Tax Avoidance in a World of Aggressive Tax States

I finally got around to posting the presentation I made last month at the Journal of Tax Administration Conference on "The Changing Shape of Tax Avoidance." The paper upon which this presentation is based is still in progress, I'll post a draft soon. I would be very happy to have comments on the ideas I am developing in this project.

Documenting the spread of OECD norms: Country by Country Reporting Map

Here is a world map showing status of implementation of the OECD's Country by Country Reporting regime; clicking on the flags gives a brief country status report. I'm not really sure how informative it is in that it is not all that useful to read simply that CBCR is being implemented but the implementation date is "unknown" in various countries, especially when the little flag masks real controversy surrounding the country's intentions.  Also I am not sure what to make of all the blank space--do the map's curators think these other countries are irrelevant to the inquiry? Even so, if the idea is that the map will one day be covered in green flags, and that the world with green flags is remarkably different than today's world with mostly red and yellow ones, watching the map evolve will be a fascinating study in the power of soft law.

OECD public meeting on tax-base erosion project: US MNCs hope to 'participate'

Reuters reports that the OECD will have a "public meeting" in Paris on Nov 12-13, at which "companies will get to voice their concerns about the OECD's 'base erosion and profit shifting,' or BEPS, project":

The United States Council for International Business (USCIB), representing about 300 U.S. multinationals, has asked to participate at the hearing, said Carol Doran Klein, USCIB's tax counsel, on Monday.

And here comes a parade of lobbying that will be designed to protect all that is favorable to their clients in the status quo. These are the moments when I really appreciate the amount of transparency we have in US politics thanks to organizations like Open Secrets, the Sunlight Foundation and Muckrock:

A number of U.S. companies, including E. I. du Pont de Nemours and Co, (DD.N) and Starbucks Corp (SBUX.O), have raised questions about the BEPS project with members of Congress and the Obama administration, according to corporate lobbying disclosures filed earlier this year.

Remember "raising questions' is like "raising concerns": it doesn't mean the speaker has either a question or a concern; instead it means the speaker has an agenda. The Reuter's story continues:

Under existing international standards, the fees charged [on an inter-company basis] are supposed to be set using an "arm's length" approach, meaning one that replicates market-level values. In practice, fees are often skewed so that profits can be shifted into the low-tax country where the assets are located and out of higher tax countries. 

These practices are legal, but tax fairness activists and some less-developed countries are complaining about them.

Interesting subtext there. The story doesn't give any more detail about the public meeting but here is what the OECD says:

On 12-13 November a consultation, open to the public and press, will be held at the OECD in Paris. If you wish to attend, please contact TPConference@oecd.org.

Is not public and press redundant? No matter: the point is, this is part of the public consultation portion of the BEPS program.Here is a draft agenda in pdf, and it is fascinating in lineup of both topics and speakers--namely, only two are named right now and one of them has been a long time and trusted voice of business interests against corporate tax transparency, and purveyor of norm framing exercises at the OECD, namely, GE's Will Morris; the other is Michelle Levac, noted as one of the 50 biggest influences in tax by International Tax Review, owing to her role in leading Working Party 6 on transfer pricing. These two get bookend treatment, opening and closing the consultation. All the other speakers are TBD, so this is where the USCIB seeks to gain a foothold. Here is the outline so far:

Programme  Public Consultation on Transfer Pricing Matters  12-13 November 2013  OECD Conference Centre  2 Rue André Pascal, Paris 16th, France  Tuesday 12 November  08:30-09:30 Registration   09:30-09:50 Opening remarks and Ground Rules    Speakers:
Michelle LEVAC, Chair of Working Party No. 6
William MORRIS, BIAC   09:50-11:15 I:  Implementing country-by-country reporting  The BEPS Action Plan directs the OECD to develop and implement a system of country-by-country reporting to tax authorities of high level MNE group financial information.  A large number of questions arise in connection with implementing such a system.  These include:  (i) what information should be reported; (ii) at what time should that information be reported; (iii) to whom should such information be reported; and (iv) how should such information be shared among relevant governments, taking into consideration concerns regarding non-cooperative governments, incomplete treaty information exchange obligations, and the need to protect confidential taxpayer information.
Speakers: to be announced
1.  Information to be reported
2.  Information to be reported
3. Mechanisms for reporting / to whom to report / information sharing   11:15-11:45 Refreshment Break      11:45-13:15 II:  White Paper on Transfer Pricing Documentation  The BEPS Action Plan calls for the OECD to develop rules on transfer pricing documentation.  To initiate that process, the OECD published a White Paper on transfer pricing documentation on 30 July 2013.  The White Paper raises a number of issues on which business has provided comments.  These include: (i) the implementation of a standardised two tier documentation system; (ii) the use and content of a global master file; (iii) mechanisms for limiting early reporting to information useful in risk assessment with subsequent opportunity for governments to obtain detailed information necessary for audit; (iv) the development of materiality standards; (v) implementing consistent documentation formats across countries; and (vi) mechanisms for minimising unnecessary compliance burdens.    Speakers: to be announced  1.  Two tier approach
2.  Contents of global master file
3. Establishing materiality standards  4. Mechanisms for simplifying compliance (1)
5. Mechanisms for simplifying compliance (2).   13:15-14:30 Lunch break      14:30-16:00 III:  Revised Discussion Draft On Transfer Pricing Aspects Of Intangibles – Definitional Issues And Comparability Factors  On 30 July 2013 the OECD published a Revised Discussion Draft on Intangibles.  In the RDD, the definitional section was changed in some respects.  In addition, a new section of the RDD addresses comparability factors including location savings, features of local markets, assembled workforce, and corporate synergies.   Discussion in the afternoon session will be devoted to definitional issues and to the new section on comparability factors.
Speakers: to be announced
1. RDD changes to the definition of intangibles
2. Usefulness of the term “marketing intangibles”
3. Treatment of goodwill and on-going concern value / Examples 16 and 18   16:00-16:30 Refreshment Break      16:30-18:00 IV:  Revised Discussion Draft On Transfer Pricing Aspects Of Intangibles – Definitional Issues And Comparability Factors  (Continued)    Speakers: to be announced
4.Treatment of location savings and local market features
5. Treatment of Assembled Workforce
6. Treatment of group synergies
7. The financing and guarantee examples / Examples 1 and 2     Wednesday 13 November     09:30-11:00 V.  Revised Discussion Draft On Transfer Pricing Aspects Of Intangibles – Section B Of The RDD Section B of the June 2012 Discussion Draft attracted numerous written comments and was the subject of much discussion at the last business consultation. It has been substantially redrafted.  The approach in the RDD is more transactional in nature, while still emphasising the primary importance of functions performed, assets used and risks assumed.  The morning discussion will focus on the changes to Section B and the related examples     Speakers: to be announced
1. The general approach of new section B.
2. Examples 1 – 3
3. The treatment of outsourcing arrangements
4. The treatment of important functions   11:00-11:30  Refreshment Break      11:30-13:15 VI:  REVISED DISCUSSION DRAFT ON TRANSFER PRICING ASPECTS OF INTANGIBLES – SECTION B    Speakers: to be announced
5. Examples 11 – 14 and footnote 5 on page 63.
6. Treatment of funding for intangible development
7. Guidance on the use of corporate trade names   13:15-14:30 Lunch      14:30-15:15 VII: Other Discussion Draft Topics    Speakers: to be announced
1. Treatment of valuation techniques
2. Guidance on transfer pricing methods
3. Options realistically available / Example 24   15:15-16:00 VIII: Transfer Pricing Aspects Of The Beps Action Plan
The BEPS Action Plan published in July will guide much of the OECD transfer pricing work in the next two years.  The Action Plan contains four substantive transfer pricing areas of work in Actions 4, 8, 9, and 10.   This discussion will provide business an early opportunity to comment on the transfer pricing aspects of the Action Plan and the approach that Working Party No. 6 should take to fulfilling its mandate under the Action Plan.    Speakers: to be announced
1. How should the BEPS Project approach the question of hard to value intangibles / particularly transfers of partially developed intangibles?
2. How should the BEPS Project approach questions of risk allocations that may give rise to separation of income from relevant economic activity?
3. What role should there be for approaches outside the arm's length principle in addressing BEPS issues?        16:00-16:30 Refreshment Break      16:30-17:30 IX:  TRANSFER PRICING ASPECTS OF THE BEPS ACTION PLAN (CONTINUED)    Speakers: to be announced
4. How should the BEPS project approach the topic of recharacterisation of transactions?
5. What should the BEPS project consider in connection with global value chains and profit split approaches?
6.  What should the BEPS work on financial transactions address?    CONCLUDING REMARKS   17:30-18:00 Speakers:
Michelle LEVAC, Chair of Working Party No. 6
William MORRIS, BIAC   18:00 ADJOURN

Perhaps there will be additional public consultation meetings, I do not know. As Lynne LaTulippe taught my tax policy class recently, the consultation process is an often overlooked and in general understudied aspect of norm diffusion and lawmaking. This is one of the many times I wish that I was geographically situated to attend these things. I will be very interested to see how the speaker lineup evolves and would be very grateful to hear about the discussion from anyone who attends.

Corporate tax: why disclosure is the key to reform

Two columns of interest emerged today on the issue of corporate tax disclosure, plus another interesting public hearing in the UK, this time with the big four in the hot seat.  Put all of this together and we can see very clearly the intense connection between tax reform and public understanding of the status quo.  With the latter as to corporate tax being woefully inadequate and relevant information intentionally hidden from public view, the former can be neither informed nor meaningful.  The answer is corporate tax transparency, particularly for multinationals, i.e., on the order of country-by-country reporting for listed companies.  First, on the columns, both from the FT.

In this one, John Gapper says "Companies are complying with laws that governments could change if they wished," and then explains:

Starbucks’ supposed immoral act is not to pay UK corporation tax that it does not owe, and would not owe even if it did not license its brand from the Netherlands. It obeys both the letter and the spirit of global tax law, which governments could reform if they wished.

That's 100% correct. And if you think there is some "spirit" in the transfer pricing law that isn't being acknowledged, then you are forgetting that the transfer pricing rules were effectively written by the industry they are meant to police. So I think the spirit is pretty much being well given its due. Gapper also nicely illustrates what I call the mercenary tendency of the tax state in an economically integrated world: agree with whatever seems politically expedient in principle, defect in practice:

I look forward to Mr Cameron naming and shaming companies such as Google (also a target of British politicians) if they are drawn from Ireland to the UK by his tax arbitrage. 

...Governments must decide which regime is fair, and companies and individuals must comply. 

... most companies that place operations or intellectual property in low-tax countries – or even in tax havens such as Bermuda – are not breaching the spirit of global tax law. They comply with a structure established under the League of Nations in the 1920s. 

This allows – indeed, encourages – multinationals to split their operations among countries, paying taxes as if they were separate entities, in order to avoid double taxation. They have to make transactions at “arm’s length” – as they would deal with others. 

It worked for a long time but is under strain because of the growing value of brands, intellectual property and intangibles to global corporations. “Ideas are their biggest asset, and what generate profits, and it is far easier to shift intangibles than factories,” says Jeffrey Owens, of the Institute for Austrian and International Tax Law.

Well, this is mostly right, at least close enough for its purposes. However, I am just not sure what principles we should expect to emerge when reporters turn, as they too often do, to Mr. Owens, former director of the OECD's tax arm and the man who presided over the demise of the corporate tax on a global scale under the nurturing constancy of the OECD's business-driven tax policy making machine, a person moreover who has publicly called for governments to "avoid like hell" any taxes on corporations. He would seem to be the last person you would ask about how to make a corporate tax system function, again, unless we are talking about that movie.  Gapper concludes:

Politicians thus have the choice of indulging in easy rhetoric against companies that obey the laws they have passed or struggling to reform the tax regime for little reward, with lots of disruption. In their position, I might posture too.

If that's not an argument for greater public accountability of how transfer pricing works out in practice, I am not sure what is.

That brings me to the second column of the day from the FT which illustrates why the public ought to know more about how these regimes work in practice, this one by Bruce Bartlett in which he asks, can publicity curb corporate tax avoidance? He lays out the case nicely for the runaway corporate tax base and he concludes:

[L]ittle in the way of real economic activity, such as jobs or tangible investment, has shifted anywhere. All that has shifted is the tax base. 

...This makes the international tax regime a ripe target for reformers.

... With reports of low domestic taxes paid by large profitable corporations such as Starbucks in the UK, the time may also be ripe for an international agreement to curb tax shifting. The US has recently implemented a law called the Extractive Industries Transparency Initiative that requires companies to disclose their payments to governments from oil, gas and mining assets. Allison Christians of McGill University argues that the expansion of such information reporting to the transfer pricing of all multinationals is the first step towards capturing the revenue now lost to the shifting of business costs to high-tax jurisdictions and revenues to low-tax jurisdictions. 

There is growing evidence that corporations are sensitive to the public outcry when they are caught avoiding taxation excessively. Starbucks, for example, recently agreed to pay more taxes in the UK than legally required to quell the controversy over its virtually nonexistent tax bill. The same shaming technique may have broader application to multinationals generally. 

As Justice Louis Brandeis of the US Supreme Court once put it, “publicity is justly recommended as the remedy for social and industrial diseases”.

First, thank you for the shout out, Mr. Bartlett! Second, this column demonstrates clearly the strong connection between tax reform and public understanding of the status quo, as I suggested above.  Tax reform is not going to come from the only party that has all the info it needs right now, namely, the IRS. Tax reform comes from public expression.  Right now, observers of tax policy need more information in order to offer meaningful reform proposals, and that information is being hidden because governments do not require it to be disclosed, plain and simple.  That is a matter of regulatory choice, and these columns show the choice is bad for policy analysis.

That then brings us to the UK's hearings today in which the public accounts committee taking on the big four accounting firms, trying to suss out what the letter and the spirit of the law is with respect to corporate tax on multinationals.  What emerges is the "perfectly legal" nature of all of this tax avoidance, again confirming the editorials by Gapper and Bartlett.  Here is the BBC's take on the hearings, worth reading in full.  Richard Murphy declares it a win for the PAC but the question is whether that translates to a win for those who do in fact pay taxes in the UK and elsewhere.

That question will be answered affirmatively if instead of killing EITI, which is currently apparently a high priority for many, we expand it to cover all listed companies.

Human rights and tax secrets

Think those two don't go together? Prince Charles begs to differ:

Prince Charles has used the Human Rights Act and the Official Secrets Act to block revelations about his tax affairs – even though Her Majesty’s Revenue and Customs has said the disclosure would be in the public interest. 

The move follows a bid to uncover the secret arrangements which allow the Prince of Wales to avoid paying tax on the Duchy of Cornwall, his vast estates which generated £18 million profit last year. 

The test case centres on a request by an academic who has asked to see correspondence between the Duchy of Cornwall and HMRC. 

But the Government and the Duchy of Cornwall have refused to agree to the release of the documents because the disclosure would breach Charles’s right to privacy. They also say the information is protected by the Official Secrets Act. 

John Kirkhope, an expert on trusts law from Weston-super-Mare, Somerset, is trying to use the Freedom of Information Act to uncover how HMRC came to grant the Duchy a tax exemption which is estimated to have been worth millions of pounds over the past century.

The issue here is the right of the public to know what the treasury already knows.  A spokesman for Prince Charles said "The Duchy is not a company and is not therefore liable to pay corporation tax." That is completely irrelevant. What is being asked here is not whether tax has been levied and if not why not, but whether the public has a right to know whether tax is being levied, and if not, why not.  That is a transparency question, the kind that animates EITI& CBCR. Of course, neither of these regimes would extend to the Duchy, since its not a public corporation.

Relatedly, notice that the Prince's right to privacy is the invoked protection against the government's disclosure of his tax information to a third party, i.e., a party other than the government itself. That right is, of course, what any UK taxpayer that also has US status will have to forego in order to fulfill the UK's FATCA obligations. No official secrets act protection in that case--just the data privacy act, which the UK has said only requires UK financial institutions to inform (not obtain consent from) their customers whose information they will disclose to the US.

What we know and can't know about MNCs and their taxes (a.k.a., why don't we know what Google actually pays?)

In Through a Glass Darkly: What Can We Learn About a U.S. Multinational Corporation's International Operations from Its Financial Statement Disclosures?, three accountancy profs explore what we can and can't discern from SEC disclosure about the taxes MNCs pay.  Here is the abstract:

We discuss the accounting rules that apply to reporting a U.S. company’s international operations. We use examples to illustrate diversity in accounting and offer caveats for policy makers, standard setters, analysts, and researchers regarding their interpretation and use of financial accounting information.

This is an important topic because it highlights a few of the many reasons why we might benefit from Dodd-Frank-style disclosure in the face of media stories about the low, low taxes paid on a global basis by companies like Google, Apple, and Microsoft.  The authors use case studies of SEC disclosures to highlight some of the book/tax differences that show why companies' reported tax rates are nowhere near their actual taxes paid.  For example, in the case of Google:

• Google’s “expected” provision at its federal statutory tax rate of 35 percent is a“hypothetical” federal income tax that Google would owe if all of its pretax book income was reported on its U.S. corporate income tax return.  
• In 2011, Google reported “income before income taxes” of $12.3 billion.  At a 35 percent tax rate, Google would owe $4.3 billion in taxes
• But Google reported an income tax provision (an amount it says it owes) of $2.5 billion, for an effective rate of 21%.  
• The difference between the headline 35% rate and the 21% effective rate is explained by book/tax reporting differences for various taxes and credits, some of which are permanent differences (will never be reconciled) and some of which could be reconciled in the future, but the big difference is explained by its "foreign rate differential," which is short form for what Google saved by reporting its income as earned outside of the US.

Much more in the paper.  The basic story is not new, but it's nice to see how the policy choices that go into corporate tax disclosure play out in practice and how they inform our understanding of how the tax system works.  The authors have a few suggestions for how non-accountants (including journalists) should understand and interpret what they find in SEC documents.  

I have been told that one of the reasons corporate managers resist greater tax disclosure in their SEC filings, such as is contemplated under Dodd-Frank and its impetus, the EITI regime (and country by country reporting more broadly) is the fear that people will misunderstand the information and therefore draw incorrect conclusions.  The authors acknowledge the validity of this fear and explore how companies make disclosure decisions with public perception in mind. Yet this paper itself provides an antidote to that fear.  It shows that tax data disclosure is capable of being correctly understood and interpreted.  We may need experts to help us do that in the face of flexible rules and ambiguous cases, but there is no shortage of experts.

Tax transparency: EU development

Richard Murphy points to a press release from Global Witness regarding developments in country-by-country reporting for the extractive industries in the EU:

Global Witness welcome today's European Parliamentary committee vote requiring that EU oil, gas, mining and timber companies publish their payments to governments to help deter corruption.  

The vote brings Europe one step closer to shining a light on payments worth billions of Euros by extractive companies to governments, which have previously remained secret, enabling corrupt government officials to siphon off or misappropriate natural resource revenues.

...The text also contains thresholds for payments that align with similar US 'sunshine' rules for US listed extractives companies set at the end of August.

...a final version of the directive goes to all MEPs for a European Parliamentary vote later in the year.

Arlene McCarthy MEP, the Parliament Rapporteur on the Transparency law, said after the vote in the legal affairs committee: "With this vote we now have a strong negotiating mandate to force the Member States and Commission to accept the Parliament's amendments, putting us on track to create strong global transparency standards, with equivalent rules in the EU and the US." 

More at the link.  

Corporate Tax Transparency: U.S. Update

A step forward in the global tax transparency effort: the U.S. SEC has finally approved rules for implementing the extractive industries transparency provisions of Dodd Frank s. 1504.  The rules were due, by statute, more than a year ago.  Industry lobbying against their issuance was fierce but, perhaps spurred by Oxfam's lawsuit compelling the SEC to stop its foot-dragging, the agency has finally produced.  Here is the announcement from the SEC.  A number of stories call this a big day for transparency and a big step by the US, from the New York Times, Global Witness, the Financial Integrity Task Force, the Brookings Institute.

Of course, as Brookings notes, the devil will be in the details, a.k.a., the implementation.  From their report:

Tomorrow those details will be in the hands of the SEC and will determine whether ‘effective transparency’ is attained or continues to remain elusive. Namely the SEC will determine whether the information that needs to be disclosed by companies is sufficiently detailed, relevant and accessible, enabling effective monitoring and analysis by civil society, investors and government reformists.

Given the content of the 2-year-old Dodd-Frank legislation, the SEC has no choice but to mandate disclosure. However, effective disclosure is by no means guaranteed as the SEC could issue weak rules, rendering disclosure ineffective. Thanks to Dodd-Frank legislation mandating transparency, the main danger is no longer wholesale ‘transparency evasion’ by many companies, but the more nuanced risk of enabling ‘transparency elusion’ (or ‘transparency avoidance’) by companies that wish to skirt detailed disclosure, thereby masking possible misdeeds.

Similarly, from the NYT:

Oil experts said it was difficult to know how onerous the payment disclosure rule would be since it was not yet known how the S.E.C. would define some of the requirements. Kevin Book, an analyst at ClearView Energy Partners, said in a research note that the ruling could “impose very real competitive challenges for U.S. companies,” particularly if “compliance leads to disclosure of previously secret terms of concessions, leases and production-sharing agreements.”

More on this to come.

Tax Transparency, California style

California is considering a new bill that would have the FTB "publish a list of the 1,500 largest corporate taxpayers per taxable year, including each taxpayer's tax liability and income apportionment information..."  The 1,500 are "as measured by gross receipts, less returns and allowances, that filed a Form 10-K with the federal Securities and Exchange Commission for that taxable year."  Industry reps consider this a privacy violation for corporate taxpayers.  Maybe, but maybe not.  This involves public companies that have disclosure requirements because they are publicly traded, and it involves information they already disclose to the SEC, only with extraneous (non-California) information removed.  It's not at all clear to me why public companies need privacy rights when it comes to taxes paid.  Why are taxes paid and basic measures of how they are calculated so different than all the other financial information these companies already have to disclose in the interest of illuminating their public shareholders about their financial health?

There is no real difference, but tax disclosure presents a very real social/cultural problem for public companies that are paying very low rates of tax--which apparently includes most or all public companies.  The real worry therefore is not a loss of privacy at all but the legitimate worry that sunshine will lead to bad press as data emerges regarding how public companies arrange their tax affairs.

The latest action on the bill, AB 2439, was a second read plus a third reading ordered in the state Senate.  From the Aug. 8 Senate Floor analysis, we get this:

Existing state and federal laws generally prohibit unlawful disclosure or inspection of any income tax return information. ... the FTB may publish statistical data related to taxpayer information so long as nothing specific to a single taxpayer is disclosed.  Notwithstanding these provisions, the Legislature directed FTB to publish a list of the top 500 tax delinquencies over $100,000... 

ARGUMENTS IN SUPPORT: According to the author's office, this bill will ask for the FTB to post one specific data point on its website which corporations already have: corporation taxes paid to California. It simply disaggregates the amount already reported in their SEC 10-K form to be California-specific.  This simple data is urgently needed for several reasons.  First, California recently made significant changes in its corporation tax system, adopting "elective single sales factor apportionment." This new system means that corporations have a choice of how to apportion multi-state income to California. The FTB has estimated that this choice will cost the state nearly $1 billion annually, beginning in tax year 2011. With this bill, we will be able to accurately determine the distribution of benefits and costs from this drastic change.  

ARGUMENTS IN OPPOSITION: The opposition expresses concerns that this bill will result in misleading information that provides no context for a taxpayer's disposition and will provide no objective evaluation of the single sales factor. For many multi-state corporations, their finality tax liability may not be resolved for years after their return is actually filed so the information in this bill may not be accurate. Furthermore, the opposition states that breeching [sic] taxpayer confidentiality is punitive to the individual taxpayer but will not provide further information to the state to determine whether specific tax policies made sense. 

Regarding the "arguments for," I don't know that the legislature's ability to "accurately determine" things requires the data to be publicly disclosed.  The legislature could as easily simply require public companies doing business in California to include the information on their confidential tax returns, which are typically available to state legislatures to review in the aggregate for policy purposes.  Someone needs to make an argument about why public disclosure is necessary.  There are plenty of available arguments, one need only review the CBCR and PWYP campaigns (or you can read my chapter which examines these arguments).

Regarding the "arguments in opposition," I am not sure why the information is misleading unless companies are reporting false or misleading data to the SEC; if that is the case, we have bigger problems.  No, it is not that the data is misleading.  On the contrary, it is more likely that the data is likely going to be painfully and inconveniently accurate.   True, returns are subject to contestation by the FTB.  I would submit that in the name of the rule of law, the process and outcome of agency contestation ought also to be public information  (it is not, unless the matter ends up in court).  But that is no reason why the original claim is somehow misleading, unless intentionally so by the author.  It is the company's stated position at the time it is made.

Interesting typo alert: it is "breaching" not "breeching" that belongs in that last sentence, but the visual of corporate confidentiality as a baby trying to emerge wrong-way around is quite fascinating.  Still, they've made the right point--the case has not (yet) been made for public disclosure.

Tax transparency activism-Australia

Via TJN, a new campaign in support of country-by-country reporting in Australia called Shine the Light, introduced in this video:



More at the link.

Do we need to know more about our public companies?

In a new Tax Notes Int'l column this week (pdf here), I discussed the media coverage of Apple/GE/Google etc and explored the appropriateness of tax confidentiality with a brief discussion of disclosure rules past and present, and the current call for broader disclosure via country by country reporting.

UK Hearings on Tax Transparency

The UK Parliament is gathering information on country by country reporting in the context of a series of hearings on the issue of taxation in developing countries.   The next hearing is scheduled for May 15, when the UK tax authority will give testimony.  At the April 24 meeting the committee heard from Tim Scott, head of tax at Glencore, Emmanuel Mutati, chairman of Mopani Copper Mines, Graham Mackay, SABMiller CEO, and Chris Lenon, who introduced himself as speaking on behalf of OECD's BIAC but is also head of tax at Rio Tinto.  You can read the entire transcript online here, and it's really very long.  All the now familiar refrains are here: companies comply with all applicable laws, what developing countries need is capacity building [yet according to Chris Lenon as to transfer pricing enforcement, "I think that most tax authorities, including the Zambian ones, are perfectly capable of looking at a transaction"], countries should focus on information exchange, CBCR disclosure won't be helpful because tax law is too complex, CBCR disclosure is costly to produce, companies care more about certainty than rate of tax.

I do note a couple of very interesting points.  Tim Scott (Glencore) said:

We obviously do not pay more tax than we have to under law ... We pay what is the right amount of tax ... according to the spirit of the law, and not necessarily the letter that we have managed to find a way around.

That's an ambitious claim.  Glencore, unlike Rio Tinto, has failed to support the extractive industries transparency initiative (EITI) and has come under a lot of fire for shirking tax, such as with graphics like this one:

And reports like this from ActionAid.  I am not sure what Mr. Scott means by "spirit of the law."  But I don't think the press coverage on Glencore suggests that's what they're doing.

A second interesting point of the transcript shows Christopher Lenon trying to not answer a question about the approach companies take to compliance:

Q106 Mr McCann: Can I just ask a followup question to that, Mr Lenon? Do you believe that companies are taking advantage of the lack of capacity [of developing country tax administrations]? 

Christopher Lenon: Having dealt with tax in developing countries since the late 1980s, I think there is a misunderstanding. I would rather deal with a wellresourced, wellfunctioning tax administration than one that is completely arbitrary-and I have dealt with both. The trouble with arbitrary ones is that they can make mistakes both in your favour and significantly against you. I would think that most business would see capacity building as the important area that we should focus on. 

Q107 Mr McCann: ...I am not asking the question of whether you would want to deal with someone who is unprofessional or who is professional. I am asking: is there capacity up to a certain point, and are companies enjoying an additional benefit because that is not moved to an optimum level? 

Christopher Lenon: I think we should aspire to capacity building where tax authorities in the developing countries are of the same standard and quality as they are in OECD countries.

Mr. Lenon was not asked what "we should aspire to."  I think we was asked, do you take advantage of a tax administration  if you can?  That question was decidedly not answered.  Unfortunately the discussion shifted when another MP jumped in so Lenon's nonresponsive answer was not challenged.

Tax transparency, democracy and "expertise"

Transparency is being fully contested in international tax circles:

The hosts were expecting a heated but constructive debate, and for most of the nine-hour conference delegates heard in turn the impassioned arguments of campaigners for country by country reporting and the deliberations of tax professionals whose main argument centred on the complexity of international tax.

The complexity issue is that if regular, uninformed people are given all the data, they will misinterpret it and hang effigies of the innocent.  This is an unconvincing argument that the OECD tried to imply with its consideration of the matter in 2011: “the issue of whether greater transparency could aid public debate on appropriate tax policy” would be “very difficult to assess” because the political discourse would involve “differing arguments, [that] can be used more or less responsibly.”  This is an argument that tax compliance is so subjective, no one could ever make sense of it definitively, so it's best not to argue it in public.  Only experts should do so, and then only in quiet rooms.

I was happy to see Sol Picciotto mentioned in the article, he's a terrific thinker and scholar on international tax:

During a discussion on tax dispute resolution Sol Picciotto, Emeritus Professor of Law at Lancaster University, interrupted James Bullock’s defence of modest meals shared at meetings with HMRC to say that the level of transparency being proposed was ‘quite clear – that taxpayers should declare what tax they pay in each country’.

Picciotto added: ‘As regards disputes, the terms of a settlement should be public. We’re not talking about sandwiches, we’re talking about the transparency of what tax people pay where. If a dispute goes to the tribunal, it’s public. If there’s a settlement, it should be public.’

Later, Judith Freedman, University of Oxford tax prof, said that publishing details of settlements ‘would not be that helpful’ to people: ‘What are they going to make of them? I want to have a properly instituted organisation which has independent experts who can scrutinise those settlements. That’s far better than leaving it to whoever happens to be able to pick up on this, the press …’

‘That’s democracy,’ a delegate shouted from the audience. Freedman continued: ‘I believe it’s the job of properly constituted organisations, rather than the press, to examine this because that would give us integrity and confidence in the system. These are very, very difficult things to understand.’

That statement is distressing on grounds of the expertise question alone.  Who decides what constitutes "a properly constituted organisation"?  Professor Freedman?  The Oxford Center for Business Taxation?

The article closes with a mention of a twitter feed associated with the conference, in which it was tweeted ‘It has to be admitted that few tax experts have oratory skills or passion comparable to [those of] tax campaigners and politicians.’


Perhaps, but it's a matter of backing and platforms, isn't it.

Murphy on country-by-country reporting

If you're following the corporate tax transparency movement, you'll have heard of Richard Murphy, who takes the credit for creating the concept of country-by-country reporting.  He has a post today on his blog in which he recreates a recent speech explaining the origins and developments of the movement:

When, almost ten years ago I wrote the first ever version of country-by-country reporting in response to one of the first ever questions John Christensen asked of me I thought the entire audience for the idea would amount to just two people – John and Prof Prem Sikka, who had just introduced us. How wrong I was! It seems a good idea has a life all of its own.

...Country-by-country reporting is, and was always intended to be, a full blown and completely new view of the trading of a multinational corporation, ideally required by an International Financial Reporting Standard, but failing that by international regulation. 

What that accounting standard would demand is a full consolidated profit and loss account for each and every jurisdiction in which a multinational company trades.

And when I say full I mean 'full', including sales, costs, an analysis of labour costs and head count and full tax notes – including  a deferred tax analysis.

And in some ways I mean more than full when it comes to this profit and loss account – because country-by-country reporting would also require disclosure of all intra-group sales and purchases, all intra-group hedging and derivative trading and the disclosure of all intra-group financing activity too.

Let's be clear about why country-by-country reporting does this. It's based on a series of solid assumptions. The first is that multinational corporations might act globally but they do not float above the global economy. Their actions are all ultimately geographically located. Country-by-country reporting recognises that. It makes globalisation accountable locally.

Second country-by-country reporting recognises that it is impossible to say that existing accounts for multinational corporations can possibly give a true and fair view of business when up to 60% of world trade – the part that takes place on intra-group basis – is totally lost to view in existing financial statements. It is ludicrous that we don't account for that trade in a globalised world.

More at the link.

Council of Europe: Stop Tax Havens with Corp Tax Transparency

From Europe, we see movement on corporate tax transparency in the form of a council resolution:

Strasbourg, 27.04.2012 – The Parliamentary Assembly of the Council of Europe (PACE) has demanded a series of steps to end what it calls “massive tax avoidance, evasion and fraud” caused by secrecy jurisdictions, tax havens and offshore financial centres. 

Adopting a resolution ... the parliamentarians said tackling global distortions due to harmful or predatory tax practices – including bank secrecy, lack of transparency and effective public oversight, regulatory dumping, predatory tax arrangements and abusive accounting techniques within multinational companies – was “a moral duty” because they drain public finances and cause serious harm to the public interest. 

The resolution calls for the following corporate tax disclosure items:

• country-by-country reporting by multinationals wherever they operate, across all business sectors
• a ban on anonymous accounts, off-balance-sheet bookkeeping and bearer shares
• disclosure of the ultimate beneficial ownership of all business entities, notably trusts and funds
• moving towards the automatic exchange of all tax information

With this kind of disclosure, that NYT story on Apple would not be so maddeningly imprecise.


h/t Richard Murphy, for whom this is "another campaign win"--quite so.  

Apple

It's not news that big multinationals face low, low effective tax rates, but I was very glad to see that this NYT report acknowledges that we are working in the dark really, in confirming just exactly how low those rates are.    This is because countries simply do not collect the data, and if they do, they don't require enough disclosure for any kind of accurate analysis.  From the article:

"Neither the government nor corporations make tax returns public, and a company’s taxable income often differs from the profits disclosed in annual reports. Companies report their cash outlays for income taxes in their annual Form 10-K, but it is impossible from those numbers to determine precisely how much, in total, corporations pay to governments. In Apple’s last annual disclosure, the company listed its worldwide taxes — which includes cash taxes paid as well as deferred taxes and other charges — at $8.3 billion, an effective tax rate of almost a quarter of profits. 

However, tax analysts and scholars said that figure most likely overstated how much the company would hand to governments because it included sums that might never be paid. “The information on 10-Ks is fiction for most companies,” said Kimberly Clausing, an economist at Reed College who specializes in multinational taxation. “But for tech companies it goes from fiction to farcical.”

Yes, it's pretty much speculation.  But it makes for good theater: NYT has put together an accusing graphic to provoke a sense of outrage:

Feel outraged?

More to come on the subject.

The Lobbyists are Winning: Corporate Tax Transparency edition

The activist-led movement to increase multinational tax disclosure is proving to be a full-employment program for natural resource industry lobbyists.  The money and energy available for fighting against transparency seems limitless.  We have seen the effects of this in the US, where Dodd-Frank's section on extractive industry transparency has been completely undermined and consistently sidelined as a result of lobbyists.  We have seen the effects in Canada, where the industry managed to kill transparency legislation all together by means of a tidal wave of lobbying by the energy industry there.  Today the FT tells a similar tale unfolding in the EU.

There is a perhaps not obvious but very pernicious undercurrent in this transparency contest.  It is that in each country, lobbyists are using the success of the lobbyists in the other countries to bolster the cause for their own success.  No matter we may like to think about the nature of tax policy as somehow a sacred and protected space for purely national politics, that hallowed chamber of sovereign entitlement, it's clear that lobbying is fully globalized and therefore tax policy is, too.

Today's FT story provides a case in point.  First, the FT notes that the EU's work on transparency was prompted by the inclusion of new corporate tax information disclosure standards for resource extractors (think oil, gas, etc):

The European Commission last year proposed a scheme that allowed for payments for specific projects to be tracked, with reporting requirements that broadly matched the US approach enacted in the Dodd-Frank Act.

Just by putting the possibility of corporate tax transparency into legislation, even though it could not and still cannot be implemented without further action through federal regulations, Dodd-Frank put extractive industries transparency on the map of legislative possibilities, and therefore cleared some space for the policy to spread to other nations (I analyze this more thoroughly in my forthcoming book chapter on global tax activism).

The FT reports that industry in the EU responded by protesting the new rules as unnecessary, onerous, etc.--in other words, a set of self-serving arguments with which those of us who have been following this issue in the US and Canada have become all too familiar and most of which do not hold up under scrutiny.  But lobbying works very well, and so the EU is considering a much less transformative version of the proposal, one that would not require very much disclosure if any at all.

The FT closes the circle by concluding that:

If the compromise passes in Brussels, it will bolster industry arguments that the US rules being drawn up to implement Dodd-Frank should be watered down to match the EU approach and ensure a level playing field.

The idea that tax policy is in any sense a purely national project could not be more clearly debunked.  The EU's imminent adoption of a more lax standard arms lobbyists in the US with a fresh round of anti-transparency ammunition.  Their ability to use this to further the anti-transparency cause in the US will in turn re-invigorate lobbying in Europe and elsewhere.  This will continue until transparency is uniformly killed, unless the pro-transparency lobby gains a similarly viral foothold from which to reinvigorate the campaign for transparency.  It is an international game with fascinating network aspects and effects.  Too bad then that in the meantime, a policy that really ought to be implemented, not least because it is in fact written into the rule of law here in the US at least, will be stalled indefinitely.

On a related note, it is worth recognizing that a new euphemism is emerging in international tax policy that is steadily gaining ground through casual and unexamined use.  That is the idea that this or that tax policy is necessary to "ensure a level playing field." Both sides of the transparency issue have used the term to support completely opposing goals in the past, so it would seem that the term means very little.  That means a translation is in order when people use the term to score political points.

Let us be clear then that when used by opponents of transparency, "ensuring a level playing field" is what people say when they mean that the lobbyists are winning.  That is because a level playing field would quite obviously exist when the market has full information--that is, when all multinational companies engage in full disclosure of their tax payments in all countries, and all stakeholders--shareholders, taxpayers, governments, and watchdog groups--have the same information about how generous tax policies support industry all over the world (this is how the pro-transparency crown use the term).  When what is sought is a market with little or preferably no publicity of this kind of information, "the level playing field" means something very close to the current status quo--the product of all that successful lobbying to date.

Tax Activism

Activists around the world are taking on tax dodging as a threat to economic development in poor countries and to society in general in all countries.  I write about the movement and its prospects for involving NGOs and other non-business civil society groups into the rarefied world of international tax policymaking in my latest paper, Tax Activists and the Global Movement for Development Through Transparency.  In the paper I explore how the rise of concern about tax avoidance, especially by multinational companies, came about, and how the elite tax policy community is reacting to it (not particularly well).  Tax avoidance has been a staple of entity-level planning ever since we have had an income tax, and tax havens have existed for decades with tacit acceptance by governments.  It is only in the last decade or so that you could say a "movement" to bring multinational taxation to the public discourse as a matter of social justice began.  What happened to get the ball rolling and what turned it into a sustained force capable of disrupting the status quo?  The paper traces the movement and how it is faring as a means of contesting the established policymaking order.  If you're interested in the extractive industries transparency movement, country-by-country reporting, how tax connects to economic development, or how the OECD manages international tax discourse, you'll find the paper of interest.  It is forthcoming as a chapter in a book on tax law and development, edited by Miranda Stewart and Yariv Brauner.

News from the tax transparency movement

Richard Murphy links to this review of an international tax conference hosted by the Oxford Centre on Business Taxation, in which the author quotes Lord Hollick, a businessman and influential member of the UK House of Lords Economic Affairs Committee:

"In a world of globalisation, how do single countries hold corporations to account? . . . It's hard to work out how much tax is paid where.  The disclosure regime does not get to the heart of the issue.  We need full disclosure. ... Having been an executive of a large corporation, I would be happy to do this. Companies should pay a fiar rate of tax.  We should move vigorously towards the path of transparency."

Murphy adds: "good for Lord Hollick. You can't keep a good idea down and country-by-country reporting is an idea whose time has come."

I've been working on a chapter about the rise of the tax transparency movement and its connection to economic development, will post a link to a draft soon.