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Tax and development: transparency report discounts multinationals’ tax planning

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The objective of holding multinationals to account in relation to tax planning strategies – one of six stated ‘possible objectives’ – was discounted by a group of tax experts and practitioners reporting to the OECD in April on the case for greater disclosure of tax information.

The group’s report said: ‘As there was no consensus within the group on the appropriateness of objective (vi) [to hold companies to account with regard to tax planning strategies even where the amount of tax due has been paid], this report’s discussion of holding companies to account considers only accountability with regard to the amount of tax due, objective (v) [to hold companies to account with regard to paying the amount of tax due (under the law) in each country in which they operate].’


Martin Hearson, tax policy adviser at ActionAid UK, was a member of the group, which was chaired by Michael Devereux, chairman of Oxford University’s Centre for Business Taxation (CBT).

Hearson told Tax Journal that there are tax planning situations ‘which may not involve non-compliance with the law, but which are unacceptable from a development perspective’.

‘We think it’s fair comment to criticise companies for taking such opportunities, as well as questioning whether the legal framework needs to change to prevent them. It was disappointing that not everyone in the drafting group agreed with us on this, but we recognise that we need to work harder to make our case,’ he said.

The CBT group’s report recognised that the incentive ‘clearly exists’ for multinationals to shift profits from higher taxed countries to lower taxed countries. ‘There is empirical evidence that such shifting takes place, although the scale of such activity is not clear.’

Country-by-country reporting

The European Commission has said responses to its recent consultation on country-by-country reporting showed a ‘rather diverse pattern of opinions’. Tax preparers, accountants and auditors were in general opposed to the reform, while NGOs and others were in favour, it said.

Minutes of the April 2011 meeting of the OECD's Informal Task Force on Tax and Development record that an informal drafting group led by the CBT was exploring ‘whether public disclosure of financial information by multinational corporations on a country-by-country basis would serve as an instrument to hold both governments and multinational corporations to account’.

The drafting group, which included representatives of the OECD, PwC, Rio Tinto, and Christian Aid as well as ActionAid UK, was asked to ‘explore the broad question and identify issues for possible future work ... [but] not to make concrete policy recommendations’.

The CBT published the group’s report, titled Transparency in reporting financial data by multinational corporations, last week.


‘On one view, some types of artificial tax minimisation techniques, even if legal, may not be ethical,’ the report said. ‘Those who hold this view claim that corporations should be guided by this higher standard and that public disclosure of information would encourage such higher standards. These commentators also argue that public disclosure would highlight aspects of the law that might need to be strengthened or changed.

‘The alternative view is that in the tax arena, corporate responsibility must be defined by the amount of tax legally due and companies cannot be expected to make voluntary payments over and above the amount required by the relevant legislation. According to those who hold this alternative view, in a democratic society it is for the legislature to determine the standards which should apply to taxpayers and companies must then abide by that law. These commentators argue that if one moves to other standards, it is hard to know who could lay these down and on what authority they are in a position to police them.’

Practical difficulties

While there was no detailed examination of the sixth objective, the group did note that the Task Force on Financial Integrity and Economic Development, which describes itself as a ‘unique global coalition of civil society organizations and more than 50 governments’, has argued that large scale tax avoidance is facilitated by a lack of transparency in the way MNCs report and publish their accounts, and that making such accounts more transparent ‘would help tackle tax avoidance at very low cost’.

Devereux’s group went on to describe a number of uncertainties and potential practical difficulties associated with country-by-country reporting, including:

  • Exploitation of gaps and loopholes in tax law is legal although some will object that it is not ethical or ‘acceptable’.
  • There may be a range of behaviour making use of uncertainty in tax law, where the effectiveness of the activity is unclear until the matter is adjudicated by the courts or dealt with by arbitration.
  • Establishing the boundaries and interpreting complex tax law is notoriously difficult. Sometimes the intention of the law is not clear cut and different interpretations can legitimately be made.
  • The difficulty of valuing the ‘transfer prices’ in transactions between associated entities depends on the circumstances. Valuing more sophisticated services or assets, especially those involving unique intangibles, can be extremely difficult, and multinational companies have access to expertise in taxation and transfer pricing which cannot be matched by the tax authorities of most, if any, developing countries.

The report observed that if there are gaps or loopholes in tax law which governments do not intend, ‘the natural response of civil society is to hold governments to account to remove these gaps and loopholes’.

It added: ‘There are examples of civil society groups in lower income countries which support this work. In addition, civil society groups argue that companies should be accountable and responsible for how they use gaps and loopholes in tax law. Others question whether civil society should attempt to hold companies to account to a standard of behaviour that is not required by law.’

The report suggested that given the ‘genuine difficulties’ in identifying the correct amount of taxable profits and hence the amount of tax due, country-by-country disclosure of tax payments would not be very useful unless it included at least some measure of country-by-country profit. Even then, the information ‘would still be only a weak indicator’ of possible profit shifting between tax jurisdictions.

Greater transparency ‘may benefit public debate’

‘Insofar as any information in the public domain may inform the electorate and decision-makers, greater transparency in financial reporting may be a benefit to the public debate about the best set of policies and international rules for protecting the tax base in less developed countries,’ the group observed.

But it suggested that the effect that greater disclosure of corporate financial information would have on political dialogue is ‘very difficult’ to assess.

‘Evidently, information can be used to support many differing arguments, and can be used more or less responsibly.’