The report says that companies in the extractive industries are using rogue transfer pricing methods to transfer profits from the source countries to companies based in other low tax countries.
PWYP, which campaigns for transparency in multinational entities’ financial reporting, also said tax administrations in developing countries rarely have the resources or the ability to check that transfer pricing is in line with arm’s-length standards.
Country by country reporting (CBCR)
PWYP has put forward a policy proposal for consideration by the EU which would require multinationals to disclose full financial statements on a per-country basis.
Janine Juggins, global head of tax for Rio Tinto, said she does not think the PWYP report is a fair reflection of the true situation: “It is not possible to accurately quantify the proportion of transfer pricing that is correct versus the proportion that is incorrect, nor would the publication of full financial statements change this conclusion.”
“Many related party transactions take place between countries that have extensive transfer pricing legislation, and transactions with entities in low tax countries will not withstand scrutiny unless supported by the facts,” Juggins added.
Companies in the extractive industries, like all multinationals, are already subject to transfer pricing rules in every operational country that has transfer pricing legislation. They are therefore required to maintain transfer pricing documentation to comply with the relevant laws and to avoid tax penalties, and are subject to tax return filing requirements and tax audits.
Juggins said that full consolidated financial reporting would not be the most efficient way to review transfer pricing since it would not provide all the required data and won’t help the tax authorities in developing countries that lack the knowledge and resources to utilise such data to challenge taxpayers.
A more realistic option
“It would be far more effective if the tax return required specific information on all related party transactions to allow the tax authority to then use experts for targeted transfer pricing audits,” said Juggins.
“In developing countries, the capacity of tax authorities to undertake transfer pricing reviews and audits needs to be strengthened and tax authorities from developed countries, civil society and the private sector can each play a role in this.”
PWYP’s proposal would require multinationals to break down information reported in financial statements – such as revenues, costs, taxes and production – and disclose this on a country by country basis.
The proposed reporting standards will not directly target transfer pricing.
Good for investors
Mona Thowsen, secretary general of PWYP Norway, said, if adopted, the proposals will enable investors to follow their money and will provide governments with valuable and standardised information across all jurisdictions in which the companies operate.
“It will be the place of choice when investors and other constituencies seek insight into the use of their resources,” said Thowsen.
“The robustness of this proposal is that it is connected to the control of what natural resources are taken out and this form of reporting is exactly in line with how extractive companies are already consolidating their accounts, which means that this will not increase their costs,” Thowsen added.
However, Juggins disputes this assertion, as she said not all multinationals do consolidate their accounts in this way.
“Full consolidated financial statements per country would impose a significant burden in cases where the business is not managed by country and so financial information may not be collected in that format.”
“Such an approach is more likely to give rise to costs that are disproportionate to the benefits, particularly when it would be simpler to request the transfer pricing as part of the tax return,” she added.
CBCR of payments made to governments has already been adopted in the US under the Dodd-Frank Act and a similar proposal is being reviewed by the EU.
The EU response
The EU proposals target companies with activities in the extractive and logging industries that are listed in the EU as well as large non-listed companies registered in the EU.
Michelle Kosmidis, of the EU Commission, said CBCR for payments to governments could feasibly be introduced within two years, as the accounting and transparency directives are likely to be fully agreed by EU institutions during 2012.
However, although the initial EU debate on CBCR featured the idea of extended CBCR including full consolidated financial reporting, it appears the EU will not be looking to adopt this in the immediate future.
“Following the public consultation, the Commission decided to require CBCR only for payments to governments, and companies will not be required to disclose transfer pricing information,” said Kosmidis.
“However, a review will take place no later than five years after the date of entry into force of the directive, so in future it might be extended to include further information.”
Juggins said she does not deem mandatory disclosure of payments to governments to be necessary to achieve transparency, and hopes Rio Tinto’s voluntary disclosure of taxes paid information will show that the objective can be reached without legislation.
“We are very supportive of anti-corruption efforts and have raised the bar for other extractive companies in terms of transparent reporting by demonstrating what can be achieved without legislation,” said Juggins.
