Tax Avoidance: Country by Country Reporting

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Action Item: Require that all multi-national corporations report sales, profits, and taxes paid in all jurisdictions in their audited annual reports and tax returns.

Background: Tax avoidance is a global problem. It involves the abusive exploitation of gaps and loopholes in domestic and international tax law that allows multinational companies (MNCs) to shift profits from country to country, often to or via tax havens, with the intention of reducing the tax they pay on some or all of their profits. Tax avoidance on such a large scale is facilitated by a lack of transparency in the way MNCs report and publish their accounts. Making MNC accounts more transparent would help tackle tax avoidance at very low cost.

At present most MNCs publish segmented information that breaks their trade down along product or division lines. However, MNCs are not required to publish geographic data, and there is no requirement to do so on a country-by-country basis. Despite publishing their accounts as if they are unified entities, MNCs are not taxed in this way. Each member company of the group is taxed individually. This makes it difficult to establish an overview of what is happening within a group of companies for tax purposes.

Tax avoidance is facilitated by tax haven structures created to shroud business activity in secrecy. It is often impossible for tax authorities to obtain information or assistance from the government of a tax haven, and companies are not usually under any obligation to disclose what they are doing outside the country that is making the enquiry. Given this opacity, even proving the existence of a tax avoidance scheme can be difficult.

The European Parliament has already urged the International Accounting Standards Board to move beyond voluntary guidelines and support the development of an appropriate accounting standard requiring country-by-country reporting by extractive companies. While this measure is a sound first step, it is not far-reaching enough.

G-20 Jurisdiction: Working Group 1 (Enhancing sound regulation and strengthening transparency) and Working Group 2 (Reinforcing international cooperation and promoting integrity in financial markets).

Executing Authority: International Accounting Standards Board.

Benefit: Country-by-country reporting (CCR) would provide information to a wide range of stakeholder groups which will strengthen efforts to monitor corrupt practices, corporate governance and responsibility, tax payments, and world trade flows. CCR would benefit investors by revealing which corporations operate in politically unstable regimes, tax havens, war zones, and other sensitive areas. CCR would also enable citizens of developing nations to determine who owns the companies that are trading in their countries, what tax is being paid and whether that appears reasonable in relation to the tax rates in the country in question.