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The state of the tax debates in 2017

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2017 saw a flurry of new attempts to bridge the divide in the debates between tax professionals, campaigning organisations, policy makers, journalists and the public. At the same time it saw a return to antagonistic form with the paradise papers. Will 2018 be the year in which the tax debates come of age?

Public debates about the impact of business on society tend to follow a similar pattern, whether the controversy is about child labour in supply chains, dolphins in tuna nets, ‘conflict minerals’ in mobile phones or carbon dioxide in the atmosphere. In the early stages, activists push the issue into public consciousness by painting it in broad moral brushstrokes, without acknowledging details and dilemmas. A few companies are picked out to be poster children for ethical fecklessness. Noise levels rise. Businesses and professionals respond defensively to what they see as under-informed criticism: ‘it’s not our fault’ and ‘we follow the law’. In the next stage, a few companies recognise that expectations are changing. They make efforts to stake out the reputational high ground, sometimes engaging in problem-solving relationships with their critics. As the issue matures, rancorous accusations give way to roundtable discussions. Simple assumptions on all sides are gradually replaced by a more nuanced understanding. Expectations are stabilised through collective learning, standard setting or legislation.

The public debates on corporate and offshore taxation have, in some ways, followed the same path – with campaigns, exposés and the theatrics of the Public Accounts Committee setting the scene for more careful action; particularly under the G20/OECD BEPS and tax transparency projects.

But the public tax debates themselves don’t appear to get any better, remaining stuck in a cycle of antagonism, inflated expectations and mutual misunderstanding between tax professionals, journalists and campaigning organisations. Public understanding is often the casualty as tax planning, tax avoidance, tax evasion and ‘illicit financial flows’ (money laundering, corruption and theft of public assets) are bundled together into a single ‘scandal’.

In 2017, were there signs that the public debate on international taxation in the UK might be coming of age?

Noise levels have certainly come down. Public attention on corporate tax issues has abated somewhat since the heyday of the Starbucks protests and Margaret Hodge’s reign as chair of the Public Accounts Committee. Partly, the change in the tax debates in 2017 reflected bigger shifts. The world felt like a different place in 2017. With the US president twitter-baiting the world and the UK setting out to negotiate a painful divorce with the EU, it is likely that there were simply fewer pub conversations about transfer pricing than in previous years.

However, the public tax debates have not gone away. At the beginning of the year, the Institute of Business Ethics’ annual survey found that 43% of the British public said that tax avoidance is the corporate ethical behaviour they are most concerned with: an increase from 34% the previous year. Corporations are increasingly concerned with the reputational risk of tax issues. And towards the end of the year, the ‘paradise papers’ brought offshore tax issues back into the public debate.

Country by country reporting

This year, corporate tax teams got to grips with compiling the confidential country by country reports (CBCR) required under BEPS Action 13. Tax authorities are starting to exchange the information, and test how in practice they can use it to target audits.

For campaigning organisations such as Oxfam and the Tax Justice Network, the holy grail remains public CBCR. While the OECD BEPS process agreed that CBCR data should be confidential to tax authorities, campaigners have continued to call for publication and Brussels has been pushing ahead with this. A proposal for public CBCR was approved by the European Parliament on 4 July, and is currently in the trilogue stage of negotiations between the Council, the European Parliament and the European Commission. Under the Parliament’s resolution, any multinational group with an annual turnover of €750m or more, and branches in the European Union, would be required to publish a global country by country tax report.

Campaigners tend to argue that the question about public country by country reporting is not ‘whether’ but ‘when’? Tax professionals, however, are still asking ‘what for?’, as it is not clear how public reports would be used.

Companies putting together their first CBCR submissions would have been wise to consider how their numbers might be interpreted if they came into public view, but few have taken the proactive step of publication. The energy company SSE remains one of the few companies to voluntarily publish (it is also one of the only large companies to sign up to the ‘Fair Tax Mark’). However, with its multinational operations not reaching beyond the British Isles, its ‘report’ is a short table which does not offer not much of a proof of concept. This year, the educational publisher Pearson also took the plunge, including in its published tax strategy country by country information for its 12 largest markets (accounting for 95% of total revenue). The FMCG company Reckitt Benckiser, after attracting the attention of an Oxfam report in July, came out in reluctant support for country by country reporting, without actually committing to voluntary publication itself; but calling for the UK government to encourage international action in order to create a level playing field.

Still, there is little clarity about whether public country by country reporting would, as its proponents claim, provide meaningful information to investors and other stakeholders, or whether it will lead to more confusion. Under the EU Capital Requirements Directive (CRD) IV, banks in the EU are already required to publish country by country revenue, profit, and tax and headcount information. Some, such as Barclays, accompany this with a narrative explanation of the business and tax situation in each country. Most simply give the raw table of numbers. In March, Oxfam France published ‘Opening the Vaults’ based on country by country reporting in the banking sector data. Its analysis, which concluded that 19% of the banks’ total profits are being reported in tax havens (places like Hong Kong, Ireland, Belgium, Luxembourg and Singapore) while ‘they should be reported elsewhere’, demonstrates the methodology which civil society organisations may use to analyse CBC reports, and the gap between this and how tax professionals think. It used the number of employees in each country as a basis to estimate the profit that banks ‘might be expected to report’ (if the relationship between employee numbers and profits was homogenous). The report was enthusiastically received by the tax justice community and largely ignored by the banks and tax profession. This seemed like a missed opportunity (on both sides) to explore and explain what is revealed in the banks’ CRD IV reports, in particular whether the assumption that there should be the same relationship between staff numbers and profits across the whole of a multinational is commercially realistic.

The Panama and paradise papers

The ‘paradise papers’ made a splash in November, and again reflected the split in the debate. The stories which emerged from files of the offshore law firm Appleby, are like the ink blots of a ‘Rorschach test’: campaigners saw the files as ‘leaked’, while tax professionals said they were ‘hacked’. Campaigners said they revealed dodgy tax dealings and widespread illegitimate behaviour. The International Consortium of Investigative Journalists (ICIJ), for example, say that they ‘expose significant failures and weaknesses inside the offshore industry’. Margaret Hodge called an emergency debate in Parliament and argued that ‘the paradise papers reveal the enormity and scale of the problem’, speaking of ‘ill-gotten gains of tax dodging’. Tax professionals saw the stories primarily as a breach of confidentiality, and tended to interpret them as showing legal and generally pedestrian tax planning, and ordinary offshore fund management. Pascal Saint-Amans at the OECD said: ‘They are quite different from the Panama Papers,’ and that they mainly demonstrated legal behaviour: ‘Some are not even questionable from a legitimacy point of view.’ Jeremy Cape, tax partner at Squire Patton Boggs, argued that: ‘There appears to be little of revelation in the leaked papers about the role of offshore, or the role of offshore advisers.’

It’s good to talk?

While all of this confusion and disagreement suggests corporate taxpayers, the tax profession and their critics were barely on speaking terms, in fact 2017 saw a flowering of initiatives seeking to bring people together, clarify concepts, and discuss and set standards for responsible tax practice. These included the All Party Parliamentary Group on Responsible Taxation, the Responsible 100, the United Nations Supported Principles for Responsible Investment, meetings convened by the think tank CoVi, and the senior HMRC trade union ARC, the KPMG Responsible Tax dialogues, and a working group convened by the business leadership group ‘The B Team’ (I am involved in this one). And that was just in the UK. Internationally, the UN, World Bank, OECD and IMF started to work together as the ‘Global Platform for Collaboration on Tax’ on supporting developing country tax policy and administration. The European Commission sought to bridge the technical-ethical debate by commissioning the International Bureau of Fiscal Documentation (IBFD) to provide ‘international tax 101’ training to NGOs, and it held a multi-sector conference on tax fairness. Oxfam Denmark and Oxfam US held roundtable discussions with tax directors from major companies. Perhaps most surprisingly, Twitter turns out to be a remarkably good medium for enabling serious conversations between tax professionals, researchers and NGO activists.

New year’s resolution?

Will the tax debates turn a corner next year? Or will they continue to diverge?

One thing they will have to cope with is the change in the global tax landscape caused by US policy change. While I have mainly focused on the UK and European public tax debates, perhaps the most important debates this year were taking place in the US. Changes in the US tax system would change the pressures and opportunities for avoidance and tax planning on both US companies and foreign investors into the US.

Facebook has recently announced that it will start recording revenues for ads supported by local teams in the country of sale. They cite the demand of governments and policymakers around the world for greater transparency and visibility over these revenues. Tax is increasingly being viewed as a reputational matter. And in the UK, even those that haven’t taken the step proactively are now required to publish tax strategies. Many are publishing statements about paying tax where value is created and not undertaking aggressive or artificial tax avoidance. If companies argue that publishing the OECD CBCR template is not the right format for communicating where they pay taxes and how, the ball is back in their court (but perhaps not for long) to find a meaningful way to back up their statements on good practice with internal assessment and external communication. Transparency does not just mean tables of numbers, but tax professionals and business stepping up to articulate acceptable and unacceptable practice, and finding ways to communicate the difference between tax planning, tax avoidance, tax evasion and ‘illicit financial flows’.