No. 9: Richard Murphy
Richard Murphy came up with the idea of country-by-country reporting (CbCR) in 2003 and his vision reached a milestone this year, earning him a top-10 spot in this year’s Global Tax 50.
In July 2017, the European Parliament voted to adopt public CbCR – that is, CbCR where the public, not just tax authorities, get access to the data.
In the decade and a half-long war that Murphy has been fighting against aggressive tax avoidance, this is the prize.
From when Murphy first came up with what then seemed to be a radical concept to the most recent vote in the European Parliament, it is evident that there is a real chance to curtail financial secrecy. "The rate of progress has been phenomenal, even if it feels glacial to everybody outside the accountancy profession," Murphy tells ITR.
Prompted by international scandals that put intense scrutiny on the financial wrongdoings of multinational enterprises, tax transparency has gone mainstream. "Curiously, I don't get a negative reaction to it [public CbCR] now from large companies," says Murphy. "I can remember when it was treated as if it was one of the greatest taboos: impossible, too costly, technically undeliverable, a demand that was holy unfathomable, that would end all known commercial opportunities ever created by any large company. All of which were complete nonsense of course."
Unfortunately, despite the European Parliament vote, progress has hit a wall in the European Council. Some member states are opposing the initiative, which has led to ongoing technical meetings. As the EU Council has not yet formulated its position, the dossier to achieve this change has now been handed over to the incoming Bulgarian presidency.
Murphy says that these countries who object to the legislation fall in to two categories: "There are those who object to CbCR who are tax havens – and obviously there are European tax havens – and there are those who appear to think that it is somehow creating a competitive disadvantage (that's the UK in particular). And, in addition, those who think that secrecy is important – that's Germany in particular, which has some big hang-up about providing this information for reasons that are very hard to work out because almost every survey on profit shifting suggests that Germany is one of the big losers and that they would win enormously from public CbCR."
"So there are blocks. But there are also countries that appear to be in favour – the Netherlands has, for example, retained that position despite a change of government and France appears to have that position. Will we get public CbCR? I don't think so quite yet. I think we are still on the way. But in the end, we will, most definitely."
Curiously, resistance to public CbCR is not generally from corporations but from countries. Murphy feels that these delays are intended to give time to companies to rid their CbCR of anything that would be embarrassing were it to enter the public domain. In time, he thinks these objections will by and large disappear.
"One of the fundamental questions that CbCR has given rise to over the years is why it has taken civil society [so long] to pioneer this approach and to understand the geographic, geopolitical, tax haven, commercial and other types of risk that CbCR exposes, whether they relate to financial returns, or governance or taxation, and yet the accounting standards authorities have persistently chosen to ignore all of them?" Murphy says.
The lack of involvement from the accounting profession has, quite rightly, called its motives into question. "The biggest impediments to progress are firms which facilitate tax avoidance. That's because they've got so much intellectual property invested in the arm's-length transfer pricing process and they make a great deal of money out of it. They see anything that threatens that as a commercial risk to them. CbCR threatens that profit base that they enjoy, and that is why I believe that they are the major obstacles to progress, i.e. replacing it with something which is obviously more sensible," Murphy says. He feels that bringing together a group of appropriately concerned individuals to create accounting standards would be the ideal scenario for future progress.
With public CbCR firmly on the tax agenda, Murphy is moving to his next mission. He is now discussing the common consolidated corporate tax base at length with the EU, politicians and technical experts at the BEPS monitoring group, which he believes will be the next major international area.
Moreover, Murphy says that the tax narrative is changing and there will be less focus on international tax. "Domestic tax risk is going to be just as important as international tax risk over the next few years and is going to attract its own focused attention."
"Tax still remains surprisingly outside the policy debate as an instrument for governments to influence the way in which economies are run. It is still seen as a very technical issue and only of relevance at a very microeconomic level," Murphy says. "But actually tax, is much more than that. It is at the core of macroeconomic management of an economy now that interest rates simply don't work for that purpose. Right across the accounting, taxation and legal professions there is a lack of understanding of tax as an instrument to government policy and I believe that awareness of this is going to be an upcoming area, which is going to be much more significant in the future and demand a lot more attention."
Murphy's next mission could be one to watch if his past achievements on CbCR are anything to go by.
Congratulations on your inclusion in the Global Tax 50. As I'm sure you are familiar with, a part of the Tax 50 is a collection of profiles highlighting their achievements from the year and the prominent projects they have worked on. This year, the editorial team at ITR have chosen to include you for this year's milestone of progress with public country-by-country reporting. I was hoping to get a few sound bites from you and discuss this year's progress with the law.
Last I read the progress of the law in Council has been at deadlock because of an increase in technical meetings called about it. Are you involved in any of these/or do you know why?
As the pioneering father of public country-by-country reporting, I can see from your blog that its favourable vote in the European Parliament in July was a huge moment for you. How was that cup of the tea? Jokes aside, if I asked you back in 2003 if you thought CBCR would be adopted into law in the EU what would you have said?
You mention there are two weaknesses in the law; can you explain to me how these inhibit the effectiveness of CBCR? Is there anything else you would do differently?
What discussions or other involvement of yours would you highlight as milestones throughout the progress of public CBCR?
Do you have any other ideas in the pipeline that could become the basis of a solution to an international problem?
Anything you would like to add or highlight in your profile?
I've taken part in public hearings on it [public CbCR]. The issue is clearly that the Commission want it, they proposed the legislation, the Parliament want it, they passed the legislation, the problem is that some countries don't want it, they object to the legislation and they fall into two categories it seems: there are those who are tax havens (and obviously there are European tax havens) and there are those who appear to think that this is somehow creating a competitive disadvantage, that's the UK in particular, and those who think that secrecy is important and they tend to overlap with those who think it's a competitive disadvantage and that's Germany in particular, who have some big hang-up about providing this information for reasons that are very hard to work out. Because in fact every survey on profit shifting suggest that Germany is one of the big losers and would win enormously from public country-by-country reporting in any consequent change in behaviour by corporation, so why then they are so adamantly opposed is quite hard to fathom. So there are blocks, there are countries that appear to be in favour - the Netherlands has for example retained that position, France appears to have that position – so will we get it? I don't think so quite yet. I think we are still on the way. Curiously, I don't get a negative reaction to it now from large companies. I can remember when this was treated as if it was one of the greatest taboos, impossible, too costly, technically undeliverable, a demand that was holy unfathomable, would end all known commercial opportunities every created by any large company, etc.
All of which were complete nonsense of course.
We know that it is entirely possible to deliver it now; of course they have to deliver it now its part of the tax-reporting requirement for large companies. So all those objections were pretty hollow and I actually don't think many large companies are really worried about it anymore – bluntly. I think they have got a point where they are basically reconciled to its happening – is the impression I get. I think large companies are also in the process of cleaning up their act. I can see some evidence of that from the search I'm doing and there appears to be a move away from offshore. Companies are closing down unnecessary offshore subsidiaries; they don't want to have to disclose information that could be embarrassing for them if it went public.
I almost feel that the delays are somehow designed to facilitate that process as though, 2015 the OECD said it wanted it but companies hadn't fully anticipated it and so they need time to get their act in order/ducks in a row before we actually get to publishing information for everybody and they're being permitted that by delays being built into the system by objections at this stage. Do I think that in a couple of years those objections will by in large disappear? Yes because I think we will see more large companies saying there's no problem here lets get on with it. Investors are becoming more vocal, we are seeing the local authority pension funds in the UK are saying we want this, I'm seeing charity investment funds and the property funds saying we want this and those are two significant investment markets. We are seeing a willingness to embrace this amongst global reporting initiatives and others appear to be moving in this direction so again things that weren't heard, said, weren't on the table even three or so years ago are now being refereed to as this is on its way its just a matter of continuing pressure.
But there will need to be continuing pressure to do it, I'm not pretending otherwise. This does eventually come down one of two things:
There are two ways of delivering public country-by-country reporting. One is of course the EU government decide to do it and the other one is that the accounting profession get its act in order, listen to public opinion, listen to enlightened companies and say actually this is useful financial data which should be included in the financial statements of large companies so that investors can fully understand the risk that they face by giving money to these companies and where and how they allocate that, to which countries, with what rates of return, what tax take and size and matter which shareholders need to understand. Why is it, at its core, one of the fundamental questions that country-by-country reporting has given rise to over the years is a question of why has it foregone to civil society the likes of me, bluntly, to pioneer an approach to understand geographic, geopolitical and tax haven and other types of risk whether they be financial or governance or taxation that the accounting standards authorities have chosen to ignore? Why have they decided that this is an issue that they do not wish to address and I think that's the important question because there are many who question the validity of both the UK's financial reporting standards and international collection of reporting standards and the regulators who back those? I think that is a very important question to ask. Why will they not apparently even accept that this is an issue.
FRC never really thought about CbCR and one of the UK's accounting standard setters who was involved in the FRI102. 'Its not accounting information is it?'
Nonetheless, I don't deny it lets be blunt. When I first thought it up, rather a long time ago now. Well it seemed so in accounting terms; the rate of progress has been phenomenal even if it feels glacial to everybody else. It's been 15 years since I first thought this idea up now so why is it that the accounting profession is still in denial about what's about. It is however fundamentally useful to exposing tax risks.
The trouble with all this and again I got back to the failure of the profession on this. What we need is a proper accounting reporting standard. Because as much as I like the world's politicians and some of them are descent people, they aren't accounting experts. It's time that we got some accounting expertise behind creating a proper accounting standard on this issue. Now, obviously I have my concerns, I'm well aware that not all the accounting profession share the same perspective on the importance of this issue or the use of this data as I do. If we actually, frankly, got together a group of appropriately concerned individuals to set a standard I think we could overcome many of the difficulties that arise at present. It would be obvious it would be necessary to disclose intragroup transactions and explain how the group accounts reconcile with the CbCR accounts.
I would love to see the creation of proper tax reporting standards which will provide the information that is necessary to appraise what tax is paid where because this is one of the biggest issues for multinationals and their credibility. Why won't multinationals and the accounting profession take it seriously is obviously the fundamental question. Why has it still got to fall to NGOs to lead the way on this issue? After 15 years I was hoping that wouldn't be the case and it still is.
The biggest impendent to progress is, well there are four of them actually: there called PwC, EY, Deloitte and KPMG. And that's because they've got so much intellectual property and so much invested in the arms-length pricing process and transfer pricing methodologies that they make a great deal of money out of that and I believe that they are the major obstacles to progress with replacing it with something which is obviously more sensible. Of course there are other people who would object to the reform of the international taxation system, in particular countries like Ireland who obviously have much to lose. But the reality is like it or not we are going to have to move on and I think there is that awareness and that is the big debate quite how more unitary develops, how the CCTB develops is obviously open to question. But it is serious heavyweight thinking is being put. I'm discussing this at length inside the BEPS monitoring group, which I'm a member of. We are having serious discussions about how can this be done. We are interfacing with EU, politicians and technical people on this issue because it's so important and I believe that is the next major international area. Actually, I believe to some extent the next area for taxation is that there will be less focus on international tax curiously. I think the focus on international tax being incredibly important is leading to significant change but whilst tax avoidance internationally has been what has dominated the headlines for a long time and I certainly helped that process, quite deliberately. Domestic tax risk is going to be just as important and is going to attract its own focused attention over the coming years as well.
So do I expect that there will be some changes to the tax narrative. There will also be discussions about alternative tax basis and in international tax obviously that is going to lead to questions about wealth of taxation, the taxation of capital, which has been generally dismissed as 'well there's not much we can do about that because capital is mobile'. So it is, but under common reporting standards, capital may well be mobile but capital is also beginning to be accountable and so there well be a new debate opening up about wealth taxation. I have a chapter in a book coming out this year with the Old Bank. Its called: Winning the Tax Wars, it came out of a conference with the World Bank. But it indicates again another direction of travel. They want to talk about tax gaps that they haven't before.
I think the thing we haven't mentioned here is the significance of the tax gap. Tax still remains surprisingly outside the policy debate as an instrument for government to influence the way in which economies are run. It is still seen as a very technical issue with a very micro level, which is addressed as if it is just an *outrage of money but actually tax is much more than that. I mean that was the reason why I wrote my book, the joy of tax, which I genuinely think of as an appropriate title. Tax changes the way we can structure societies. Most people, who are involved in taxation as a profession, don't see it that way. They don't understand that tax the nature of tax, as an instrument for government policy and in that sense tax education is extremely weak. There is so little macro understanding, macro economic understanding of tax, amongst a tax profession that is heavily micro economically focused. In practice there is right across the accounting, taxation, legal profession a lack of understanding of tax as instrument to government policy and I believe that that is an upcoming area, which is much more significant. I'm shocked at the little attention. Right across the board
The Global Tax 50 2017
The top 10 • Ranked in order of influence
6. Arun Jaitley
The remaining 40 • In alphabetic order