I've been called by a several reporters this week wanting to talk to me about UK Uncut. I'm not sure why, because I've never met those who run UK Uncut, have no involvement in it, and do not know its plans. I therefore suggested they call UK Uncut.
I did however take the opportunity to talk about what I think the issues are concerning tax and accountability - which is something I have been addressing for a long time. As I explained, when it is almost impossible to tell for the vast majority of large companies (who are of greatest public concern) where they make their money, where they declare their profits and where they pay their tax a fundamental issue of accountability is missing from corporate reporting. This has, of course, been the basis for my work on country-by-country reporting. It's my genuine belief that if there was greater accountability on tax paid by major corporations then many of the issues being raised would, at the very least, be subject to better informed debate, and in some cases may be resolved.
So it was pleasing to note this blog post on Liberal Conspiracy, written by Lydia Prieg, a researcher in the Finance & Business team at the new economics foundation (nef).
This week, the European Commission’s call for evidence on country-by-country financial reporting drew to a close.
It is asking whether multinationals should be required to disclose, on a country-by-country basis, information such as: sales, costs, profits, number of employees and taxes paid (and more).
If these new standards are adopted, this would be an important step towards combating international accounting fraud, tax evasion and tax avoidance.
Christian Aid has estimated that approximately $160 billion of potential tax revenue in developing counties is lost each year as a result of “transfer pricing” abuse. For example, a company could have a marketing team based in the UK, intellectual property rights or trademarks based in Switzerland, and production facilities based in China.
Multinationals can manipulate transfer prices by mispricing the products traded between subsidiaries, which thus facilitates the flow of capital between countries. For example, a company may overstate the price of a product being sold from a subsidiary in a high-tax country to a subsidiary in a low-tax country.
This is particularly prevalent when dealing with hard-to-value intangible assets, such as trademarks, which can be assigned any geographical location. “Management fees” to individuals and entities domiciled in tax havens are also commonly deployed, and the rates at which different subsidiaries lend to each other also often differ.
It is also fundamentally unjust that small and medium sized businesses, which are too small to have overseas subsidiaries, pay their full tax bill, whilst large corporations dodge their social obligations.
There are other benefits too:
- As many multinational companies operate across the globe under differently named subsidiaries, it is currently often difficult for investors to determine all the locations in which a company operates. This means that many investors are unaware of the geopolitical risks to their investments.
- Country-by-country reporting would also help ethical investors make informed decisions when deciding which companies they wish to invest in.
- These new rules would help increase transparency in developing countries, where corruption is rife. For example, citizens would be able to see how much their governments make exporting natural resources to the West. This would shine a light on the large sums of money that go directly into officials’ pockets.
In 2009, even Forbes admitted that “intra-company pricing crosses the line from tax avoidance into outright tax evasion”.
Let us hope that the consultation heralds a new era of transparent accountancy. Let us also hope that the major accountancy firms support this move and live up to what used to be the watchwords of the profession: “true and fair”
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Richard, is country by country reporting the same or similar to Segmental Reporting?
@Stephen
Yes – but a long. long way removed from International Financial Reporting Standard 8
Wouldn’t Transfer Pricing rules enacted by the countries who are purportedly being deprived of tax revenue be more effective. At least TP regulations would have teeth by making appropriate adjustments and getting the correct tax take.
Seems to me that country-by-country reporting is pretty toothless insofar as countering tax avoidance is concerned.
@Justin
A great many don’t have TP rules
And if they do they can’t get data
So country-by-country reporting is a risk assessment tool to help them choose the right cases to pursue when they have limited resources to allocate
@Justin
Transfer pricing rules are notoriously difficult to enforce. Country by country reporting is essentially a signpost. It tells each jurisdiction in which a company operates, where manipulation might be occurring. Then more specific inquiries can be made by the local tax authorities.
I come from an African country.
Iam concerned to see that you are advocating Transfer pricing control as a means of providing poor jurisdictions with tax money. Since when did that happen?
The opportunity for transfer pricing will disappear as the free for all caused by the collapse of the financial systems and cicuits of the French and the British colonial systems itself is integrated into the new global American capitalism. The old ways were replaced by a free for all in which American multinationals moved in, with their so-called Peace Corps and the marines to bribe, insinuate and hide behind, to take over and spread their version of capitalism, and the consolidation of everyone’s capital in the hands of their banks. Look at how the rest of the world has had to pay for the American’s foolishness in believeing that they can finance cheap social housing through a stock market, and persuade the rest of the world to invest their pensions in it! If they can’t pay they walk away. US economy is a Ponzi scheme: borrow, and don’t bother to work, someone else will pay.
Transfer pricing is a corporate tax issue. Leave it to the Corporations, it is their lot. If you work on the basis that a corporate tax model has to be adopted by everyone, are you not assuming that every country is not only industrialised but able to comprehend this system in its economy? How senseless.
This must be wrong.
You should be advocating either a transport levy or a source based system of taxation on minerals and extraction, coupled with customs duties which are simple to collect and administer. Then, once they have paid their dues, the multinationals can be subject to their home country jurisdiction for their share of the corporation tax base and profits made on the industrial processes used.
That is how in France, Gaston Febus managed to make the rivers of the South West navigable, and gave that part of France, a better economy. Do not concentrate on eveil, you will only see evil. Concentrate on good, and the peiople you help will prosper. See even someone from Africa can understand.
Don’t forget, corporation tax is a tax introduced to finance war and agression. You should not be encouraging its propagation or pushing it down people’s throats. What benefit do you get from that?
Please send this to the Rowntree trust, as they are believers too. They may understand.
@Pierre Hache
I do argue for source based tax
And high mineral royalties
And am proud to have done so
And country-by-country reporting also shows if these are being paid too
I happen to think profits based taxes help too
And that corporations are going to be on the international trading agenda for a long time to come so we had better tackle them
And I don;t think you can reasonably sat corporation tax pays for aggression – all tax can do that
So I’m not sure we share political perspectives – but I think I call for a lot of what you do too
@Richard Murphy
Thank you for your comment.
My politics? I don’t know.
Corporation tax was introduced to fund war. Income Tax too. War uses industrial produce, not grain.
Why bother asking for details of each country, when the money has already gone? Take it before it goes. This accounting is too late. It does not help.
Contrary to you, not what I said, profits tax still pay for agression too. Why are there troops in Africa? Is it Africa who is paying, or you?
But, why waste time with this and accountants who fiddle tax returns – tax at source. You can also tax agriculture like this.
I see you have your own intentions.