OECD countries and others have agreed on a new standard for multinational companies to report their economic activities, including profits and tax payments, on a country-by-country basis. This agreement has the potential to be truly transformative for the ability of developing countries to obtain broadly proportionate tax revenues, but as long as the data are held privately by tax authorities, rather than made openly available, much of the benefit will be lost.
The agreement is part of the OECD’s first major tranche of outputs from its Base Erosion and Profit Shifting (BEPS) initiative in which G-8 and G-20 countries gave a mandate to address damaging tax behaviour of multinational companies.
As Owen Barder and I discussed here after the UK-hosted G-8 summit in 2013, the call for an OECD template for country-by-country reporting looked highly significant; its delivery within 18 months confirms the seriousness of the commitment. It is all the more impressive given the long-standing opposition of leading private-sector players, including major accounting companies and business groups.
I looked back at my 2005 study on tax abuse and development to get a sense of just how far things have moved. I wrote, rather gently, that “transparency may be the best weapon” against corporate profit-shifting and noted that a “detailed proposal for an international accounting standard to report turnover and tax by location already exists, namely that of Murphy (2003). "Engaging policymakers and industry bodies with such a proposal … is an important next step.” Nearly ten years later, the same Richard Murphy has welcomed the new standard.
How Good Is This Really?
Here’s the catch — or, rather, two of them. First, the template declares that, “It is not necessary to reconcile the revenue, profit, and tax reporting in the template to the consolidated financial statements” (h/t @fcablog). In other words, the aggregate of values reported on a country-by-country (or tax-jurisdiction-by-tax-jurisdiction) basis need not sum to the global totals in the consolidated accounts. This seems to open up the potential for misunderstanding at the very least and perhaps manipulation. Other flaws are likely to become apparent as the template is adopted into use.
The bigger catch, and the next issue on the agenda for tax justice campaigners, is this: At present, the data will not necessarily be made public. Instead, it will be provided by individual companies to individual tax authorities and possibly shared by them with other relevant tax authorities, but no further.
As I argue in a cost-benefit analysis for the Copenhagen Consensus, switching to fully open data is likely to yield large benefits. First, the major costs of compliance are now fixed. In fact, they are likely to fall if reporting is made public, since there would be no need for multinationals to enter into separate, confidential communications with each relevant tax authority. Reports would instead be filed, once, to a simple open data registry system, such as that used for aid transparency by IATI.
Although the costs of making this data public may be small or even negative, the benefits are likely to be large. While a broad range of potential benefits have been highlighted (see section 7 of Murphy’s 2012 study for a breakdown by stakeholder), it is simplest to think purely in terms of possible tax revenue benefits. Here the range is inevitably wide and the estimate uncertain, but it is difficult to envisage a scenario in which revenue would not amount to billions of dollars annually. And a major additional advantage for civil society of publishing this information, rather than providing it privately to tax authorities, is that tax authorities can be held to account for their actions as well as multinationals.
Now that the compliance costs are set, the only way to make a case against more open disclosure would be if publishing such information added significant costs to multinationals. It is hard to see how competitiveness issues can be significant, given that there will be a level playing field for all. And scenarios in which privacy between multinationals and tax authorities work to the broader social benefit do not immediately present themselves.
I’ll stick my neck out and say that, absent international agreement on open publishing, it’s a matter of time before some multinationals and some tax authorities start to make public their data unilaterally. And then the pressure on others to do the same and to establish a common mechanism and a consistent level of transparency may quite quickly become overwhelming.
Right now, it would be great if the United States and EU could make a set of swift decisions, so that each of their own (public) country-by-country reporting measures, including those for extractive industries and banks, would align as closely as possible with the OECD standard. Otherwise there are twin risks of unnecessary compliance costs for business and of needless complication for data users. The authorities here also have the opportunity to set the standard of open publication of country-by-country data that can eventually include the OECD reporting of all multinationals.
One last thought: Regardless of whether any of the OECD reporting data is published, what it will do is reveal to tax authorities — not least in some major developing countries — the extent to which their share of some multinationals’ global profits is completely disproportionate to their share of the underlying economic activity. If BEPS fails to deliver rapid progress for non-OECD member countries, the attractions of a move toward unitary taxation will only grow as the data stack up, year on year.