The Task Force on Financial Integrity & Economic Development’s annual conference in Paris last week showed how taxpayers could benefit from a more transparent reporting standard, but activists admitted they must do more to engage companies in the debate.

Delegates heard about the harmful impact of tax avoidance on the developing world and the need for country-by-country reporting to tackle the problem.

Xavier Granet/Task Force

Research from the OECD shows 60% of world trade takes place between the member companies of a corporate group and where a significant number of these subsidiaries are located in opaque or tax havens it can be difficult to determine whether companies are paying the right amount of tax in the countries in which they operate.

Richard Murphy, director of Tax Research, argued that it is important to know what tax companies owe, where they owe it and the profits and losses they make in each jurisdiction.

“And we want to know how many people you employ and where,” Murphy said. “We want to know who you exploit. That is what this is about, the poorest people in the world.”

But the argument is not just about the poorest people in the world. It is also about some of the richest. As many at the conference recognised, the non-governmental organisations (NGOs) cannot win the debate on country-by-country reporting without convincing multinational companies that transparency is in their interests as well.

Murphy argued for a level playing field where everyone, including companies of all sizes, wins from paying tax, which funds better infrastructure and educated employees.

“If you want to make profit, you pay your tax,” Murphy said.

Join the debate

Activists, however, are a long way from convincing companies to join the debate. The clearest sign of that was when Giuseppe van der Helm, president of the European Sustainable Investment Forum, asked who in the room works for a corporation or in the financial community and not a single hand went up in a room packed with development activists, academics and tax officials.

“Country-by-country reporting is not on our agenda,” said van der Helm, whose group includes some of the world’s largest investors and multinationals. “The challenge is to engage with companies.”

Beyond the basic moral arguments put forward by activists, Heidi Finakas of asset management company KLP Kapital gave one of the most compelling reasons as to why companies should support greater transparency: their investors.

“We invest globally in a huge number of companies,” explained Finakas. “We own a little bit of everything, so we have to rely on the system, on the market. This is why we’ve engaged in this issue. We want to improve the financial system, not just one company.”

Finakas argued that KLP Kapital does believe in the positive effects of country-by-country reporting for developing countries, but for the investment community, the main argument must be financial.

“We believe it would provide investors with better information on their potential investments,” said Finakas.

The benefits

A better understanding of political risk, detail on the value of a company to the economy, easier assessment of asset value and the cost of capital were just a few of the benefits of country-by-country reporting Finakas identified.

Finakas also pointed out that it is important for companies to have good relations with the civil society in which they are operating and this is particularly true in the case of the extractive industries. She highlighted the example of one company who reported quarterly on a country-by-country basis because it found it useful to prove to civil society that it was paying its fair share of taxes when it had been accused of dodging them.

David McNair, principal economic justice adviser at Christian Aid, whose campaign has sought to engage a number of FTSE100 companies, noted the difficulty arguments for country-by country reporting have faced.

“Where we’re missing a trick is engaging businesses and owners,” McNair said.

However McNair did see a changing dynamic on the issue and he argued that the issue has become increasingly important for companies’ corporate social responsibility policies and the risks they face.

On the one hand there is the risk of getting a bad public reputation, where the public will no longer tolerate the traditional defence that distinguishes between legal avoidance and illegal evasion.“Companies like Vodafone are aware of the need for a good tax news story,” said McNair.

He also pointed to the increased risk of litigation where there is insufficient transparency and, perhaps most importantly, he noted a cash flow risk for taxpayers.

“An aggressive tax position is a risk to sustainable profitability,” McNair said, arguing that if a loophole which a company has been able to exploit to legally reduce its tax bill is closed, then the next year, even if the business remains the same, profits will fall. This makes for a volatile business model, which may not put shareholders at ease.

The moral case for country-by-country reporting and its potential benefits for some of the world’s poorest people were strongly presented at the conference. But, while some business leaders will be swayed by civil, political and ethical pressure, the argument for tax transparency will be won not by morality, but by profitability, and dialogue between NGOs and taxpayers is key to this.

“Line managers cannot tell shareholders we have to do it because it’s good,” said van der Helm. “There has to be a business case for it. Fortunately there is.”

 This article republished with the permission of International Tax Review.

PCS wishes to draw attention to the massively worrying trends in UK taxation, all put in place since 2009, which mean that far from tackling tax haven activity, the UK Government is now actively encouraging such activity on the part of multinational corporations based in the UK. Furthermore, because of the international tax agreements it has reached with them, it is also actively promoting the use of the financial services industry in both Switzerland and Liechtenstein for tax avoidance and evasion purposes.

Tax havens increase tax evasion and avoidance, redistribute wealth from the poor to the rich, create corruption and financial instability, and weaken both markets and democracies. For more information on the report and Tax Havens generally, follow Richard Murphy at the Tax Research UK blog.

The slides I’ll be using are here.

As I say in them:

• CBC is a new way of looking at the MNC;
• It is in essence a demand for a profit and loss account and limited balance sheet for each country in which the MNC trades;
• But it’s also something much more than that;
• This is an accounting system that roots the corporation in the countries that host it – and not somewhere floating above them; and
• And this is accounting that says the MNC is an entity in its own right with responsibilities all of its own – it’s not just an agent for its owners.

What are those responsibilities?

• To meet need, and so make profit;
• To do so sustainably or we wouldn’t invest in it;
• To do no harm;
• To settle its obligations;
• To be accountable for doing so; and
• To be honest in that accounting.

But that means it is accountable to:

• The equity investor group (shareholders);
• The loan creditor group (banks and bondholders);
• The analyst-adviser group who advise the above groups;
• Business partners;
• Consumers;
• Employees;
• The surrounding community;
• Civil society organizations; and
• Governments and their institutions.

And it is precisely because of this diversity that is both universal, and without exception local, that we need country-by-country reporting.

The rest is on the slides.

And here.

With thinks to the Task Force on Financial Integrity and Economic Development for inviting me over for this event.

The European commission has realised that the [proposed UK and German] DTAs [with Switzerland]  would compromise the EU work on automatic exchange of info. Now the Commission has been in direct touch with Germany and UK regarding this issue.

Most important is that they are concerned about Switzerland now being a conduit for all black money back to the UK / Germany if assets are regularised…

So they should be. With the fundamentalist free market government of the UK (yes, I mean that fundamentalist comment – those in our government are as dangerous in their ideological blindness as those usually attributed with such description) being in my opinion at the forefront of this process of promoting bank secrecy to assist their clear objective of undermining government and taxation whilst promoting income inequality the European Commission clearly has very good cause to be concerned. In April 2009 the world agreed that closing down tax havens was fundamental to creating the transparency markets need and generating the revenues all governments are due. Now the ConDems (yes, both parties) are going out of their way to support the corruption that secrecy jurisdictions in general and Switzerland in particular promote.

This is an act of the highest international irresponsibility. I am amazed that international protest is not pouring in. Why? Well note this from Swissinfo (who I note have been reading this blog this week):

Barely two years ago Swiss banking secrecy appeared to be on the rocks with little prospect of it surviving a battering from the United States and Europe.

The impending negotiations of tax accords with Britain and Germany now appear to have lifted the pressure from the Swiss financial centre’s most prized asset. But to what extent has the threat really been lifted?

Konrad Hummler, head of Switzerland’s oldest private bank Wegelin, believes that talks with the two powerful countries – which centre on withholding tax as opposed to an automatic exchange of tax information – will leave banking secrecy intact.

“The protection of privacy through banking secrecy has been strictly separated from the issue of taxation,” he told the Tages-Anzeiger newspaper. “Banking secrecy has therefore been strengthened because it is no longer under suspicion of protecting injustice.”

That’s his story.

But as they note:

Writing on his blog this week, Richard Murphy of the watchdog group Tax Research UK accused Britain of “abandoning the fight against tax havens”.

“No indication is given as to how these accounts are to be regularised,” he went on. “Indeed, there is no prospect that they can be because the £40 billion [SFr63 billion] or so of evaded assets will not have to be declared by name by the Swiss. In that case there is no prospect of UK interest or penalties being charged.”

And Swissinfo added:

But before Swiss bankers can breathe a collective sigh of relief that their cherished secrecy has been saved, the European Union warned that the proposed deals with Germany and Britain would not be allowed to supercede EU demands for an automatic exchange of tax information.

“We have assurances from Germany and the United Kingdom that they are totally behind our aim of achieving automatic exchange of information within the EU, and of promoting as broad a system of information exchange as possible at an international level,” said Emer Traynor, spokeswoman for the EU commissioner for taxation, Algirdas Semeta.

“If there is a conflict, European law always takes precedence over bilateral agreements,” she added.

The pressure to ensure the EU delivers has increased. This is a fight with Cameron they have to win.

–

Originally published on the Tax Research UK blog.

Prepared by Richard J. Murphy

LONDON—Despite being rescued by taxpayers during the crash, UK banks will avoid paying £19 billion of tax on future profits by offsetting their losses during the financial crisis against their tax bills. This is equivalent to more than £1,100 for every family in the UK, a TUC report says today (Monday).

The TUC report – The Corporate Tax Gap – says that as well as benefitting from an £850 billion bailout from taxpayers and the Bank of England during the recession, banks are able to offset their £19 billion of tax losses between 2007 and 2009 against paying tax on future profits.

The report, authored by tax specialist Richard Murphy, has calculated this double subsidy from the accounts of five UK high street banks – HSBC, Royal Bank of Scotland, Barclays, Lloyds TSB and HBOS (later Lloyds Banking Group) – and HM Revenue & Customs (HMRC) data.

The Corporate Tax Gap warns that banks could soon be paying a lower rate of tax than small businesses. The corporate tax gap – the difference between the rate of tax set by the Government and the actual rate companies pay – has grown by an average of 0.5 per cent a year over the last decade. Between 2000 and 2009, the effective corporation tax rate fell from 28 per cent to 21 per cent, much deeper than the headline rate cut from 30 per cent to 28 per cent, says the report.

With the Government planning to reduce corporation tax to 24 per cent, the UK’s largest companies, including banks, will soon be paying an effective tax rate of 17 per cent – three per cent lower than small businesses, who are less able to exploit loopholes and therefore pay a headline rate of 20 per cent. As a result, the UK will soon have a regressive corporation tax regime, says the report.

The TUC has calculated that the banks’ £19 billion double subsidy could pay for the following cuts between now and 2015:

• switching the indexation of benefits from RPI to CPI (£5.84 billion);
• housing benefit (£1.77 billion);
• tax credits (£3.22 billion);
• child benefit for higher rate taxpayers (£3 billion);
• estimated cuts to the science research budget (£3 billion); and,
• estimated cuts in HMRC resources to tackle tax avoidance (£2.1 billion).

TUC General Secretary Brendan Barber said: ‘Banks caused the global financial crash and triggered the recession that produced the deficit. Yet not only did they take almost a trillion pounds from taxpayers to bail them out, they are now using the losses caused by their irresponsibility to cut their tax bills for years to come.

‘The Government’s bank levy is small change compared to this huge loss as the business-as-usual bonus levels show.

‘It’s double bubble for the banks, but huge cuts, job losses and VAT increases for ordinary families.

‘Small firms have every right to be angry too. Not only are they finding it hard to get credit from the banks, soon they will be paying more tax on their profits than the banks and other big companies.’

–

Source: TUC

As I note in that report:

In 2000, half the sample of companies surveyed published information in their published accounts on their results arising in the UK. Usually this separate geographical information related to turnover, staff numbers, profit, tax and also to gross and net assets employed, although there was some variation from company to company. Then in 2005 companies ceased to publish accounts in accordance with UK Generally Accepted Accounting Principles and instead published them in accordance with International Financial Reporting Standards (IFRS), issued by the International Accounting Standards Board with the backing of the European Union. Under IFRS rules, data on what are called ‘business segments’ could be reported on the basis of the major business activities of the reporting company rather than on the basis of geographical location. The result is that many of the surveyed companies ceased providing any data on their UK based activities at all, so that by the end of the survey period just eleven were doing so. Wolseley plc was the only one to take up such reporting over the period surveyed. Some very notable companies, such as Barclays, Lloyds TSB (now Lloyds Banking Group), BP, BT, Glaxo Smith Kline, Centrica and Legal and General were amongst those giving up the practice. Just none companies reported in this way in 2009.

The fact that major corporations are not now reporting their activities (whether it is their sales, number of staff employed, profits or tax paid) in the UK is a cause for considerable concern. It seems that the major companies quoted in the UK no longer think they have any geographical association with this country, or indeed, any other. They do instead report as if they float above the reality of the geographical space in which the rest of us exist as if they belong to some other global space of which only they are a part and which leaves them without attachment to anywhere.

This however, is a denial of corporate responsibility, which we believe to be based on the duty of the company to the state which first grants its limited liability charter and secondly (if different) in which its activities are hosted. This responsibility to that place or those places (for there can be more than one, and in a complex multinational corporation we are aware there may be up to 150, or more)is, we think, at least in part fulfilled by paying the tax that each state asks of the company with regard to its activities in that place. This is part of the culture of tax compliance which we believe is indicative of true corporate responsibility. Tax compliance is seeking to pay the right amount of tax (but no more) in the right place at the right time where right means that the economic substance of the transactions undertaken coincides with the place and form in which they are reported for taxation purposes.

A company may, of course, suggest it is tax compliant, but the right to limited liability also carries with it a responsibility to report how that privilege (for that is what it is) is used, and in that case we view this decline in the reporting of the national activities of multinational corporations as a serious retrograde step in their accountability. The difficulty it gives in estimating the UK tax gap is simply indicative of the problems this causes, and is in turn representative of the lack of accountability that has been created for multinational corporations during the period when the creation of regulation covering such issues has largely been under the control of the accounting profession.

It is for this reason that the TUC called in ‘The Missing Billions’ for greater accountability for multinational corporations including a requirement that they account for where they are located and where they pay their tax. This demand is incorporated in the call now made by many in civil society for what is popularly called ‘country-by-country reporting’ by multinational corporations.

Country by country reporting would require disclosure of the following information by each multinational corporation in its annual financial statements:

1. The name of each country in which it operates;
2. The names of all its companies trading in each country in which it operates;
3. What its financial performance is in every country in which it operates, without exception, including:
   1. It sales, both third party and with other group companies;
   2. Purchases, split between third parties and intra-group transactions;
   3. Labour costs and employee numbers;
   4. Financing costs split between those paid to third parties and to other group members;
   5. Its pre-tax profit;
4. The tax charge included in its accounts for the country in question ;
5. Details of the cost and net book value of its physical fixed assets located in each country;
6. Details of its gross and net assets in total for each country in which operates.

If this information had been available for each of the companies in the FTSE surveyed as part of this review calculation of the UK tax gap would have been an easy undertaking. It is for this reason, amongst others, that the accountability that country-by-country reporting cerates is important. Unless companies can be held to account for the tax they pay, an essential component of their accountability is lost, and reform to ensure this is possible, is vital if we are to guarantee that all companies make their fair contribution to the UK economy over the years to come.

Prepared for IBIS, NCA, CRBM, Eurodad, Forum Syd and the Tax Justice Network

The report, entitled ‘Investments for Development: Derailed to Tax Havens: A report on the use of tax havens by Development Finance Institutions,’  looks at a critical area in the development activities of many European countries – the role of the Development Finance Institutions that they own in funding private sector investment in developing countries.

Development Finance Institutions (DFI) invest their capital in developing countries for the express purpose of advancing development in those places by promoting investment in local business. In this respect their activities can be compared to that of the European Investment Bank (EIB) and International Finance Corporation (IFC) – a part of the World Bank. At the end of 2008 the DFIs that were members of the European Development Finance Institutions network (EDFI) had combined funds invested of about €16.7 billion.

However, the business models of the DFIs has been subject to much criticism. Their investments have moved away from those areas normally associated with poverty relief – such as agriculture – and into areas like finance, hotels and telecoms. The DFIs have in many cases ceased to invest directly but do instead invest through funds over which they appear to have little control. And many of their investments are now routed through tax havens – and issue which attracted international attention when Norway banned their fund from investing, at least temporarily, in this way after the report of their  Commission on Capital Flight from Developing Countries attacked this practice in their report “Tax Havens and Development”.

The new IBIS report looks at these issues and suggests a new Code of Conduct for Development Finance Institutions to replace the one they have themselves recently proposed.

The Code is robust, and promotes transparency, accountability and a focus on local management of the investment Development Finance Institutions make.

Photo by Andy Radcliffe / CC BY-SA 2.0

The Isle of Man Today web site carries the following back handed compliment today, the following being an edited (shortened) version of the story:

We have also written a story about a letter from a group who thinks the Isle of Man should ditch zero-10 company tax.

The group of 12 people – including a high profile charity worker – says that we’d be better off in the long run and have a better reputation if we re-introduced company taxes.

You might remember that a few weeks ago (August 10, to be precise) we ran a story based on a survey of corporate service providers and other finance sector interests. They predicted doom and gloom – ultimately lots of job losses and a big cut in tax take – if the Island lost zero-10.

We’re delighted we’ve got a response today.

Unfortunately, the group of 12 people who’ve written to us aren’t establishing themselves as a formal pressure group. That’s a shame because they could have help to fill an argument vacuum on this topic and widen the debate. We sometimes find it hard to find someone to put counter-arguments in political stories because there are few pressure groups and little in the way of formal party politics – which thrive on confrontation – in the Isle of Man.

But at least there’s someone here in the Isle of Man – and not just Richard Murphy, the UK blogger – making the argument.

Well, I’m delighted too. I don’t want to be the one-man political opposition in the Isle of Man and never set out to be so.

But I also note how very hard it is for there to be effective political opposition in places like the Isle of Man and the other Crown Dependencies. Any pretence that there is freedom of speech in such places is just that – a pretence. These islands are effectively occupied  by the financial services industry, and they use their power – the very real power to make or break people’s chance to make a living – to ensure that opposition to their activities is silenced – or belittled to the fringes.

This is not an accident. This is the ultimate expression of the neo-liberal contempt for government – that overlaps with that of anarcho-capitalism, as I noted here. That same contempt for government and the rule of law that it upholds is indeed inherent in the whole definition of secrecy jurisdictions: Secrecy jurisdictions are places that intentionally create regulation for the primary benefit and use of those not resident in their geographical domain that is designed to undermine the legislation or regulation of another jurisdiction. They do, in addition, create a deliberate, legally-backed veil of secrecy that ensures that those from outside the jurisdiction making use of its regulation cannot be identified to be doing so.

The Isle of Man Today web site and the weekly Isle of Man Examiner newspaper can welcome twelve brave individuals standing up against their government – as I do too – but the reality is that if that paper really believes in freedom of speech, politics and proper government it would challenge the whole structure of secrecy on which the Isle of Man’s business model is predicated. But it doesn’t. As such it is complicit with the occupying force within the island that holds it in fear and to ransom.

That’s why a few of us – not just me by a long way – from outside the Isle of Man and other secrecy jurisdictions have had to challenge what happens in these dark corners of corruption that set out to undermine democracy, society (as we know it), accountability and the rule of law, and which are—in consequence—the very enemy of society itself. We’ll know we’re winning when there is real democracy in these places. Maybe the twelve who have written are a start – and I wish them well without knowing who they are – but we have a long way to go. Until we get there, they can rely on much external support – and not just from me.

This submission addresses issues of opacity within the financial reporting of multinational corporations quoted on stock exchanges which we believe should be addressed by revision to the European Union’s Transparency Directive.

We focus in particular on these issues:

1. The current opacity regarding ownership of such multinational corporations;

2. The opacity regarding the structure of such multinational corporations;

3. The almost complete lack of information currently available on the internal trading of multinational corporations, and;

4. The current absence of information of the geographical impact of the activities of multinational corporations.

We believe that in combination these weaknesses in the current reporting requirements of multinational corporations leave them unaccountable for their actions to any identifiable party and that this has in turn allowed them to operate in what we call the ‘secrecy space’.

The secrecy space that multinational corporations occupy exists for these reasons:

a. So that the ownership of interests in multinational corporations need not be disclosed. As a matter of fact the ownership of many multinational corporations is hard, and maybe impossible, to identify. We note the reasons for this and recommend the changes the European Union should demand to rectify this situation.

b. Existing regulation has, on the basis of research we have undertaken, made it almost impossible to identify in the majority of cases, or with any consistency:

i. What companies comprise the group that the multinational corporation recognises to be under its management and control;

ii. To what extent those companies are controlled by the multinational corporation, and how that control is exercised;

iii. Where those companies that comprise that group are incorporated;

iv. What trades or other activities those companies are engaged in;

v. What level of activity those companies undertake.

This affords the management of multinational corporations the opportunity to undertake transactions that no one outside their organisation, and many within it, might never know about. There are substantial risks in this which we explain and explore.

c. The availability of considerable secrecy that verges on total opacity within tax havens, or as we would prefer to term them ‘secrecy jurisdictions’ (which term is used hereafter in this paper), considerably assist multinational corporations in hiding their activities. This is because:

i. Their ownership of a multinational corporation can be disguised in secrecy jurisdictions;

ii. Their activities in secrecy jurisdictions need never be disclosed;

iii. The nature of their internal trading is, therefore completely hidden from view.

We explain the consequences of this risk.

To address these issues we make two fundamental recommendations. In the first part of this submission we argue that the beneficial ownership of interests in multinational corporations must be recorded. Beneficial ownership of such interests does, of course, differ in a great many cases from legal ownership but must always be identified for anti-money laundering purposes and as such this is not an onerous obligation.

In part two of the submission we propose the use of country-by-country reporting within the financial statements of multinational corporations. The nature of country-by-country reporting and the advantages that we believe will from its adoption are explained.

It is our suggestion that in the interests of financial transparency, which we define in this paper, these two recommendations should be incorporated into the European Union Transparency Directive when it is amended.

—

Originally posted on the Tax Research UK blog.

A May 2010 briefing from Tax Research UK (prepared by Richard Murphy) explains the benefits of an international country-by-country reporting standard.

In short, the briefing explains that country-by-country reporting would:

• Provide a stakeholder view of accounting;
• Create reporting of results by country, without exception, which has previously been unknown;
• Provide a new view of corporate structures;
• Impart a new understanding of what the business of a corporation is, and where it is;
• Opens up a new perspective on world trade because intra-group transactions would be reported for the first time in multinational company accounts;
• Give a new view of world labour markets;
• Create an entirely new tool for geo-political risk profiling of companies;
• Permit better appraisal of corporate contributions to the governments that host their activities and in the process contribute to constraining corruption on the part of some recipient governments;
• Provide better awareness of the true extent of tax haven activity;
• Allow measurement of tax lost through tax planning by corporations through the relocation of profit;
• Provide a better understanding of the physical resource allocation of the corporate world.