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«A case study of Fair Finance Guide International Transparency & Accountability in the Financial Sector A case study of Fair Finance Guide ...»

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Regrettably the OECD’s proposed Common Reporting Standard as currently formulated does little to meet the needs of low-income developing countries, many of which are particularly vulnerable to tax evasion by their wealthy elites and by multinational companies. These countries will be required to sign up to exactly the same conditions as the far better resourced OECD countries, and will face exhaustive confidentiality requirements which will allow secrecy jurisdictions to opt out of the scheme on the basis that sensitive data need only be exchanged with reciprocal and diligent recipient authorities. In other words, tax evaders using banks and other financial institutions located in secrecy jurisdictions will have nothing to lose sleep over, since host governments will probably refuse to share information with developing countries on the pretext that the latter would be unable to guarantee data security.

Secrecy jurisdictions can also opt out selectively, on a discretionary case-by-case basis, or systematically reject the new reporting standard. Switzerland has already expressed its intention to sign a limited number of bilateral agreements, but only with countries on which the future of the Swiss finance industry depends. The US is also likely to reject the new multilateral framework, either by not signing or not ratifying, and protecting their own interests via the Foreign Account Tax Compliance Act instead. Even for countries that do ratify, there are no requirements for member states to publicly justify their refusal to exchange information with specific jurisdictions.

-84Conclusion To all intents and purposes the Common Reporting Standard in its current form is a voluntary scheme, with sufficient loopholes and opt-outs to allow secrecy jurisdictions and their clients to continue as before. While the standard is not yet a done deal, without the adoption of a global requirement for public registries of beneficial ownership information, and absent specific measures to provide for the needs of developing countries, there are few grounds for celebration. There remains sufficient time to amend the new standard before it enters into force, but there is little evidence that the G8 leaders have recognized the scale of public anger about tax evasion and are willing to commit to getting it right.

-85Chapter 13 Country-by-Country Reporting, Fair Tax and Transparency Ted van Heesxi Fair Finance Guide International The 2008 financial crisis caused an avalanche of proposals for reform of the financial sector, only a limited number of which have materialised. A major set of the reform proposals aimed at intensifying and enhancing transparency and accountability of banks and other financial institutions. Tax avoidance and tax evasion scandals, including the recent LuxLeaks,210 have focused the debate even more on the lack of transparency and accountability of transnational banks and companies. This article will concentrate on the way governments are trying to regulate reporting on a country-by-country basis, thus increasing the ability of tax authorities North and South to make the financial industry (and the corporations they lend to and invest in) pay their fair share of tax.

13.1 Country-by-Country Reporting

The call for Country-by-Country Reporting (CbCR) has been at the centre of addressing the lack of financial sector transparency and related taxation problems. Since the mid-2000s, broad based European and global civil society networks, including the Tax Justice Network (TJN), Publish What you Pay, Global Witness, Oxfam, CCFD in France, Action Aid, and Christian Aid -working with experts such as Richard Murphy- developed politically feasible and technically sophisticated proposals for CbCR. Support from national and European politicians, such as the French Member of European Parliament (MEP) Eva Joly of the Greens, helped place tax evasion and avoidance, and related transparency problems, higher on the European political agenda. In the aftermath of the 2008 financial crisis, as different tax scandals came to light while austerity measures were being prescribed, political pressures on legislators to act increased, and eventually the G8 and the G20 tabled tax evasion and avoidance in their own discussions as well.

Prior to this turning point, tax and transparency policy and problems were considered to be a technical domain of the OECD, the Paris based club of predominantly rich countries. The OECD’s traditional and highly technocratic approach on those matters excluded the voices of developing countries and effectively denied them real influence in the debates on improving regulations on tax and development, including the taxation of Transnational Corporations (TNCs).

OECD and the Arm’s Length Principle13.2

The OECD maintains the Arm’s Length Principle (ALP) as the basis for taxing TNCs. The OECD’s Glossary defines this as a “valuation principle”, which “is commonly applied to commercial and financial transactions between related companies. It says that transactions should be valued as if they had been carried out between unrelated parties, each acting in his own best interest”.211 xi I thank Francis Weyzig, Policy Advisor Economic Inequality and Tax Justice Oxfam Novib and Henri Telkki, Researcher and Legal Expert Finnwatch for their valuable comments. The author is however the only one responsible for the contents of this article.

-86According to ALP, the tax base is calculated from the comparison of a price of a product (as set by a TNC) with the price of this same product on the free market. Even if we disregard whether free markets do really exist in certain sectorsxii, applying ALP faces another huge problem: if these prices are different from each other, tax authorities should be alerted that the company (TNC) is manipulating the price of the product or of technology delivered to a subsidiary and, thus, by over-pricing or under-pricing of raw materials, half-fabricates or end-products, engages in profit-shifting through transfer (mis)pricing. This practice leads to enormous technocratic, non-manageable, and expensive bureaucratic procedures, which are beyond the capacity of many countries, and make it easy for TNCs to escape payment of taxes in both developed and developing countries, by claiming –for example- that product A is not the same as product B, after making tiny change in the character of the two products subject to comparison. Even more importantly, ALP implies that a parent company and its subsidiaries are legally considered as separate entities, while they in fact belong together.212 ALP enables TNCs to shift profits and other sources of income, like royalties or payments for technology, from one jurisdiction to another, thus leading to minimising tax on profits for the whole TNC. In practice, this often involves the use of tax havens with low or no taxation on certain sources of income, including profits.

The obvious first step to address this problem is to consider the mother corporation and its daughters as belonging together, thus as a unit, and to use this unit as the basis for taxing the corporation. Prem Sikka describes how “…even though companies may be under common ownership, control and strategic direction, they were to be taxed as separate entities. Thus a company with 100 subsidiaries will be treated as 100 separate entities for tax purposes.” Sikka adds that “Apple is Apple, no matter where it trades, and all its profits accrue to the same entity.

We need to know a company's global profit. This can only be made when a company transacts with the outside world. This means that all intragroup transactions should be ignored for tax purposes because they add little or no value. Such a principle is already enshrined in the law of most countries. Multinational companies are required to publish what accountants call consolidated accounts. These treat the entire group of companies as a single economic unit and show its global profits.” 213 It is because of this that we talk about Unitary Taxation (UT) as the major principle for enhancing transparency and accountability of TNCs and also Transnational Banks (TNBs).

Raymond Vernon, the author of In the Hurricanes Eye puts it this way: “In the real world profit allocated to each country by a TNC commonly is an artefact of whose size is determined largely by precedent and the debating skills of lawyers and accountants”. 214

13.3 Tax where TNCs are economically active!

Tax and transparency scandals, academic, media and CSO research and pressure, have all led politicians in recent years to conclude that we need to radically change the way taxes are calculated. German Chancellor Merkel, French President Hollande and US President Obama, all stated in past years that TNCs should pay taxes in the countries (“jurisdictions”) where they are really economically active and where they make their profits, thus outlawing tax jurisdictions with no substance, i.e. with only a symbolic presence of relevant and productive TNC or TNB employees.

xii “For example, just 10 corporations control 55% of the global trade in pharmaceuticals; 67% of the trade in seeds and fertilisers and 66% of the global biotechnology industry. So companies are playing creative games to dodge taxes and many developing countries are substituting their own norms.

Resolving transfer pricing disputes is costly for both companies and tax authorities.”

-87The implementation of CbCR, and the treatment of TNCs as a Unit and thus adopting Unitary Taxation (UT) instead of the cumbersome application of the Arm’s Length Principle, therefore constitute the adequate response. The next step would be to assess in which country or region TNCs and TNBs add value to products and services delivered (profits, technology payments, royalties, copyrighted material etc.) and should pay taxes according to the principle of Formulary Apportionment (FAxiii).215

13.4 Regulation of Reporting Country-by-Country

As said before, CbCR is the basis for TNCs and TNBs to start paying taxes where they make their money. In April 2014 the European Parliament passed a Directive which obliges companies with more than five hundred employees to disclose information on environmental, diversity, human rights, anti-corruption and bribery issues. The European Council of Heads of State Ministers adopted this Directive in September 2014, which will require companies to which the Directive applies, to publish reports from 2017 onwards. In other parts of Europe and the world the need for tax transparency made governments decide to adopt CbCR regulation by TNCs. In the Nordic countries, including EU-member states, Denmark, Finland and Sweden, large and/or state-owned companies are obliged to disclose the revenues of companies, profits and taxes (to be) paid. Australia is preparing similar legislation for 2015.

Indonesia also adopted a reporting directive on tax transparency.

13.5 OECD, BEPS and tax transparency

The G20 requested the OECD to lead on the Base Erosion and Profit Shifting (BEPS) process and to report and finalise its work in 2015. The BEPS Action Plan, which was adopted in September 2014 by the G20 Finance ministers, tries to combine the ALP with elements of unitary taxation. The original 2013 template listed fifteen actions to be implemented in 2014 and 2015, and finally required reporting of aggregated information per country (and thus not per company!) on financial data for revenue, earnings before tax, cash tax, current tax, stated capital and accumulated earnings, number of employees, tangible assets, listing of all group entities per country and business codes for each entity’s major activities. The OECD argues however that “the adoption of alternative transfer pricing methods like formulary apportionment would require development of an international consensus on a number of key issues (which countries do not believe to be attainable in the short or medium term)”.216 The OECD believes that “formulary apportionment could also raise systemic problems which could result in even more damaging problems for countries’ revenues”. What these problems are, the OECD does not further explain, asserting that “it is believed that it will be most productive to focus on directly addressing the specific issues arising under the current arm’s length system”.217 Pascal Saint-Amans, the director of the OECD’s Centre for Tax Policy, argues that the OECD proposed template will require TNCs reporting to tax authorities (and not to the general public) on turnover, profits, paid taxes, accrued taxes, number of employees and assets deployed to conduct business activity. He claims that this “will help to stop aggressive tax planning” and “to smell a rat” by shifting your profits to a “zero tax jurisdiction where you have no sales, no employees and no assets”.218 This sounds politically naive and overly optimistic. It also shows that the OECD’s first interest is not in transparency for the broader public. Even worse, Saint-Aman says that the confidential treatment of such tax information risks to be challenged and “if this process [of opening up on more transparency] doesn’t happen quickly, pressure may well grow to make the information public”. 219 xiii Allocating profit earned (or loss incurred) by a corporate group to a particular tax jurisdiction in which the corporation or group has a taxable presence.

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