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Lord Hollick backs country by country reporting as NGOs focus on EC initiative

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Companies should pay a fair rate of tax and ‘move vigorously towards the path of transparency’, the Labour peer and former newspaper publisher Lord Hollick told tax experts earlier this month, as campaigners renewed calls for country by country reporting (CBCR) by multinationals and claimed that the European ‘tax gap’ might be as much as €1 trillion a year.

International Tax Review reported that Hollick asked at a conference on tax policy-making, hosted by Oxford University’s Centre for Business Taxation: ‘In a world of globalisation, how do single countries hold corporations to account?’ It was hard to work out how much tax was paid where, he said. ‘The disclosure regime does not get to the heart of the issue. We need full disclosure.’

Salman Shaheen, Indirect Tax Editor at International Tax Review, reported that Hollick said large corporations should ‘publish their tax affairs in the same way they do the other aspects of their accounts’. In a comment piece, Shaheen said multinationals with nothing to hide should back CBCR. Investors wanted stability and better information, and companies were becoming increasingly concerned with reputational risk, he wrote: ‘Lord Hollick is right to stand up for transparency, because businesses with nothing to hide have no need to hide.’

EC recommendation

Last October the EC recommended that EU-based multinationals in the extractive and forestry sectors should be required to disclose payments to governments on a ‘country by country and project basis’.

There was an Extractive Industry Transparency Initiative (EITI) which a national government could voluntarily adopt, but the EC pointed out that ‘out of the 50 countries considered to be hydrocarbon or mineral rich by the IMF only nine are currently EITI compliant’.

Mining and forestry companies would have to be more open about taxes, royalties and bonuses paid worldwide’ the EC said in a press release. CBCR would apply to ‘EU privately-owned large companies or companies listed in the EU’ that are active in the oil, gas, mining or logging sectors.

The EC added: ‘CBCR is a different concept from regular financial reporting as it presents financial information for every country that a company operates in rather than a single set of information at a global level. Reporting taxes, royalties and bonuses that a multinational pays to a host government will show a company's financial impact in host countries.’

The EC’s summary of responses to the earlier Consultation on Financial Reporting on a Country-by-Country Basis by Multinational Companies indicated a ‘diverse pattern of opinions’. Preparers, accountants and auditors were in general opposed to CBCR, while NGOs promoting development or tax justice were in favour.

European tax gap

Eurodad, the European network on debt and development , believes that multinationals should ‘shed light on their activities in tax havens’ and claims that pressure has been mounting for CBCR to be extended to all industry sectors.

Alex Marriage of Eurodad, a network of ‘50 non-governmental organisations from 19 European countries’, told Tax Journal that the EC’s proposal ‘could be extremely useful against corruption, but to work out if payments are fair the EU should ask for information such as companies’ profits and remuneration’.

He added: ‘Applied to all sectors, [CBCR] could help the EU reduce the €1 trillion it loses to tax evasion and avoidance annually.’ That estimate is based on a study commissioned by the Progressive Alliance of Socialists and Democrats in the European Parliament, and written by Richard Murphy, Director of Tax Research UK.

Tax haven activity

Murphy’s report, published last month, said: ‘Using consistently credible sources the resulting estimate of tax evasion in the EU is approximately €860bn a year ... Estimating tax avoidance, which is the other key component of the tax gap in Europe, is harder. However, an estimate that it might be €150bn a year is made in this report.’

CBCR would, he argued, ‘provide a stakeholder view of accounting [and] a new view of corporate structures; impart a new understanding of what the business of a corporation is, and where it is; open up a new perspective on world trade because intra‐group transactions would be reported for the first time; 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; provide better awareness of the true extent of tax haven activity; and allow measurement of tax lost through tax planning by corporations through the relocation of profit via transfer pricing’.

‘Sensitive information’

In its response to the EC consultation the Chartered Institute of Taxation said existing disclosure requirements provided ‘sufficient’ transparency. ‘We suggest that the correct test to be applied is whether any benefit of this proposal is proportionate to the cost which would be incurred by companies as a result of its implementation. The first step therefore should be to articulate the perceived benefit much more clearly,’ the CIOT said.

‘Imposing additional disclosure requirements on companies would greatly increase their administrative burdens, would be costly and we can see no particular benefit from doing so. In particular it is not as all clear to us how or why such additional disclosure requirements would increase corporate social responsibility ... On the other hand, requiring such disclosure could lead to a competitive disadvantage where sensitive information would have to be made publically available and thereby accessible to competitors in non-EU countries.’

The CIOT claimed that it was ‘not at all clear’ why additional disclosure of the type suggested would assist in enforcing transfer pricing rules.

‘Each territory already knows what income is being reported locally so why does it help it to see what has been earned in a different country? The existing transfer pricing rules and international co-operation (through treaties etc) should enable any country’s tax authority to assess the correct level of taxation due in its territory. If this is not happening, we suggest the solution is to devote more resources to training the local tax authorities to use the information currently available rather than imposing additional burdens and costs on EU based multinational companies.’

The Confederation of British Industry also opposed CBCR, arguing that it would impose ‘significant’ additional costs and workload. ‘The purpose of improving tax governance at a global level through disclosure in financial reports is outside the scope of all-purpose financial statements,’ it said. Financial statements should focus on ‘being an effective communications tool with shareholders, and not a general repository of miscellaneous and unhelpful or irrelevant information’.