The Corporate Accountability Network (CAN) sets out its comprehensive aims in a discussion document, covering everything from financial reporting to environmental concerns. As part of this document, the network has called for mandatory public CbCR for all multinationals.
One tax director at a UK-based software house suggested that the shift towards public CbCR is already underway. “I suspect CbCR will become public, either by stealth or by leaks,” the tax director told TP Week.
“There’s a strong likelihood that some countries will make CbCR public,” the director added. “Once that happens other countries will follow.”
A number of companies would also welcome a level playing field on transparency rather than falling back on voluntary standards such as the Global Reporting Initiative (GRI). A lack of good information is a problem for markets, not just the tax system.
“Many companies are too afraid to put their head above the parapet,” said Lara Blecher, shareholder engagement executive at consultants PIRC. “They fear that the media and the public would not understand the disclosures.”
“Mandatory reporting would put all companies in the same boat and require them to put their head above the parapet,” Blecher said. “This would help investors gain greater clarity.”
Nevertheless, the CAN is making the case for disclosures that would go much further than anything seen in tax reporting today. The prospect of greater transparency is unnerving for some taxpayers just as CbCR was, when it was first proposed.
“There are going to be more disputes and audits in the future, that’s a given,” said one head of tax at a tech company. “Above all else, business leaders want certainty and simplicity when it comes to tax.”
Loss of perception
A lack of good information can even impair how a multinational company (MNE) understands its own business model and operations. It may sound outlandish, but a global enterprise can have the wrong impression about its own subsidiaries.
There is concern that this lack of information can hold back investment and may even lead to bad decisions if a company’s tax strategy is obscured from its shareholders and board of directors.
“The complexity of international tax undermines the ability of investors to form a full picture,” said Seema Suchak, investment analyst at Schroders. “It increases the likelihood of misinterpretation, particularly for large, multinational groups.”
There’s a risk that disclosures on profits could be double counted. A multinational company (MNE) can book profits in multiple jurisdictions and overlapping data disclosures could then lead to a misinterpretation of the profits and losses associated with the larger group.
“We firmly agree that investors lack standardised and consistent information to enable a full understanding of tax strategy in a company,” Suchak said.
“The available information, in its current form, does not enable us to understand companies’ reliance on complex tax structures and how a regulatory clampdown could impact income going forward,” she said.
On the other hand, there are other reasons why investors might favour certain forms of tax planning, and choose not to give up on tax efficiency just yet. It’s not only about getting the least costly tax bill possible.
“Some investors want aggressive tax planning because it can help drive up the share price and it’s a competitive advantage,” the tech company head of tax told TP Week. “Other investors want sustainability and long-term security from scandals.”
One sprawling conglomerate based in the US had more than 8,000 subsidiaries spread all over the world. “We can’t remember why we created them,” the tax director at the US MNE said. “So we can’t get rid of them in case one of them is vital to our business operations.”
Richard Murphy, director of Tax Research UK, founded the network as the next step in his personal campaign for reform. He is well known for his involvement in anti-tax avoidance campaigning, but he’s also served on the boards of several companies.
“I don’t think most board members have a clue about the obligations they have,” Murphy said. “Very often accountants do not offer an explanation of the figures they present to the board.”
“We will continue to get auditing failures and bad reports if we don’t get the right accounting standards in place,” he stressed.
This is still just a discussion document. The aim is to develop an accounting standard that will apply to multinationals of all sizes – not just in the UK, but internationally.
Murphy has reached out to the Big 4 to get their perspective on accounting standards. He hopes to engage a wide range of stakeholders before moving forward. What happens next could determine the future of accounting standards.
Return to prudence
The CAN has the advantage of making its case just after a slew of accounting scandals such as Carillion, Patisserie Valerie and Sports Direct have made waves in the press. These scandals have helped reinforce the public perspective that reform is needed.
“The problem with Carillion was that it hit them when the company had bad cash flow,” the tax director said. “So writing down the good will created a huge deficit in their accounts. They had been paying dividends on the promises of the future.”
Murphy suggested that the problem comes down to how accounting standards have changed over time. “Carillion would not have got away with what it was doing before 2005,” Murphy said. “Fair value has been a disaster in accounting.”
“We should go back to prudence,” he said. “Any losses that happen on day one, you will account for them on day one. That was prudence.”
Not everyone agrees that the standards are to blame. “You could argue the accounting standards are too rigorous,” the software house tax director said. “If you’re overpaying for asset value, you have to apply an impairment test to ensure that it’s still a valuable asset.”
“The problem with projections is that the results depend on who is making them. It’s pretty rare for management to project huge losses,” they said. “Human nature is such that there will be an implicit bias towards rosy projections.”
However, the CAN aims to raise the bar in an industry that is increasingly under scrutiny for auditing failures. Accounting standards might become the next front in an ongoing struggle over the future of the tax system.