A Financial Times editorial noted a while ago that country by country reporting might expose what it called ‘the scandalous tax treatment of multinationals in the rich world’. The editorial published on 22 December 2010 said:
‘Current practice turns corporate tax largely into a voluntary gesture by the well-run multinational, whose methods of choice for locating income in lower-taxed jurisdictions are intragroup financial links and transfer pricing of intangibles such as intellectual property. As finance and intangibles grow in importance, so will the slipperiness of the corporate tax base.’
During the last two weeks I’ve listened to almost 12 hours of discussion and debate on tax and transparency, where the focus has been on the impact of tax avoidance on developing countries. I’ve reported very briefly for Tax Journal news on the Commons International Development Committee (IDC) hearing of 24 April and International Tax Review’s excellent Tax and Transparency Forum, held on 2 May.
And I’ve read ActionAid’s report Calling time: Why SABMiller should stop dodging taxes in Africa. It is essential reading for anyone with an interest in tax or development or both – in theory at least, this means everybody. Certainly, if you have any doubt that there is a clear link between tax avoidance and poverty in developing countries, you should read it.
All of this has been enough to convince me that country by country reporting of profits and taxes paid – an idea developed by Richard Murphy and supported by many NGOs – should be written into international accounting standards. The UK government should be pushing for this reform if it is serious about tackling tax avoidance, but the signs are that it is more interested in tax competition.
I have not been persuaded by the arguments against country by country reporting that have been advanced by the few people in the business community who have been prepared to discuss it at all. My view is that the virtual silence that we have experienced until recently, and the focus now on the question of what people would make of country by country reports, show the weakness of the case against greater transparency. As Salman Shaheen of International Tax Review has said, if there is nothing to hide, why hide?
‘The normal way of doing business’
ActionAid’s report has brought home what I think a very large number of large businesses and tax professionals know, but few others realise – that the international tax system itself gives the multinationals an unfair advantage over national governments, and over those multinationals (perhaps the majority) that do not do ‘aggressive tax planning’, and over the millions of people and smaller businesses who pay more tax as a result.
If I had read the whole of ActionAid’s report (first published in November 2010 and updated last month) before I wrote the first Tax Journal story, I would still have quoted SABMiller CEO Graham Mackay’s comments at the IDC meeting at some length. But I would have seen those comments in a different light, because the cornerstone of ActionAid’s argument is that SABMiller was able to work within the transfer pricing arm’s length principle to ‘minimise its tax payments’. Neither the MPs on the IDC nor Graham Mackay addressed this.
ActionAid uses the terms ‘tax avoidance’ and ‘tax dodging’ interchangeably. Avoidance (unlike evasion) is legal, and SABMiller is not alone by any means. As ActionAid says (p6):
‘The lucrative search for ways to pay less, creating complex corporate structures, routing money through opaque tax havens, and employing highly paid professionals to find loopholes, is legal: indeed, it is so common it is accepted as the normal way of doing business. And it gives multinational companies a distinct advantage over their local competitors.’
The report alleged that SABMiller’s Accra Brewery in Ghana became ‘a textbook example of the techniques used by big business to avoid corporate income taxes’ by transferring millions of pounds to sister companies in tax havens. Marta Luttgrodt (p7) sells SABMiller’s Club beer at her small beer and food stall in the shadow of the brewery. She has, according to ActionAid, ‘paid more income tax in the past two years than her neighbour and supplier, which is part of a multi-million pound global business’.
Is the whole system flawed?
Many tax professionals will have dismissed John Christensen’s argument at the IDC that the current regime for taxing multinationals is ‘not fit for purpose’. But he may well be right.
ActionAid argues that the transfer pricing rules leave ‘enough wiggle room for companies to inflate prices and bump up profits in places where they will incur low taxes, all within the law’. A key reason for this is the lack of comparables needed to fix an ‘arm’s length’ price. No surprise there, because up to 60% of the world’s trade happens between companies in a multinational group, and is hidden from view because it does not need to be shown in the group’s consolidated accounts.
In January 2010 Michael Durst, a former director of the IRS’s advance pricing agreement programme, suggested that the OECD should re-evaluate transfer pricing laws.
ActionAid quotes Durst (p31) as saying in an article published in Tax Notes International that ‘multinational groups generally have been free to enter into internal contracts that shift interests in valuable intangibles to tax haven countries in which taxpayers conduct little if any real business activity’.
The Tax Justice Network published extracts of Durst’s article here. And ActionAid has noted that there is ‘a distortion in the system when it comes to transactions in intangibles such as trademarks’.
Now this is how the established principles of international taxation – developed by the OECD and supported by big business and tax professionals all over the world – almost invite multinationals to minimise their corporate income taxes. ActionAid again:
‘Transfer pricing takes corporate structures, even those motivated entirely by tax avoidance, for granted, only examining the prices charged rather than the structures themselves.’
No wonder, then, that campaigners such as the Tax Justice Network are calling for an overhaul and a better method of allocating profits between countries.
Tax Journal’s focus is on UK taxes and the magazine (where I have been the news editor since February 2010) has not explored these issues in depth since a series of articles was published in 2009, in response to The Guardian’s ‘tax gap’ series – see below. We have followed the debate closely in the news pages. While the issue is an international one, it is clearly one of great importance to UK businesses and taxpayers generally.
I reported recently that Barclays voluntarily disclosed the amount of its UK corporation tax bill for 2011. It is ludicrous that a multinational with a major presence here should not have to disclose that information. Country by country reporting would fix that.
I mentioned a Tax Journal series on the ‘tax gap’. Anne Redston, now a barrister at Temple Tax Chambers and a Visiting Professor of Tax Law at King’s College London, noted in an article published on 6 April 2009 that The Guardian had criticised companies whose relocation appeared to be a charade: ‘One such “headquarters” turned out to be merely the premises of the company's accountants. Other multinationals had just a handful of staff at work, no nameplates outside, or occupied the premises only sporadically.’
Anne Redston also noted that the paper had attacked the ‘migration of well-known UK brands to tax havens such as The Netherlands, Zug in Switzerland and Puerto Rico’. She asked why, if the driving force behind brand reorganisations was said to be commercial convenience, had so many brands ‘ended up in obscure jurisdictions like Puerto Rico, instead of where the companies' business operations take place?’
Commercial considerations were often ‘a mere fig leaf for tax avoidance’, she wrote. And while the amount of revenue lost to poor countries by transfer pricing abuse was uncertain, the existence of transfer pricing as ‘a mechanism for stripping tax revenues out of poor countries’ was not.
Country by country reporting would at least give people a chance to assess the scale of tax haven activity and whether the current tax regime is really in need of an overhaul. It should be high on the agenda.