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The Fair Tax Mark for multinationals

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The latest phase of the Fair Tax Mark says it is ‘designed to reward multinational companies that are proud to be playing fair on tax’.

The prominence given to country by country reporting may deter companies from applying.

In 2012, tax campaigner Richard Murphy launched his Fair Tax Mark (FTM) with an evaluation of 20 retailers. That wasn’t received well, both because no one had requested a mark and also because there were clearly some errors in the way the review was carried out.

In 2013, the Ethical Consumer Research Association took on responsibility for the FTM, with Richard Murphy remaining as technical director. The revamped FTM became optional. A company could pay a fee and, provided it passed the criteria, become entitled to display the mark publicly. The first iteration was aimed at small domestic UK companies. The organisers are now consulting on an extension of the mark to UK companies which have both UK and foreign operations.

How it works

The mark is based on a combination of transparency and the corporate tax liability and has four categories:

  • basic transparency;
  • public country by country reporting;
  • tax policy and compliance; and
  • tax rate and disclosure.

The basic transparency criteria attract five marks and seem more geared to very small entities. In particular, they ask for a full set of accounts and details of shareholders with more than 10% of the share capital. Slightly controversially, they also ask for the home addresses of directors, which many are reluctant to give due to misuse of the information.

No one who has followed Richard Murphy’s writings on taxation can be surprised that public country by country reporting features prominently. Twelve marks are awarded for this category, but at least one mark can be claimed for reporting the list of subsidiaries (which is actually a Companies Act requirement). It does not appear that any multinational actually complies with the full requirements, although a small number of major groups – such as Legal & General, Rio Tinto and Vodafone – have sought to explain where they make profits and pay tax. However, it is clear that this is not an easy task. Typically, the information provided takes some time to pull together.

Most in business do not regard country by country reporting as a helpful way for a large multinational to report. The volume of information for a large multinational is enormous, as many will have over 100 reports to produce. One thing that is clear to everyone involved in corporate taxation is how little the basis on which companies are liable for tax is understood. The CBI in its statement of tax principles encourages companies to:

‘Seek to increase public understanding in the tax system in order to build public trust in that system, and, to that end:

  • ‘They should consider how best to explain more fully to the public their economic contribution and taxes paid in the UK.
  • ‘This could include an explanation of their policy for tax management, and the governance process which applies to tax decisions, together with some details of the amount and type of taxes paid.’

The CBI does not in general support the use of country by country reporting since it is complex, expensive and more likely to confuse than inform. It is also clear from the approach taken by some campaigners that it has the potential to mislead, as the data could be used to claim that tax should be paid on a formulary apportionment method. This is one of the reasons that certain multinationals are concerned about providing some of this data to tax authorities.

Twelve marks are awarded for tax policy and implementation. A company should have a tax policy and a named director responsible for it. Large multinationals will have had a tax policy for some years and medium-sized groups are starting to put one in place. Corporate best practice is to make the policy the responsibility of the board, however, rather than of a named individual. Companies subject to the ‘senior accounting officer’ regime are encouraged to have a tax policy and provide it to HMRC as part of general risk assessment.

Many companies will have some difficulty with the next requirement:

‘Does the tax policy statement refer to: (a) seeking to declare profits in the place where their economic substance arises?’

This is at the heart of the BEPS project: an effort to redefine how profits should be allocated and the weight that should be given to particular elements of economic substance. The new version of guidance on intangibles will place much greater emphasis on people factors, but the United States has already indicated that it will not agree an allocation of profit which does not give a proper return to capital. Companies have simply allocated profits based on the existing transfer pricing guidance.

The FTM also asks whether tax havens are used, other than to provide goods or services to people living there. There are difficulties with this. The wide definition of tax haven includes Singapore, Hong Kong, Switzerland and the Philippines. All these locations are commonly used for operations that provide global services, with substance underlying them. We can all think of goods and services supplied from these countries for global use.

The final category awards marks depending how closely the company’s current tax charge is to the headline rate of tax: 1.5 marks are given for a rate within 7% of the expected level; and six marks are given for a rate within 1%. Marks are then given for reconciliations and explanations, which is generally something to encourage.

The final question that any company may struggle with is what exactly would they achieve by successfully applying for the FTM? It’s not clear whether domestic companies have applied for the mark and what benefit, if any, they have derived. The arithmetic in the multinational version makes it almost impossible for any company to get the mark without country by country reporting, so it seems quite unlikely that we shall see many applicants.

The consultation was open for two weeks and closed on 10 July.