We simply do not need this data to hold a company to account if we have the data I note above: in most case that would give us the vast majority of what we need and if parliament needed more it could ask, in camera. But I think that far enough. A sense of proprtion is required here, and any demand has to recognise compromises of cost and risk to the privacy of others in relation to utility. That weighs against publishing corporate tax returns in my view.
I suggest focus should be on what we really need. There's ample to do there already. Let's get public country-by-country reporting first.
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Those out there who just lump you into the traditional leftie bracket would do well to read this post. Yours is a very reasonable and well argued proposition.
It might also make me very unpopular
But that’s life
Having and sticking to principles, like telling it how you see it, not how others want you to see it, and being prepared to change your views in response to argument/evidence that convinces you are admirable traits. The seeming paucity of those traits in much of public life must surely lie at the heart of so many of the political problems we’re going through.
In the interests of demonstrating my support, not any suspicion that you will, don’t change!
I’m too bloody awkward to do that
I think publication of tax returns would be useful. It would show, for example, whether foreign branch elections had been used, group relief movements within a group, overseas tax actually paid. Further the reconciliation from pre-tax profit to taxable profit would be much more useful than an IFRS total tax reconciliation, for those wishing to understand a company’s tax drivers. In theory most of the pertinent information should be in the tax note to the accounts but in practice the tax note often leaves a lot of guess work to be done, especially when it is consolidated.
In terms of your arguments:
1. Tax returns can be large but no larger or confusing than a set of accounts and the really interesting information is contained in one or two schedules (also most tax returns cross reference figures to a greater degree than financial statements).
2. There is a danger of information overload here I agree but most large groups have one or two big trading subsidiaries who generate the bulk of the profit and these would be the interesting returns. Also things like group relief will be cross referenced giving users the ability to navigate the group.
3. Totally agree there is a gap unless you include foreign sub tax returns and overseas tax returns submitted by UK companies.
4. I’m sceptical of whether companies can disclose all of the information needed to hold them to account over tax in a way which is concise neat and understandable to a lay person. The tax affairs of large international businesses are so complex and multi-faceted that I don’t have the vision to see how they could be condensed into small one or two page reports. I agree we should try but I think having the detailed stuff in the public domain allows activists the chance to really scrutinise companies and hold them to account.
5. With all of this type of information there is a danger of overload but I don’t think consolidated accounts or CbCR reports (in their current un-audited form) are useful without this background detail. Yes they show profit and tax in different countries in a more condensed format but they assume that users know what should have been paid. In their current form (for example extractive industry disclosure just made for 2015) CbCR reports give very detailed payment information (by field in some cases) but don’t actually demonstrate application of the appropriate tax legislation whereas tax returns do, or at least should. As I said above a good tax disclosure in the accounts could give you this information but the level of aggregation of line items and the use of total tax recs can make it very difficult to make sense of the accounting data (even as an accountant). Again I don’t think this is data that the public will be able to pick up and understand but then I don’t think you’ll get to the bottom of these companies tax affairs without trawling through a lot of data.
I understand the argument about confidentiality but for a lot of companies there probably isn’t anything commercially sensitive in their tax return that a competitor couldn’t glean from the accounts or trade publications. Where there was something commercially sensitive (and I agree litigation or capex spend could be) then I think disclosure could be amended so as not to jeopardise the company’s operations, this might mean one return going to HMRC and a separate one with amended disclosure going to Companies House intended for public access. I also think this is relatively straight forward for companies, publishing a tax return (which they have to produce anyway) or a slightly amended version with anonymised counterparty names and detailed asset addition schedules suppressed doesn’t seem burdensome.
In the wider sense though I don’t refute the necessity of publishing the other information you’ve listed. In particular I couldn’t agree more about the need for more detailed transfer pricing documentation, I think once we can understand how these groups shift profits internally and demonstrate how flawed the ALP is for connected companies we’re on the way to getting rid of a lot of avoidance.
Thanks for this
Three points as I am pushed for time
1) EITI style data is not CBCR
2) Sio what about group relief elections? What is wrong with the group being a single entity for tax when economically it is, as TJN argues?
3) I know of no NGO with the capacity to use this data
Thanks for the speedy response!
1. Noted but I still think tax returns provide an extra layer of data (the application of tax legislation) which I would argue is more difficult to get from accounting information or even the CbCR templates I’ve seen (specifically the one included in Action 13 of the BEPS guidance).
2. I’m not arguing against the merits of unitary taxation, my comment is aimed at the opacity of group relief disclosures in accounting information. I think it would be easier to make sense of how group relief has been used from tax returns rather than accounts. I understand that consolidated accounts show an ETR once group relief has been taken into account but I don’t think users get an appreciation of where group relief has been applied and where underlying losses are generated or an understanding of the commercial substance behind the loss. BHS Limited for example made losses (part of which were made up of intra-group management charges) which it probably surrendered to a company elsewhere in the wider retail group however it is impossible to tell how much loss was surrendered and where to just from the accounts.
3. No notes to compare with you there but I think there are people out there with skills to lend to CSO’s. Also the extra transparency may promote a behaviour change in business.
My suggestion is that if we need this data then it should be delivered by new reports regulated by what I would call Tax Reporting Standards, but not by the supply of totally unwieldy corporation tax returns. These would deliver specified data in a manageable form: CT returns will not for lay users
It’s a good suggestion and one I think would work for lay users as long as the standards were rigorously enforced and updated to keep pace with the legislation/commerce.
As I’ve said though the devil is in the detail with a lot of this information so I don’t see the harm in publishing tax returns to enable those who are really interested to delve deeper, even whilst acknowledging there is a relatively niche market for this data.
How about the harm to others?
Which I think there will be
If it’s commercial sensitivity you mean I’ve no doubt that some companies would argue it harms them (like the API with Dodd Frank). However as I’ve said I don’t think there’s much commercially sensitive information in tax returns that couldn’t be obtained elsewhere or disclosed in such a way as to negate any risk to the company whilst still providing valuable information re tax
(I realise we probably just disagree on this, bit it’s good to get an opposing view).
I disagree
In the way written by this report – to include all computations – a considerable amount of potentially sensitive data could be disclosed
Agree very much with indent b re full accounts irrespective of the size of the business. As a founder shareholder of a limited company formed in 1997, and at one time NED/company secretary but no longer involved, I have no idea, none, what the remaining shareholders who are directors are paying themselves. It won’t be much because the company has declined to almost vanishing point, but the principle stands. A consequence of the government’s deregulation agenda.