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The false economy

Country by country reporting is a victory for citizens over companies

Tax transparency is one step closer.

The Twitter age is about to chalk up its first success in the grey world of corporate accounting. It has been reported that the European Union will seek to make large companies disclose the taxes they pay and profits they make on a country-by-country basis.

This is part of the crackdown on corporations avoiding their obligations. The concerns are driven by tax avoidance, as companies have sales, employees and assets in one place, but end up booking them in jurisdictions with comparatively few employees, sales and assets. The idea behind country by country (CbC) reporting is to enable citizens to scrutinise corporate practices and ask critical questions.

The EU proposals mark the beginning, but CbC is a much broader idea. It supplements the traditional model of publishing profit and loss account, balance sheet and a cash flow statement. These statements relate to the company as a single economic entity and do not provide any disaggregated information. So these statements do not reveal the taxes a company may have paid in each country, or the profits and losses made there.

The traditional approach in accounting circles has been to require companies to publish “segmental reports”, in which company directors offer a commentary on major operating segments, products and services, the geographical areas in which they operate and their major customers. Such reports are too general and do not focus on each country.

In contrast, CbC requires companies to publish a table showing sales, costs, profits, losses, taxes, loans, subsidies and employees for each country of its operations. It could even be used to demand information about carbon emissions and other corporate footprints in each country. Such a table would show that a location has relatively few employees but is reporting very high profits, or that a country has a high proportion of a company’s sales and employees, but pays little or no tax. Armed with this information, citizens may be able to construct shadow accounts and question conventional accounts offered by corporations – the ones that say, “we are good citizens, we pay taxes and really care for the community”.

CbC is the culmination of a decade-long campaign by civil society organisations. When fully enacted, it will be the first accounting standard formulated and developed by civil society rather than the traditional accounting standard setters. It represents the first time activists have demanded and secured an accounting standard that the establishment was not keen on in the social media age.

In 2003, in my capacity as director of the Association for Accountancy and Business Affairs (AABA), I encouraged Richard Murphy, a chartered accountant, to draft a proposal that could highlight flight of capital, profits and the mismatch between profits, employees, assets and tax.

The first draft was published in 2003 and has continued to be refined. Initially, meetings were sought with the more traditional accounting standard setters, such as the International Accounting Standards Board (IASB) and the Financial Reporting Council (FRC), but they showed no interest.

There was considerable opposition from the professional accountancy bodies. For example, the Institute of Chartered Accountants in England and Wales was vehemently opposed to it. Major accounting firms and corporations were also opposed to CbC.

For example, Deloitte said “we do not believe that imposing incremental country by country disclosure in financial statements prepared under IFRSs is warranted”. A survey in 2010 did not show much enthusiasm for CbC among FTSE 100 directors. The usual arguments were that disclosure would be costly, even though companies should already have the information about the performance of their subsidiaries in each country of their operation. The cost of publishing this internally held information is negligible.

The main turning point was the support given by NGOs, such as Christian-Aid, Publish What You Pay (PWYP), War on Want, Tax Justice Network, Oxfam and many others, not only in the UK and the EU, but also in developing countries and the US. The credit for this must go to Richard Murphy. This campaign was joined by some Members of the European Parliament (MEPs) and also Labour MPs.

Much to the dismay of the accounting establishment, their pressure persuaded the EU to launch a consultation exercise in 2010 and has now resulted in partial implementation of CbC. No doubt, there is more to come.

The story of the country by country reporting is that in the digital era, it may well be possible to mobilise alternative centres of power, at least in crafting new accounting disclosure rules. This announcement has been a victory for those of us who campaign for greater transparency on tax. Let’s hope it’s the first of many.

Prem Sikka is senior adviser to Tax Justice Network.

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