Country-by-country reporting : panacea or pipe dream?
An ardent tax justice campaigner, an ex-cabinet minister and representatives from two of the largest companies in the extractive industry debated the merits of country-by-country reporting (CBCR) at International Tax Review’s Tax and Transparency Forum on Wednesday and, unsurprisingly, the concept provoked mixed reactions.
Richard Murphy, a tax justice campaigner who conceived the idea ten years ago, argued the case for CBCR, while Chris Lenon, tax policy adviser for Rio Tinto, and Stephen Blythe, BP’s tax director, said the proposed accounting standard would do little to help governments establish whether companies were paying the right amount of tax.
Former Secretary of State for International Development, Clare Short, who now chairs the Extractive Industries Transparency Initiative (EITI), detailed the progress made by EITI and explained why there is still much work to be done.
Murphy’s CBCR would require companies to disclose a full consolidated profit and loss account for each and every jurisdiction in which a multinational company trades, including sales, costs, an analysis of labour costs and head count and full tax notes – including a deferred tax analysis.
Murphy said CBCR would also require disclosure of all intra-group sales and purchases, all intra-group hedging and derivative trading and the disclosure of all intra-group financing activity.
“It is impossible to say that existing accounts for multinational corporations can possibly give a true and fair view of business when up to 60% of world trade – the part that takes place on intra-group basis – is totally lost to view in existing financial statements,” said Murphy.
Murphy said the standard would make companies accountable for the tax they pay in the countries where they generate their income and would let people hold governments to account for the use of tax funds.
However, Blythe said the CBCR measure is unjustified and would not help a reasonable person to determine whether a company has paid the right amount of tax or not.
Lenon said that in all areas, business wants to see a single global standard, since it facilitates international trade and investment, but he raised concerns with CBCR and said he thinks it is directed at working out unitary taxation.
“I am not a fan of unitary taxation,” said Lenon. “We have the same issues whichever form of tax system we have and there is not a panacea in moving from the arm’s length principle to unitary taxation.”
Murphy said the arm’s length principle cannot work under the present accounting system, the International Financial Reporting Standard, because it suppresses data on intra-group trading.
And, according to Murphy, there are numerous benefits for companies if CBCR is adopted: the standard would provide the best chance to assess whether accounting profit and economic profit are aligned, reducing the possibility of investigation from revenue authorities if they are; the data would help investors allocate funds more efficiently; tax risk and the risk of corruption would be reduced because of greater exposure, meaning the cost of capital would also fall.
However, Lenon said the costs for companies to comply with CBCR would be significant.
“Anyone who has ever used SAP [a type of data processing software] will know the information is not that easy to get hold of,” said Lenon.
“I think the key issue is building the capacity for tax authorities in the developing world, and that includes exchange of information, but should focus on the tools for tax authorities to assess the right amount of tax and develop coherent tax policies,” Lenon added.
The principle behind EITI is that companies should report what they pay to governments and governments should publish what they receive, and the information should be made available to the public so they can hold governments and companies to account.
Short said governments think that signing up to EITI will enhance their reputation and attract more inward investment while the incentive for companies is to prove they are transparent.
However, the initiative still requires a lot of further development.
“There is a limitation in the figures EITI is receiving and this needs to be built upon,” said Short. “There is widespread agreement that we need to give countries incentives to report more widely than they do now, for example, not all countries agree that the reported figures should be separated into which companies actually make the payments,” she added.
Short also spoke of providing incentives to companies to provide additional disclosure and said the EITI hopes to complete a review on the future of EITI this year.
Blythe said many companies would like to see EU member states signing up to EITI.
Extractive industry companies are also concerned about mismatches between US and EU regulations putting taxpayers in a difficult situation.
“Companies should not be put in a position where they need to choose which law to comply with and which to break,” said Lenon.
Lenon also said that the converging timelines for the US amending its Dodd Frank Act to require all extractive companies to publish payments made to US and foreign governments in the countries where they operate, and the EU’s steps towards similar regulations, provides an excellent opportunity for the two to forge a global standard.