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Study finds world’s largest companies lacking in transparency

10 July 2012

Salman Shaheen - ITR

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A new study has found that while the 105 biggest public companies have improved on their commitments to tackling corruption, they are severely lacking in country-by-country reporting for tax.

The study by anti-corruption group, Transparency International, gave the 105 top publicly-traded companies scores out of 10 for their public commitment to transparency, based on public availability of information about anti-corruption systems, transparency in reporting on how they structure themselves and the amount of financial information they provide for each country they operate in.

Statoil topped the list as the most transparent company with a score of 8.3, followed by Rio Tinto, which is a member of Transparency International's Business Principles Steering Committee. Google and Microsoft, also supporters of Transparency International, came near the bottom of the list at 2.9 and 3.4 respectively, while the Bank of China was at the bottom of the rankings with a score of 1.1.

One area where companies scored almost universally poorly was on country-by-country reporting, showing that while companies have acted to stamp out corruption, the area in which they are least transparent is tax.

Even Statoil only scored 50% on this measure, while 41 companies scored 0%. The average was 4%.

"Companies tend to aggregate their accounts only by region for reporting purposes, even though country-level data is available to them," the report states. "While regional presentation may be easier, valuable detail is lost in the aggregation."

Transparency International looked at five areas of financial reporting on a country-by-country basis: revenues, capital expenditure, income before tax,income tax, and community contributions. Among the selected companies, only four disclosed some of the financial data in all countries in which they operate: Statoil, Tesco, Rio Tinto and BHP Billiton.

Rio Tinto, an active supporter of the Extractive Industries Transparency Initiative (EITI), was found by the report to disclose the amount of taxes paid on a country-by-country basis for all countries in which it operates.

Despite this, Chris Lenon, group strategic adviser on tax policy at Rio Tinto, is opposed to mandatory full country-by-country reporting which would see all multinationals publicly declare a profit and loss account, taxes paid, and people employed in each jurisdiction in which they operate.

"I don't believe that this is a sensible proposal," said Lenon. "The information suggested will not be enough to calculate whether the 'right' amount of tax has been paid, though the compliance burden will be huge."

The perceived compliance burden is one of the main arguments used by business against mandatory country-by-country reporting, but Richard Murphy, the accountant who devised the standard, does not believe this objection has much weight.

"Firstly, companies have to have this data or they cannot now be meeting their internal control obligation to properly prepare their tax returns," he says. "Secondly SAP and other computer specialists tell me this would not be hard to generate as a consolidation - after all, every country has to prepare consolidation data identifying intra-group trading already."

Murphy believes that the cost would not be significant bar auditing.

"Auditing is an issue - but right now the fact that whole vast areas of MNC activity is simply not audited at all transfers that risk onto shareholders," he says. "That's not good enough. It belongs in the company. The small cost of extra auditing is a price well worth paying for the lower cost of capital that better assurance and more information would supply."

That even Lenon, who has engaged more readily than most taxpayers with the drive towards greater transparency, is opposed to this level of reporting shows how far companies have to go to be as tax transparent as the report's authors would like.

"If country-level financial information is not adequately disclosed, it is difficult to know how operations in many developing countries contribute to local governments," said Jermyn Brooks, chair of Transparency International's Business Advisory Board. "Experience has shown that the requirement to report encourages companies to build strong management systems supporting disclosures, and in the process improving their anti-corruption systems."

By far the most transparent sector is the extractive industries, which is hardly surprising considering the reporting requirements of the EITI, the Dodd-Frank Act in the US and the EU's impending measures to expand upon Dodd-Frank. Financial institutions, including HSBC, a member of Transparency International's Business Principles Steering Committee, and scandal-hit Barclays, were among the lowest ranked companies for country-by-country reporting.

If other industries are to be made as transparent as the extractive industries, country-by-country reporting may have to be rolled out to all sectors of the economy.

For more on tax transparency and what it means for your business, see the July/August issue of International Tax Review.






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