Country-by-country Corporate Tax Reporting: Testing the ambition of the G20 action plan on tax planning by multinationals

In September 2013 in St Petersburg, the G20 G20 The Group of Twenty, or G20, is a forum for international cooperation on the most important aspects of the international economic and financial agenda. It brings together 19 countries and the European Union, which together represent around 90% of global GDP, 80% of global trade and two thirds of the world’s population. Heads of State endorsed an Action Plan on “Base Erosion and Profit Shifting” (BEPS) to address aggressive tax planning schemes by Multinational Enterprises (MNEs) and for good reason: tax ‘avoidance’ comes at a heavy cost for governments’ finance, both in the North and South.

Tax rules have been on the G20 G20 The Group of Twenty, or G20, is a forum for international cooperation on the most important aspects of the international economic and financial agenda. It brings together 19 countries and the European Union, which together represent around 90% of global GDP, 80% of global trade and two thirds of the world’s population. agenda for quite some time now. One of the first priorities of the G20 G20 The Group of Twenty, or G20, is a forum for international cooperation on the most important aspects of the international economic and financial agenda. It brings together 19 countries and the European Union, which together represent around 90% of global GDP, 80% of global trade and two thirds of the world’s population. at its creation in 2008 indeed was to curb tax evasion and to accelerate international cooperation on tax havens. Policy work on this has since been slowly but steadily moving. The G20 G20 The Group of Twenty, or G20, is a forum for international cooperation on the most important aspects of the international economic and financial agenda. It brings together 19 countries and the European Union, which together represent around 90% of global GDP, 80% of global trade and two thirds of the world’s population. governments have recently committed to automatic exchange of information between national tax administrations (as opposed to the very ineffective exchange “upon request” approach). However, tax evasion and tax avoidance are two different animals. Tax evasion is illegal, while tax avoidance – which the BEPS Action Plan is bound to address – is in a grey area of compliance, and therefore is more difficult to define, detect and to deter.

For this very reason, the Action Plan is a welcome move by the G20 and the OECD. For years the OECD has been concerned about the risk of “double taxation” of corporate income of MNEs between jurisdictions. OECD and G20 tax officials never miss an opportunity to praise “tax competition” between jurisdictions. Still, the mood is changing. G20 and OECD tax officials now recognize that “national tax laws have not kept pace with the globalization of corporations and the digital economy, leaving gaps that can be exploited by MNEs to artificially reduce their taxes”. On the flip side, the Action Plan was designed and is being implemented by the OECD – the rich countries’ club – which obviously raises some questions about the inclusion and participation of developing countries.

Most of the Action Plan deliverables are expected by the end of2015 ranging from measures to prevent MNE intra-group “transfer pricing” manipulation that shifts profits away from where economic activity takes place to low-tax jurisdictions (the so-called “Profit Shifting”), to new rules against unjustified deduction of charges and fees in the accounting of the company to artificially reduce the taxable income base (“Base Erosion”).

Key decisions will need to be taken already in November this year, when the G20 Leaders meet in Brisbane – decisions that could strongly influence the overall ambition of the Plan. In Brisbane, the G20 will in particular have to agree on the format of a “country-by-country” tax reporting framework for MNEs. The geographic distribution of were corporate revenues are made, taxes are paid, workers are employed and assets are located would indeed provide essential information to help assess whether MNEs do comply with a central objective of the BEPS Action Plan: making sure that profits are taxed, where economic activity and “value creation” take place.

Unsurprisingly, business groups, their tax lawyers and auditing firms are firmly opposed to any substantive country-by-country reporting system. By raising concerns about “business confidentiality” and rising administrative burdens, they are also opposing the shared reporting by all national tax administrations.

For unions and NGOs, country-by-country reporting needs to be filed with every single national tax administration at minimum, where MNEs operate. In fact reporting should be made public. There is indeed nothing, or very little, in the OECD proposals that have been circulated thus far that could be considered as a threat to business confidentiality.

Public disclosure would also make life easier for all. It would definitely be of precious help for tax administrations in developing countries, which do not enjoy the same level of access to tax information exchange treaties as their OECD counterparts. It would respect the right of workers to be informed about a company’s foreseeable risk factors, and tax planning is a ‘risk’ for the workers employed by MNEs. It would also help responsible long term shareholders to make informed judgment about the sustainability of the companies in which they invest. And, incidentally, public country-by-country reporting would be a small, but essential step on the (long) road towards restoring public trust and accountability of large multinational corporations.