Wednesday, April 02, 2008

Country by Country reporting: briefing paper

The Tax Justice Network has published a new briefing paper setting out the case for Country by Country reporting. No single legislative measure would do more to make multinational corporations (MNCs) more transparent, and its costs would be negligible when compared to the dividends for the citizens of rich and poor countries. As the briefing says:

Making MNC accounts more transparent would help tackle tax avoidance, and at very low cost. It would provide other benefits, such as improving democratic accountability, curbing crime and removing large and destabilising risks from the global financial markets.

Many people are turned off by economics and accounting - but that does not make them any less important. Both powerfully shape the world we live in, and each profoundly affects the distribution of wealth and power within and between nation states. Like many of the issues TJN points to, we are alarmed that civil society around the world has been so quiet on this fundamental issue for so long.

The essence of the problem with company reporting is very simple. Companies do not need to break down their accounts according to the countries where they operate - but can instead scoop up all the numbers for each country and publish them in a broader geographical segment, leading to, for example, a single profit figure for "Africa." The individual African countries' tax authorities where that multinational operates cannot unpick that "segment" (as it is known) and find out the company's local profit. Sometimes they can't even work out who really owns the companies operating in their terrritory. Country by country reporting - applied as international financial reporting standards - would simply require companies to unpick their accounts for each country where they operate.

An NGO network known as Publish What You Pay already campaigns for this, but only with respect to "extractive" (mineral-based) industries such as oil production and diamond mining. TJN wants to extend this to all companies.

One little-known organisation, the International Accounting Standards Board (IASB) is at the heart of this debate. This recent article in Britain's Guardian newspaper by Professor Prem Sikka explores this a little more, and a recent TJN blog looks at an early success by the Publish What You Pay campaign on this issue, in partnership with some very influential institutional investors. A submission to the IASB produced by TJN's Richard Murphy delves deeper into the issues, looking at whom the IASB is accountable to. As Murphy says:

This body that basically sets the accounting rules for the world bar the USA is nothing more than a private company. It’s registered in Delaware USA (which says a lot in itself). It’s financed by the big banks, corporations and accountancy firms. And they could collectively do something to use accounts to tackle a real world issue by adopting this standard.

Opponents of these changes (and there are many exceedingly powerful vested interests that will fight this) say that such a requirement will add onerous burdens on corporations. They are wrong, and they know they are wrong. As the TJN briefing explains:
Country-by-country reporting would impose little or no cost burden on MNCs because they already hold all the necessary data that we are asking to be disclosed for internal accounting purposes.

Murphy goes further in their comments under Prof. Sikka's article:

The arguments are solid. Risk is geographic. More than that though a company gets its licence to operate in any territory from the government that represents those people: it has a corporate duty to account in return. This is the essence of stewardship and accountability: concepts forgotten (deliberately) in IFRS. Instead we have companies pretending they float above all these countries. They don't. It's time to hold them to account for what they do, where they do it.

Other comments under the article hit the nail on the head. One said:

A "country" is a clearly understood segment and the IASB should have followed that. Companies always look at the risks in each country and that they know investors do the same. So it is the logical basis for accounting disclosures.

Another spoke from his own experience:

I work for one of the Big Four firms and recently qualified as a chartered accountant. During my studies we were told just to learn accounting standards and ask no questions about standard setters or even their logic. We all know that accounting standards only do what big companies want. My firm always lobbies for standards that our clients want. Prem Sikka is right that "Accountancy rules affect public welfare and they should be made by a democratic organisation that is independent of big business and accounting firms".

The potential benefits are very large. Our briefing paper ends like this:

Introducing a country-by-country reporting standard would potentially raise as much tax revenue in poor countries as has been estimated is needed to secure the Millennium Development Goals. It is impossible to place a monetary value on the benefits of country-by-country reporting. But we can say with a high degree of confidence that no other measure could yield such a range of benefits with such ease and effectiveness, and with so little administrative cost.

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