The endless battle against the business lobby for tax justice and transparency proceeds apace. The European Council is scheduled to meet in Brussels on May 25 and will likely consider new rules on corporate transparency, the introduction of public country by country reporting. The meeting will take place 40 years to the day since the OECD sabotaged attempts to introduce similar transparency measures via the United Nations. The long and arduous road towards country by country reporting is the subject of a new report by the Tax Justice Network. Its authors Markus Meinzer and Christoph Trautvetter call for full public disclosure. Full report here.
As more and more scandals break concerning tax avoidance by multinational companies, there has been increasing pressure to get something done.
As long ago now as 2013, G8 leaders issued the Loch Erne Declaration which called for countries to “change rules that let companies shift their profits across borders to avoid taxes, and multinationals should report to tax authorities what tax they pay where.”
The second part of that, that multinationals should report what tax they pay where, is crucial to combatting tax avoidance.
Currently most companies report their figures on a global basis. That means that all of the companies forming part of a multinational group – from Australia to the Cayman Islands – have their figures mixed together and reported as one.
This helps companies keep tax avoidance out of the public eye. Tax avoidance happens when different companies within a multinational group shift profits between themselves, from high tax jurisdictions, to tax havens. Consolidated accounts help keep that activity below the surface.
Country by country reporting would compel companies to show where their economic activity takes place, where they are reporting their profits, and how much tax they are paying on them. But rather than reporting only to tax authorities, as the G8 declaration envisaged, public disclosure is vital. In recent years, tax administrations were found colluding, under their political leader’s instruction, with multinational companies to bend, if not break, the tax law by engaging in sweetheart deals.
Only public access thus allows holding multinationals and administrations alike accountable. Only public data enables having a more informed debate on tax policy, better investor scrutiny, more robust reputation as well as risk management, and not least pressure on companies avoiding tax.
Forcing companies to be more transparent on their tax affairs is not a new idea. As a new publication by Markus Meinzer and Christoph Trautvetter from the Tax Justice Network sets out, the UN Commission on Transnational Corporations first tried to get companies to report more detail on the activities in the late 1970s. Back then, the proposal was to make companies publish full accounts for each company they operate.
Had this happened many of the tax avoidance scandals recently revealed may well have themselves been avoided. The public and politicians still do not have sight of the full scale of profit shifting by multinational companies into tax havens. If they did, governments may well have taken more action to deal with the problem long ago.
So, with combatting tax avoidance so much in the public interest, why do we still not have public country by country reporting?
The report details the shocking history of how lobbyists have spent decades seeking to undermine any attempt at global corporate tax reform. The tactics used included getting the UN Commission responsible for developing policy to abandon majority voting in favour of consensus, making sure that any progress would be limited to the lowest common denominator.
We have also seen policy making moved from international organisations such as the UN, which have some democratic legitimacy, to entirely undemocratic self-regulated professional associations, dominated largely by the Big Four firms of accountants.
The report also reveals the stark divide between the interests of developing world countries, which often promoted transparency initiatives, and capital exporting western nations (where most multinationals are headquartered) that represented the interests of big business in the international arena.
The history of the debate on corporate transparency is incredibly relevant today. The European Union is currently debating whether to adopt mandatory public country by country reporting for all multinationals with operations in the EU. Many of the arguments and tactics being used by the corporate lobby are similar to those used 40 years ago. In particular, there is currently an attempt led by Germany to force the issue to be considered under rules requiring every European country to sign off on them.
Hopefully this timely report will help policy makers avoid repeating past mistakes.