Tax justice, the new Washington consensus?

Cross-posted from Tax Justice Network.
I had the honour of giving a keynote address at the World Bank/International Monetary Fund annual meetings on 15th October 2017, for an event entitled ‘Technical challenges and solutions for taxing wealth in developing countries’ – which gave the impression that a new Washington consensus on tax justice may be emerging.

My slides and the video, kindly provided by the Bank, are below. Following a fascinating speech from Brooke Harrington of Copenhagen Business School on the role of wealth managers in creating anonymous, un-taxed assets, I ran through the development of the tax justice movement and the rise of the core policy platform (the ABC of tax transparency), highlighting the progress that has been made but also the extent to which lower-income countries remain excluded from the benefits – and what is necessary to enable effective wealth taxation.

The event, and the discussions with a variety of experts and senior figures from the two Bretton Woods institutions (BWIs), made clear just how far both the Bank and the Fund have moved towards tax justice – and also highlighted some key areas where they need to make progress now.

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The inexorable approach of country-by-country reporting

Photo by Harald Groven, https://www.flickr.com/photos/kongharald/

Cross-posted from taxjustice.net

The full publication of multinational companies’ country-by-country reporting took a step closer today. A begrudging step, which as it stands would negate most of the benefits; but an important one nonetheless, because of the direction of travel.

A long road travelled

A little background. Public CBCR, as proposed by Richard Murphy and John Christensen for TJN way back in 2003, is a tool for accountability:

  • First, by making public the distribution of companies’ activity, and that of their declared profits and tax paid, public CBCR makes multinationals accountable for the extent of their profit-shifting and tax manipulations.
  • Second, public CBCR makes jurisdictions such as Luxembourg accountable for their role in siphoning off profits from elsewhere (without the underpinning economic activity).
  • And third, public CBCR makes tax authorities accountable for their ability and willingness to ensure companies pay an appropriate rate of tax on their activities.

After ten years of building the case for public CBCR – including the crucial support of international development NGOs such as Christian Aid and ActionAid and our partners in the Financial Transparency Coalition, and the emergence of a global network of civil society organisations, the Global Alliance for Tax Justice – success! The G8 and G20 groups of countries mandated the OECD to produce a standard as part of the international tax rules.

Private CBCR: A measure for tax injustice

Then, a setback: aggressive lobbying led to the OECD taking its broadly robust standard  and making it as unhelpful for accountability as possible. Specifically, the decision was taken to make the reporting private to tax authorities – at a stroke, eliminating all the accountability benefits with the exception of multinational accountability to tax authorities. (This, of course, is the accountability that was by far the strongest beforehand, since tax authorities could already demand very substantial additional information from corporate taxpayers; and hence the benefit arising is likely to be the smallest).

This move also reversed the development direction. Among tax authorities, public CBCR would disproportionately benefit those which are:

  1. politically least able to demand information, i.e. those from lower-income countries; and
  2. technically least able to resource long, technical battles over transfer pricing and other elements of the international rules where tax manipulation is common, i.e. those from lower-income countries.

As such, public CBCR is a measure that challenges the major inequality in the global distribution of taxing rights – an inequality that means the resulting tax losses may be several times larger as a proportion of existing revenues in non-OECD countries, on the basis of IMF research findings.

The OECD reversal was exacerbated by a decision that reporting would only be provided to headquarters country tax authorities, i.e. overwhelmingly to those in OECD countries and not elsewhere. This necessitated the development of resource-consuming, additional instruments to provide that information to other tax authorities; along with various criteria to exclude those that might have the temerity to make the data public, or to use it for non-OECD-approved tax approaches.

At this stage, then, the overall effect has been to worsen rather than to curtail the global inequality of taxing rights – exactly the opposite of what public CBCR would ensure.

Leaked European Commission proposals

Unsurprisingly, the policy discussion now centres on delivering TJN’s original proposal, and making CBCR public – with the expressed support of various European Commission officials and of UK Chancellor George Osborne. The compliance costs are now locked in for companies, and there would likely be an overall cost saving from switching to open data publishing, so that counter-argument has long gone.

Today, European Commission documents leaked to Politico and to the Financial Times show a step in this direction. The FT (£) summed up the main flaw:

In a significant disappointment for tax-justice campaigners, the scope of the disclosure rules will be limited to activities within Europe, leaving a lack of transparency on profit shifting to non-EU tax havens such as the Cayman Islands and Bermuda.

As Richard Murphy pointed out directly, this is not country-by-country reporting. It’s not only that we don’t see the likes of Bermuda; we also lose all developing countries too, and instead get a single number capturing both. Rolling together the jurisdictions where profit is likely to be shifted to, with those where profit stripping may be most egregious, is of course to negate the entire point of CBCR – which is to understand the disaggregated distributional picture.

As it stands, the proposal would support accountability of European tax authorities for LuxLeaks-type abuses – that is, it would make clear where EU members were receiving much higher shares of profit and/or tax than activity. To an extent, it would support accountability for authorities in terms of their obtaining a fair share of multinationals’ global tax base (albeit without explaining the full picture extra-EU). It would provide only limited accountability for multinationals, since the bulk of their inward and outward profit-shifting might well be hidden.

What the proposal would dramatically fail to deliver is any direct benefit for developing countries. Since their information would not be disaggregated, there would likely be little more value than from what is currently possible by comparing national tax returns with consolidated global accounts of the taxpayer’s group – except, perhaps, where the Commission proposal might reveal a particular jurisdiction risk relating to an EU member state (e.g. seeing the global scale of profit-shifting into the Netherlands might help the Ghanaian revenue authority to focus on particular transactions). Indirectly, the proposals might allow developing countries more space to pursue their own public CBCR approach; but at the risk of locking in the same weaknesses.

In addition, the proposal would fail to identify or support accountability for any non-EU profit havens – with the potential effect that their share of global shifted profits would actually increase. The Commission would be creating, deliberately, a playing field unbalanced against their own member states.

Rubbish proposals – rejoice!

Overall, then, the leaked proposals seem to fail when assessed against any realistic aims. They do not deliver full accountability within the EU; they disadvantage member states against others, to the extent that overall profit-shifting and tax losses may not be reduced; and they deliver nothing for developing countries. The proposals are, in short, a clear step back from the European Parliament’s support for a fully global approach.

And yet the proposals remain a step in the right direction. The only discussion is about how to make CBCR public; not whether to. Given the heavy lobbying against the OECD standard – to say nothing of the ten years that it took us to bring the measure to the top of the global policy agenda – it was to be expected that there would be some bad proposals for public CBCR. And the leaked Commission document is certainly one!

More work is clearly needed to educate policymakers and their technical advisers on the specific benefits of public CBCR, in order to inform a more sensible set of proposals. (Not least in the US.) And it may be that some jurisdictions pursue bad proposals before others (and perhaps some forward-thinking multinationals) lead the way with good ones. But we are on the road, inexorably, to the global delivery of TJN’s first policy proposal: public CBCR and all the accountability benefits.

The Commission’s proposal is rubbish – let us rejoice.

Photo by Harald Groven, https://www.flickr.com/photos/kongharald/

Photo by Harald Groven, https://www.flickr.com/photos/kongharald/

Benchmarking #Googletax – 2% in the UK?

The Tax Justice Network has just released a new analysis of Google’s UK tax position. Rather than speculate on the nature of the deal reached with the HMRC, the UK tax authority, we simply compare the outcome to the stated aim of policymakers, and the common feeling of the public: namely, the alignment of taxable profit with the location of actual economic activity.

As we’ve written, repeatedly, the observed degree of misalignment is a product of current international tax rules – because it is based on the logic-free approach that each entity within a multinational group be treated as if it were a separate profit-maximising company. The only viable solution is to treat firms such as Google in accordance with the economic reality that they are unitary firms: that is, they have a common global management which takes the decisions, and it is at this level only that profit is maximised, and tax liabilities should be assessed.

Once that decision is made, what remains is to apportion the global profits as tax base between countries – which could of course, and should, be done on the basis of the location of real economic activity. Where this system is already in place (for example among the states of the US, the provinces of Canada and the cantons of Switzerland), the common measures used include sales; employment (wage bill and staff headcount); and (tangible) assets.  The European Commission’s long-standing proposal for intra-EU apportionment is an equally-weighted combination of the three, while the Canadian formula is simpler: half sales, half wages.

Here’s the basis for the calculation. [Until such time as there is public country-by-country reporting of consistent data, such an exercise depends on some digging and some judgment calls.]

Sales

Google Inc’s most recent 10K filing (and their last, having become Alphabet Inc), includes a breakdown of revenues by major market: the USA, UK and the rest of the world. UK revenues for 2014 were $6.483 billion.

There is one puzzle here. We tried to check the figure with Google UK’s accounts, and found that the company has simply not reported it. The relevant line from the accounts is ‘turnover’, which is defined in the Financial Reporting Standard applicable in the UK as follows:

“The amounts derived from the provision of goods and services after deduction of:

(a) trade discounts;

(b) value added tax; and

(c) any other taxes based on the amounts so derived.”

When we look at Google UK’s accounts to June 2015 (p.12), however, it turns out that they’ve defined it as something completely different:

“Turnover represents the amount of fee payable in respect of services provided during the period to Google Inc., Google Ireland Limited and Nest Europe Limited. The Company recognises revenue in accordance with service agreements.”

Rather than the Google Inc.-reported $6.5bn of sales (or £4.6bn, give or take), this measure is much smaller – around £1.2bn. This is broken down specifically in the notes to the financial statements (p.15), showing that around a quarter is a payment from the US for R&D, and three quarters from Ireland for marketing and services.

For apportionment purposes, it is sales by the group, within the jurisdiction that matter (so the claim that they are technically made by a different part of the group doesn’t enter); but we include this UK ‘turnover’ in some of the analysis below for comparison.

Tangible assets

Tangible assets – the stuff you can touch, and know the location of – are in the books of both Google UK and Google Inc., albeit somewhat differently expressed due to the inevitable differences in accounting standards. For the UK, we have ‘Tangible assets’; for the Inc, ‘Property and equipment, net’.

Employment

Employment is straightforward in one aspect, and currently impossible in the other. For headcount, the data are each in set of accounts (the only possible complication is that Google UK accounts shows 2329 staff, while the company told the UK’s parliamentary Public Accounts Committee that they have more than 4,000. Busy hiring since July, it would seem).

Wage bill is a different matter. The costs are broken out for Google UK in note 6 to the accounts, while in the US accounts they are amalgamated under business headings (R&D; sales and marketing; general and administrative; and ‘cost of revenues’). We wrote to Alphabet Inc to ask for the global total, but have had no reply at all – not even a confirmation of receipt – so we’re left with headcount.

Profit

Finally, we take Google UK’s ‘Profit on ordinary activities before tax’, and Google Inc’s ‘Income from continuing operations before income taxes’, being in each case the relevant variable used to show tax reconciliation.

To get to 2014 figures for the UK, we are required to assume that activity was constant over the 18-month period covered in the accounts to 30 June 2015. On that basis, we scale the relevant values by 2/3. In addition, we convert the sterling figures to dollars using the prevailing exchange rate at 31 December 2014.

Benchmarking Google UK

We proceed in three steps. First, we show the proportion of each measure of activity for Google, Inc which relates to Google UK. Next, we show the implied volume of UK profit for 2014. Finally, we calculate potential tax implications.

The first table shows that for any of the measures of economic activity, Google UK’s share of the global, Google Inc total is much higher than its share of pre-tax profit: from 2.6% to 9.8% of activity, compared to just 0.64% of profit. Even if we take Google UK’s definition of turnover at face value, so that the company only provides sales services to Ireland and R&D to the group, the share of profit would still be three times higher. The second table shows the implications for UK-taxable profit, and UK tax revenues, were the misalignment of activity to be eliminated (or a formulary approach adopted). As well as individual factors of activity, we show the results for the two multiple-factor formulae mentioned above, the European and Canadian (using headcount).

The only single factor formula which has been proposed in the current debate is sales, which also shows the most extreme misalignment. Current taxable profits are just 6.5% of that implied by alignment with sales, and the tax bill for 2014 would have come in at £230 million. There are two good reasons against a sales-only basis, however. At a theoretical level, it ignores production entirely, rather than balancing production with consumption as each of the Canadian and European formulae seek to do; and at a practical level, a sales-only basis is likely to be the least valuable in terms of addressing the structural inequality in the allocation of taxing rights to developing countries. [Thanks to Iain Campbell for flagging a typo in this table, now corrected.]

google FA 1The Canadian and European multiple-factor formulae provide a broader base of economic activity against which to consider profit misalignment, and provide a closer range. The implied tax bill for 2014 is £131-£166 million; while current declared profits are 9-11% of the implied tax base.

Were the OECD BEPS process to achieve its aim, or were a unitary tax approach with formulary apportionment adopted, Google could expect to pay in UK tax each year an amount equivalent to or greater than the settlement reached for the entire period back to 2005.

google FA 2

Google UK’s taxable profits for 2014, after the deal with HMRC, are about 10% of what would be expected if their profits were aligned with the UK share of Google’s real economic activity – which is the stated aim of policymakers, and the clear demand of the public. With statutory corporate tax rates set to fall below 20%, the real effective rate may end up lower than 2% of the actual profits attributable to UK economic activity. By any reasonable benchmark, the Google deal highlights the comprehensive failure of international tax rules.

The bigger picture – and the solutions

The Google UK case is not an isolated aberration, but part of a consistent, broader picture. But it is perhaps the paradigmatic example of the failure of international tax rules.

The UK government was so seized of the importance of this particular case that a new measure, the Diverted Profits Tax, was briefed to the media as the ‘Google tax’. The tax authority, HMRC (Her Majesty’s Revenue and Customs) dedicated between ten and thirty skilled staff to this one case, every day for six years. And yet the outcome is that the UK will tax just a fraction of the proportionate profit that policymakers have aimed for, and that the public expects.

HMRC has dedicated more capacity to this one case, for six years, than most revenue authorities in developing countries are able to devote in total to all multinationals. There is no prospect that the current rules can be made to work, whether in high-income countries like the UK or in those countries where the revenues are most badly needed to fund basic education, health and public investment.

Previous research from the Tax Justice Network (http://taxjustice.net/scaleBEPS) shows that 25-30% of the global profits of US multinationals are now shifted to low- or zero-tax jurisdictions, away from where the real economic activity takes place – compared to just 5-10% as recently as the 1990s.

This is not about the particularly egregious behavior of one multinational, but about a system that is unfit for purpose. In 2013, the OECD was mandated by the G8 and G20 groups of countries to reform the system under the Base Erosion and Profit Shifting (BEPS) Action Plan. It is already clear that the BEPS plan will not bring the fundamental changes needed.

Policy recommendations

There are two immediate priorities for policymakers.

First, multinationals must be required to publish their country-by-country reporting data, under the new OECD standard, to reveal where their economic activity takes place, where profits are declared and where tax is paid. At a minimum, this will allow the public to hold multinationals and tax authorities accountable for their performance. We welcome the recent support for this original Tax Justice Network policy proposal from European Commissioner Pierre Moscovici, and UK Chancellor George Osborne – but that support must now be turned into legislation.

Second, recognising that the OECD BEPS process has failed to meet the scale of the challenge of profit shifting, policymakers should urgently convene an independent, international expert-led process to explore alternatives – starting with the taxation of multinational groups as a unit, rather than maintaining the current pretence of individual entities within a group maximising profit individually. This will allow full consideration of formulary apportionment approaches, including as recommended by the Independent Commission for the Reform of International Corporate Taxation (ICRICT); and detailed analysis of possible practical steps to move towards a functioning system. Such a process would sit well as the first major responsibility of an intergovernmental tax body, as recommended by the majority of developing country governments and by global civil society at the Addis Financing for Development meeting in 2015.

And here’s one more to ponder, as Jolyon Maugham flagged the other day and the Financial Times (£) has picked up: will public country-by-country reporting be enough, or should we have corporate tax returns in the public domain?

#Googletax, still: Why it’s not over yet

Here’s a quickish breakdown of Google UK’s accounting for the HMRC audit which has just been settled. It raises a serious question over how much – if even any – of the £130m actually relates to a challenge against international profit-shifting.  And brings us that bit closer to crossing the Rubicon of corporate tax transparency…

Credit where credit’s due: this is entirely down to the digging of Bloomberg’s Jesse Drucker (unless I’ve made any mistakes, which will be my fault alone). It is however almost entirely Jesse’s fault that we’re still seeing headlines about Google (even if they don’t all credit him).

The UK subsidiary’s accounts to 2015 – which include the announced deal with HMRC – became public yesterday, and Jesse’s scoop is based on putting together the notes to the financials over the last few years, to identify a significant inconsistency in the story.

#Googletax: A triumph against profit-shifting?

The spin from Google, and also the UK government, most notably Chancellor George Osborne but also HMRC, has been that the £130m over ten years represents the fruits of a crackdown on international profit-shifting. After all, this is where public anger and policy pressure has been directed. And as a consequence, all the reporting has followed suit.

Google’s Matt Brittin even claimed specifically that the settlement reflected the new tax rules (by implication, the OECD BEPS changes and the government’s introduction of the Diverted Profits Tax) – which, while patently nonsense (neither change is backdated, let alone to 2005), confirmed the impression that this was about profit-shifting.

The first cracks were suggested by the Times’ remarkable story, in which Alexi Mostrous uncovered that HMRC “officials are understood to have concluded that the company’s offshore arrangements were legitimate”, and not subject to the Diverted Profits Tax (or ‘Google Tax’, a name briefed by officials upon its introduction).

The story in the accounts

The short version: some, and quite possibly all, of the settlement does not relate to international profit-shifting.

Here goes. Over the years since 2010 when the HMRC ‘open audit’ (#opennotopen) started, Google made provisions for the tax and interest that they thought they would eventually have to pay. These provisions feature, respectively, in notes 8 (tax) and 5 (interest) of the financial accounts.

First, the accounts to 2012 contain a provision of £24m for tax, and £3.6m for interest. The key point is the language. Google is specific that the provisions relate, indeed, to the HMRC audit – but only for ‘corporation tax in respect of employee share based compensation’. This is presumably a stock option scheme of some sort – nothing whatsoever to do with the widely discussed international structures that Google uses.

google AR2012 note8 google AR2012 note5

The accounts to 2013 show a small increase in the provisions, with the same details.

google AR2013 note8 google AR2013 note5Finally, the newly released accounts (covering a year and half, after a change of accounting date) show a substantial increase in the provisions, and notes that £33m was the previous provision that now forms part of the overall £130m liability.

google AR2015 note8 google AR2015 note5

Where does that leave us? Google’s accounts show that the earlier provisions, which by 2015 are valued at £33m, are:

  1. The only provisions made in relation to the HMRC audit of tax years from 2005 onwards (with the exception of £1m+, see below); and
  2. Related only to employee share based compensation schemes.

What does it mean?

One possibility is that the £33m, a quarter of the announced settlement, had nothing to do with international profit-shifting – but that the remaining three quarters did. This would imply that Google was sufficiently confident throughout that although it was being audited on everything, it only provisioned in respect of this one element; and was then surprised.

Another apparent possibility is that (more or less) the entire £130m relates to this share scheme, in which case the settlement barely relates to the international profit-shifting issues over which credit has been claimed.

Most remaining possibilities, assuming no errors of accounting or my assessment above, would appear to lie in between these two polar suggestions: on which basis something between roughly a quarter and the entirety of the settlement does not relate to profit-shifting. Jolyon Maugham has neatly pulled out the additional, £1m+ provision for corporation tax that I’ve glossed over above and makes the case that there were indeed two distinct disputes, each eventually settled for liabilities in the tens of millions of pounds.

No, what does it actually mean?

Thought you’d never ask. The main effect of this curious story, and the ongoing reporting, will be to raise even more questions about this deal – and in particular, for the government and the Chancellor about how it was presented to the public. Google have batted back the questions from Bloomberg, but the Public Accounts Committee may have more leverage.

Any further unravelling will of course lead to even greater pressure in two areas: first, for greater transparency in this particular case (which will increasingly appear to violate taxpayer confidentiality – as the pronouncements of the Chancellor and HMRC may be felt to have already done); and second, for a powerful policy response that will provide the public with the kind of reassurance that is currently, painfully absent.

As I wrote previously, this would take the form of committing to publish the OECD standard country-by-country reporting (CBCR). It could come unilaterally from Google (perhaps unlikely, but don’t rule it out); or it could from the government. And in fact, since I wrote about this, and called for the same on the Today programme, the Chancellor has indeed pledged his support for public CBCR. {One to file under ‘correlation is not causation’, but at the deeper level not – public CBCR is the original Tax Justice Network policy proposal, and has gone from being written off as lunacy in 2003, to being on the verge of reality. File instead under ‘Advocacy successes where attribution is actually not unreasonable’.}

What remains is for this pledge to be made specific: for the UK to announce and deliver legislation mandating publication of country-by-country reporting, and to work publicly and privately to ensure that European Commission – currently sitting on the impact assessment they commissioned from LuxLeakstransparency champions PwC – makes the same call. An unparalleled step change in the accountability of multinationals, tax authorities and – in the tax sphere – governments too, is now within reach.

Three lessons of #Googletax

From @Jason_Spacey

From @Jason_Spacey

 

 

Since news broke that Google has negotiated a deal with the UK tax authority following the latter’s audit stretching back to 2005, criticism has been growing – of the deal, of the UK government and of the company. What might we learn from #Googletax?

1. The world has changed; oh, and life’s not fair

On the face of it, Google may feel a bit hard done by. After years of criticism over your tax bill, you agree to pay £130 million more – and what do get? More criticism. Criticism of your tax bill and, additionally, of your relationship with government.

Well, the world has changed. Nobody quite knew what to say when Starbucks decided in 2013 to raise its tax payment after criticism. Margaret Hodge, famously stern then-chair of the Public Accounts Committee, summed things up by welcoming the payment while stressing that the system still needed sorting.

But the world has changed. Prem Sikka quickly calculated Google’s effective tax rate (given some necessary assumptions on relative profitability of UK operations) at around 2.77%. Richard Murphy suggested tax of around £200 million each year would be about right, as did Jolyon Maugham QC (and like Prem, put Google’s new effective rate near 3%).

Now you might point out that none of these three are exactly ‘tax is theft’ flagbearers. But the tax-twittersphere was surprisingly quiet – where normally it likes nothing more than an event like this as an excuse to accuse each other of committing vile, ideological sins while pretending to analyse objectively, this time things were pretty calm. Nobody seemed keen to commend Google’s tax payment, nor to defend their doing a deal.

In fact, I think there’s a marked difference in public attitudes. The depth and breadth of understanding seems beyond any previous peak (not least the important heights of UK Uncut); and the general sense that a distribution of taxable profit between countries in proportion to the scale of economic activity would be about right. Who knows where that might lead?

It seems overwhelmingly clear that Google has come out of this badly, in terms of reputational impact – and that’s before they appear before the now upcoming Public Accounts Committee hearing. They may feel like they’d have been better off to keep their heads down.

So, life’s not fair.

2. Do no evil

On the other hand… A less aggressive tax position would have allowed Google to avoid (the open audit from which this deal, and the attendant bad publicity arises.

Imagine the conversation:

  • “So, this way we’ll pay tax at about 2.77%. I even think HMRC might go for that.”
  • “Meh. We can pay much less than that.”
  • “Really? Isn’t that, like, pushing it?”
  • “Tax is theft. Tax is evil. And you heard the man: Do no evil.”

No, I don’t suppose it went anything like that. But still: this wasn’t done blind. At some point, someone thought that the position they had was entirely defensible, and any risk (reputational or in terms of subsequent tax assessment) was worth taking; and that’s the position that ultimately got signed off by management and auditors.

As Owen Barder says, CSR means two things: Pay your tax, and don’t be corrupt. With this tax position agreed and hailed as a success by the UK government, there’s presumably no way back on that front. And presumably no corruption to address. So what could Google do now to reclaim its reputation?

I’d say there’s only one thing that might have any impact. And right now, it would still be a long shot. But it’s this: commit in Google’s own, inimitable, data-led way, to publish its full, country-by-country reporting (CBCR).

This would hurt. A lot. As much as Google tax is being picked over now, we’d have much more fun if we had the actual data showing the full difference between where it does business and where it pay tax. But… once it was done, it would be done. And all the pressure would be on Google’s rivals to follow suit, making them the story instead whether they published or not.

Along the way, this might help make Google what it presumably always hoped to be: not just doing no evil, but positively doing a bit of good. If they wanted to go the whole hog, they could even help us knock together the open database which we hope will provide a platform for all the eventually public CBCR data.

3. The Golden Thread is (still) worth following

What of government? After coming out early to announce the Google deal as a ‘victory’, a ‘real vindication of the government’s approach’, Chancellor George Osborne must have spent the rest of his time at Davos kicking himself. But if not, his Conservative colleague Boris Johnson certainly was – writing the next morning that “we should recognise that the fault in the whole affair lies with our national arrangements“. And it got worse for Osborne: a subsequent headline had Prime Minister David Cameron ‘distancing himself‘ from the Chancellor’s triumphal claims.

The government might, like Google, think things are rather unfair. After all, they’ve done a deal to get more tax, not less.  But the nature of the deal, and the fact that taxpayer confidentiality would seem to prevent any effective defence against the 3% claim, leaves them exposed at PAC and more generally.

That’s why this is the right time for the government to take the initiative, get back on the front foot, bring out the disinfectant and mix any other positive metaphors it can think of. David Cameron came to power claiming he would usher in a new era of transparency, and in some aspects of international tax he can fairly claim to have delivered a fair bit already.

In May, the UK will host an anti-corruption summit where it had hoped that the Overseas Territories and Crown Dependencies would follow in signing up to public registers of beneficial owners of companies. It seems increasingly unlikely that this will happen – but the Google debacle provides an opportunity for a real policy commitment that would put the UK, too, back on the side of the angels.

Having helped along the OECD’s mandate to develop a country-by-country reporting standard while hosting the 2013 G8, the government then saw the OECD deliver a technically good standard with the minimum (and most unequal) possible transparency.

The tax justice movement lost that round of the argument because OECD members saw the measure’s real value as being about holding multinationals to account (so only tax authorities needed the data); while multinationals lobbied fiercely against publication, even once they had had to accept the compliance costs.

What was lost was the point that CBCR is not just about companies’ accountability – it’s also about governments’ accountability. You can’t show you’re getting a fair share of tax from multinationals if you don’t publish this data. And you also can’t show that other governments, like Ireland or Luxembourg or the Netherlands, aren’t ripping you off.

This would be the perfect time for the UK government to discover that the Golden Thread applies at home as well as in developing countries, and to announce that it will publish CBCR data itself (in open, machine-readable format, natch); and advocate for this to be an EU-wide measure.

 

Time for a global compact on financial transparency?

Apologies for the recent absence of the Tax Justice Research Bulletin. The TJRB will be back soon, and in the meantime here’s a review of the major research contribution from the second half of 2015. This longish post is based on my remarks at the book’s launch in Oslo in December (and includes a couple of the authors’ slides), where the idea of a global compact ended up being discussed at some length…

Challenging narratives: Illicit flows, corruption, Africa and the world

Ndikumana coverIbi Ajayi & Léonce Ndikumana (eds.), 2015, Capital flight from Africa: Causes, effects and policy issues, Oxford University Press.

This new volume from the AERC (African Economic Research Consortium) is a very welcome milestone in scholarship on the complex and contested areas of capital flight and illicit financial flows (IFF). It is more than that however. It is a powerful book in terms of what it represents; what it contributes; and above all, of what it challenges. These are discussed in turn below, before consideration of a major policy opportunity that now beckons.

Context

Capital flight is defined as consisting of (predominantly illicit) unrecorded movements of capital across borders, made up of discrepancies between the recorded sources and uses of foreign exchange, combined with the movements hidden through trade mispricing. The larger set of IFF will also include recorded flows of illicit capital, for example through money laundering.

This is only the second major volume to address IFF directly, and it is no coincidence that the Norwegian government has provided support to both. This issue, now firmly on the global policy agenda, was nowhere when Norway first began to promote it. Has any donor managed such powerful impact on any issue, through targeted, strategic interventions? And yes, full disclosure: the Tax Justice Network, too, has benefited from Norwegian funding.

The first IFF volume, Draining Development, was published by the World Bank in 2012 following a 2009 conference. Despite initial agreement, the Bank backed out of providing a full study itself and instead brought together external researchers (myself included). The resulting work remains a milestone, but is inevitably somewhat patchy given the quite disparate nature of the group.

Ajayi & Ndikumana, in contrast, have produced a volume with a good degree of coherence across the individual chapters and above all in terms of the overall arc, presumably reflecting the authors’ common AERC involvement as well as the editors’ guiding hand.

The report of the African Union and Economic Commission for Africa’s High Level Panel (HLP) on Illicit Financial Flows out of Africa, chaired by H.E. Thabo Mbeki, has already brought significant policymaker focus to the issues – including outside the continent. The HLP report was itself preceded by an IFF focus for the 2014 Tana High Level Forum on Peace and Security in Africa; and over many years, the development of a strong civil society engagement spearheaded by Tax Justice Network – Africa.

And so the new volume represents further evidence of African leadership on these issues, in the research sphere also. But its contribution is greater than this.

Major findings

First, the book provides updated (Ndikumana & Boyce) estimates of the scale of capital flight from the continent over four decades. In the context of inevitable difficulties of estimating from data anomalies, things which are deliberately hidden – as well as general weaknesses of data quality and/or availability – these are the leading time-series estimates available (more on the question of estimates below).

Ndikumana slide1 The book’s major contributions lie in the analysis of the determinants, and as importantly the non-determinants, of capital flight. The non-determinants include:

  • risk-adjusted returns (chapter 2: Ndikumana, Boyce & Ndiaye);
  • ‘orthodox’ monetary policy (high interest rates in particular – chapter 6: Fofack & Ndikumana);
  • capital account liberalisation (results for domestic financial liberalisation are less clear – chapter 7: Lensink & Hermes); and
  • ‘macro fundamentals’ (especially the pursuit of inflation control and balance of payments sustainability – chapter 9: Weeks).

Weeks’ sharp statement of findings arguably applies across the wider set of results too:

“the orthodox narrative that capital flight results from unsound macro policies [is reversed]. On the contrary, capital flight may force governments into policies that work against the majority of the population”

Evidence is also found for the following determinants of capital flight:

  • external debt (much of which has historically left again through the ‘revolving door’ – chapters 2, 3: Ajayi, and 5: Murinde, Ocheng & Meng);
  • weak rules and/or capacity (throughout, but most clearly in chapter 10: Arezki, Rota-Graciozi & Senbet, which addresses the impact of thin capitalisation rules in resource-rich countries);
  • habit, and the impact of continuing impunity – including social determinants of tax compliance and the possibility of vicious circles of IFF and governance (chapters 5, 11: Ayogu & Gbadebo-Smith, and 12: Kedir); and far from least
  • international financial secrecy (chapters 8: Massa, 9, 13: Barry, 14, and 15: Moshi).

Taken together, these findings provide a base of new evidence sufficiently broad that it has implications not only for national policymakers, but also for the wider narrative.

A new challenge to sticky narratives

There are a number of sticky narratives in development. As in other fields, these are stories which seem to have a staying power in popular and policy discourse that far outlives any basis they may have in technical research. Two of these come together in the issues explored here.

Perhaps the stickiest of narratives, and certainly one of the most pernicious, is the persistent association of corruption with poverty. This narrative has its roots in self-justifying colonial discourse of fitness to rule (and to be ruled), and its persistence reflects the decades-long promulgation in the media (and by some NGOs) of images of kleptocratic elites in post-independence regimes. The largely (though far from exclusively) African identity of those states (i.e. those that most recently gained independence) often provides an additionally unpleasant (and sticky) racist element.

The Corruption Perceptions Index, which aggregates multiple surveys (largely of international elites), is highly correlated with per capita GDP: so respondents tend to perceive poorer countries as more corrupt. But the consistent presence of Somalia, for example, near the bottom; or of Switzerland near the top; may reveal more about those whose perceptions are surveyed, than those who are perceived.

One of the motivations for the creation of the Tax Justice Network’s Financial Secrecy Index was precisely to challenge this view, by using objectively verifiable criteria to rank jurisdictions according to their provision of financial secrecy to non-residents: if you will, the selling of corruption services.  Top ranking – that is, the biggest global provider of financial secrecy – is Switzerland. The United States comes in third place, Mauritius 23rd and Ghana 48th.

The second sticky narrative holds that capital flight is, in effect, a punishment on (especially African?) governments for bad policy. This can act in combination with the first to produce the story that African capital flight is the result of African corruption.

The findings of the AERC volume provide a powerful challenge to this story. First, they offer some support to the old challenge: that it takes ‘two to tango’. Or as Mobutu Sese Seko is quoted: “It takes two to corrupt – the corrupter and the corrupted” (p.406, citing Bob Geldof). In this view, African elites may be culpable but so too are their ‘partners’.

More importantly, the findings support a new challenge: What if most of the blame lies elsewhere? While governments have tended to pursue the policies shown to be ineffective in reducing capital flight, many of the real levers of power have lain outside the continent. In each of the following cases, for example, who is the corrupter and who the corrupted?

  • An anonymous BVI company is awarded a cheap Zambian mining concession, then flips it to a UK-listed plc
  • A Swiss bank holds a Nigerian resident’s overseas assets through a Jersey trust; nothing is reported to the Nigerian authorities
  • A US-headquartered multinational shifts profit from Ghana to Luxembourg

We could go on; and indeed the book offers many examples. We should also consider other examples, such as that of a South African multinational shifting Uganda profits to Mauritius. We might perhaps settle on a view that the blame is very well shared indeed around the world. We might also wonder if poverty is not associated with corruption, so much as with exploitation by the corrupt.

At a minimum, the evidence presented by the AERC authors should serve to unstick the casual elision of corruption and poverty, and of capital flight and African policies.

As Nkurunziza (chapter 2) shows, the potential gains in poverty reduction from reversing capital flight are substantial.

Ndikumana slide2

Policy opportunities

The Sustainable Development Goals’ target to reduce illicit financial flows is a golden opportunity to catalyse improved quantitative methodologies; to ensure more and better data is available; and to introduce indicators that drive accountability for progress. But the SDGs will not fill the policy gap.

Although the ‘crazy ideas’ generated by civil society in the early 2000s now dominate the global policy agenda, there is a failure across the board – most obviously in terms of country-by-country reporting, and automatic exchange of tax information – to ensure that the benefits flow to developing countries as well as OECD members.

It seems that political power, rather than genuine commitment to transparency principles, still determines who is able to benefit. The Mbeki panel has called for greater progress in these areas. But is there an opportunity to sidestep, or indeed to leapfrog, much of the current issues by taking a more direct approach?

The final chapters of this important volume (15; and 16 – Boyce & Ndikumana in particular) detail a wide range of policy responses to the various findings, from capital controls and debt audits to some of the fundamental challenges to financial secrecy that the Tax Justice Network exists to champion – not least, fully public country-by-country reporting for multinational companies.

A global compact on financial transparency

The most striking proposal, however, is one not currently on the international policy agenda: a global compact among governments, CSOs and international institutions, covering strategies at the national, continental and global levels. Boyce & Ndikumana highlight the importance of:

  • National governments integrating the various mechanisms and agencies that are relevant for each type of illicit flow;
  • Continental conventions to provide a framework for harmonisation and coordination of national initiatives;
  • Global civil society networks working more closely with local civil society organisations, with greater speed of communication, greater coordination and institutionalised collaboration.; and
  • Global initiatives that have ‘adequate enforcement capacity. At the moment, global conventions do not have the legal capacity to hold individual governments accountable for the implementation of relevant dispositions; their rules are not binding at the national level’ (p.413)

The proposal, and the last point above all, carries an echo of an earlier proposal for an international financial transparency convention. In 2009, the Norwegian Government Commission on Capital Flight from Poor Countries (section 9.2.3) proposed such a convention, which would apply to all countries and include two main elements relating to transparency:

First, it must bind states not to introduce legal structures that, together with more specifically defined instruments, are particularly likely to undermine the rule of law in other states. Second, states which suffer loss and damage from such structures must have the right and duty to adopt effective countermeasures which will prevent structures in tax havens from causing loss and damage to public and private interests both within and outside of their own jurisdiction.

The commonalities with the proposed global compact are the recognition that states have responsibilities towards each other in respect of financial transparency; and that these are sufficiently serious, and their abnegation sufficiently damaging for other states and citizens, that practical enforcement is necessary.

The authors and others in the AERC network are now working on a range of country studies which will provide detailed further evidence of the issues in question. Meanwhile the ‘Stop the Bleeding’ consortium that brings together a wide range of African actors to carry forward the agenda of the Mbeki panel is increasingly active.

Part of the reason this book is a milestone is that it sheds new light on what is known about the causes of illicit capital flows; offering supporting to the narrative that corruption and IFF should be seen not as the result of poverty, but rather as its exploitation – often led by external actors and always facilitated by financial secrecy elsewhere.

It will take on a new significance altogether if it also marks the starting point for an African-led process, perhaps backed by Norway and others, to develop an international agreement establishing the basic transparency expected – nay, required – from states toward one another; and making enforceable for the first time, claims against states for the damage caused by their financial secrecy.

[Talking of counter-measures – look out for a new TJN proposal launching tomorrow…]

EC tax ruling: Belgian opportunity, big 4 at risk?

There’s been a good deal of coverage of the European Commission decision that Belgium’s ‘excess profit’ tax scheme is illegal, and so it must claw back unpaid tax from companies that were able to achieve double non-taxation on profits shifted into the jurisdiction. The focus has largely been on the implications for specific companies. It’s worth thinking more about different jurisdictions involved, and the possible risks facing the big 4 audit firms.

Basis of the EC tax ruling: Guaranteed double non-taxation

First, the ruling seems pretty clear cut, in principle at least, because the ‘excess profit’ approach is so transparently designed to engineer double non-taxation. Much like Ireland’s bad Apple agreement which accepted that the jurisdiction was not entitled to a share of profits that were shifted in but resulted from activity elsewhere, the Belgium scheme determined that any ‘excess profits’ would be exempt from tax.

The scheme defined excess profits as those bigger than an equivalent, purely domestic business would report – in other words, the result of a multinational’s activity elsewhere. Since these were by definition being reported in Belgium and not elsewhere, double non-taxation was the aim and indeed the guaranteed result. Bingo!

Whereas other cases (e.g. LuxLeaks) involved tailored responses to individual companies, the Belgium approach was consistent leading the Commission to conclude simply that:

We did not have to investigate the specific tax rulings to each company that are based on the scheme. They are automatically illegal.

Why Belgium? Who else?

As I said in various interviews, ‘België is niet de grote vis’ (Belgium is not the big fish), and the ruling is fascinating more because of the potential scale if a similar demand for clawbacks were applied to the bigger EU players in the profit-poaching business.

Our study of US multinationals, which we find to shift 25-30% of their global profits, shows that the majority of shifted profit goes through six jurisdictions: outside the EU Bermuda, Singapore and Switzerland; and inside, Ireland, Luxembourg and Netherlands. [New work from the US Joint Committee on Taxation, with access to firm-level rather than aggregate data, puts Cayman ahead of Singapore in the top six; ut the EU jurisdictions remain central.] Using global balance sheet data (predominantly capturing European multinationals), our earlier study confirmed the same three EU jurisdictions and also highlighted the roles of Belgium and Austria.

The figure, drawing from the results of Cobham & Loretz, 2014 using Orbis data, shows the share of declared profit which would be stripped away from each jurisdiction, if profits were to be aligned with each of the measures of multinationals’ economic activity (which was the declared aim of the OECD BEPS initiative). Belgium would stand to lose 25-50% of its declared profits under any measure of activity except intangible assets, a relatively extreme position.

Cobham Loretz 2014 tab4fig-Bel

Consistent with this view of Belgium as a location for profit-shifting by European multinationals in particular, the European Commission states that the clawback will amount to €700m, of which the bulk – around €500m – relates to European multinationals.

So while Belgium may not be such a grote vis internationally – it doesn’t register for US multinationals in the aggregate, for example – it’s certainly big enough for the European Commission to have bothered with.

But the really big money would be at stake if the same type of decision were to be taken with respect to the profit-shifting into Ireland, Luxembourg and the Netherlands. Of these, the relative complexity of mechanisms in the Netherlands (using trusts and special purpose entities for example, rather than blunt rulings) may make it a harder target. But rulings in Ireland and Luxembourg are already in the Commission’s sights. If the doubly non-taxed profits here were required to be retrospectively taxed at applicable statutory rates, the effects would be substantial indeed.

Company calculations

What would that look like from the point of view of companies involved? Consider the Belgian case. Gross profit that might have faced an effective rate of 15-20%, say, in the countries where the underlying economic activity took place, was shifted into Belgium and declared as ‘excess’ and therefore not subject to tax – in any jurisdiction.

Applying the unmitigated Belgian statutory rate instead will have two main results. First, the overall tax paid will almost certainly (assuming interest is dealt with appropriately) be higher than if neither the scheme itself, nor any alternate profit-shifting arrangement, had been used. The Commission notes that for the Belgian companies used, 50-90% of profits were ruled as ‘excess’; so it’s unsurprising that companies like AB InBev are assessing their options.

The second effect is a more forward-looking one: the changes that the Commission decision may imply for current and future profit-shifting strategies. If the possibility exists for retrospective taxation on shifted profits, do companies become less aggressive? Or is there simply a premium put on the more complex and/or iron-clad methods – for example, will Netherlands structures become even more dominant? Will it favour the UK’s CFC and patent box mechanisms, now with the OECD BEPS mark of acceptability, over other (smaller) jurisdictions?

Big 4 risks

A further impact is that on the big 4 and other professional services firms that may have provided the advice on which basis multinationals made the particular profit-shifting decisions – and themselves profited substantially in doing so. If there is a case for companies to sue over bad advice in the Belgian case, imagine the exposure – for example – of PwC, if a substantial share of LuxLeaks cases were equivalently unwound? If so then at some point, given the vast scale of profit-shifting and the potential tax liability if statutory rates rather than 0-1% were to be applied, a question of financial viability could even arise.

Looking forward again, will multinationals approach such tax advice differently if the possibility of retrospective action remains? Does this simply reduce the value of the advice, or change the willingness to consider it?

And for the big 4 and their staff, with the nature – and some of the risks – of selling profit–shifting advice now impossible to ignore, what are the ethical considerations?

An opportunity for Belgium?

Finally, what can Belgium do? Not such a big fish perhaps, but definitely on the hook. The immediate upside is unexpected tax revenue; the downsides are many.

First, the country stands clearly exposed for antisocial behaviour: profit-poaching in a time of austerity, when the social costs of lost revenues in EU partner countries could not be clearer. Second, trust: how will business view the jurisdiction after this reverse? And third, the stability of the model: given the substantial share of profit booked in the country that appears to have been unwarranted, what are the tax implications of losing the right to tax the non-‘excess’ element?

Here’s the opportunity. The one-off revenues from forcible clawbacks should be sufficient to cover for some time the losses from reduced inward profit-shifting. The question is whether Belgium aims to retain a role in profit-shifting – if it tries to appeal the ruling, struggles to regain credibility with multinationals, introduces and promotes new (OECD- and EC-compliant) mechanisms… or if instead, it takes the opportunity of being ‘caught’, and decides to chart a path towards less anti-social fiscal behaviour.

This could, for example, involve taking a lead in pushing for greater transparency of tax rulings; and in advocating for full enactment of the proposed Common Consolidated Corporate Tax Base (CCCTB) and associated proposal for formulary apportionment within the EU, which would eliminate much of the current profit-shifting; and of course publishing country-by-country reporting of multinationals, which would make the extent and direction of it transparent.

Uncounted: Power, inequalities and the post-2015 data revolution

Data: Facts and statistics collected together for reference or analysis

Revolution: A forcible overthrow of a government or social order, in favour of a new system

– Oxford English Dictionary

Just published: a special double issue of the journal Development on African inequalities, including my (open access) guest editorial setting out the thesis of ‘Uncounted’ – how power and inequality are intimately related to who and what go uncounted, from tax evasion in the 1% to the systematic exclusion of women and girls, from the corrupting influence of illicit financial flows to the marginalisation of people living with learning disabilities…

Guest Editorial: Uncounted: Power, inequalities and the post-2015 data revolution

Development (2014) 57(3–4), 320–337. doi:10.1057/dev.2015.28

People and groups go uncounted for reasons of power: those without power are further marginalized by their exclusion from statistics, while elites and criminals resist the counting of their incomes and wealth. As a result, the pattern of counting can both reflect and exacerbate existing inequalities. The global framework set by the Sustainable Development Goals will be more ambitious, in terms of both the counting and the challenging of inequalities, than anything that has gone before. This article explores the likely obstacles, and the unaddressed weaknesses in the agreed framework, and suggests a number of measures to strengthen the eventual challenge to inequalities, including by the promotion of tax justice measures.

Keywords: inequality; data; household surveys; SDGs; tax; uncounted

 

While the whole edition just came out, it is technically the 2014 volume. The majority of the papers are drawn from the Pan-African Conference on Tackling Inequalities in the Context of Structural Transformation held in Accra that year, and include some cracking contributions – not least important papers on gender inequality, sustainability and disabilities, as well as broader pieces on the economics and politics of inequality. Check out the full table of contents.

Power in the darkness, uncounted

OECD country-by-country reporting: Only for the strong?

The governments of G8 and G20 countries gave the OECD a global mandate to deliver country-by-country reporting, as a major tool to limit multinational corporate tax abuse, and with particular emphasis on the benefits for developing countries.

New evidence shows that – even before its implementation – the OECD standard is likely to worsen existing inequalities in the international distribution of corporate taxing rights. That is, OECD country-by-country reporting may be so skewed that it will strengthen the relative ability of its rich country members to tax multinationals, at the expense of developing countries.

The powerful potential of CBCR

Uncounted‘ is my shorthand for the view that who and what get counted, or not, is both a driver and a reflection of power inequalities. The failure to count marginalised groups reflects their lack of power, and also undermines the prospects for the inequalities they suffer to be addressed. The failure to count powerful groups – say, the income and assets of the top 1% – reflects the extent of their power, and also undermines the prospects of challenging the inequalities they benefit from.

The requirement for country-by-country reporting (CBCR) by multinational companies should be a paradigmatic example of transparency for accountability, where openness becomes a tool for meaningful challenge to injustice.

The Tax Justice Network has taken CBCR from the practically unheard of in 2003, when we began to develop a detailed proposal with Richard Murphy around the time of our founding, to the global policy agenda when in 2013 it formed an important part of the workplan for both the G8 and G20 (see film at 2 min 50 in particular).

The case for CBCR is that it provides additional, public information on the location of the activities of multinational companies, in order to improve accountability in a range of ways.

First among these is tax. Multinationals can be held to account against the global aim of improving the alignment between where their economic activity takes place, and where taxable profit is declared.

Openness of CBCR to tax authorities allows measures of misalignment to be easily calculated, in order to identify the major tax risks. Openness of CBCR to the public allows media and civil society activists to hold tax authorities to account; and allows investors and market analysts to identify share prices risks and so price multinationals more efficiently.

In this way, public CBCR is a transparency measure that genuinely shifts power, and drives greater accountability in multiple channels.

The disappointments of OECD CBCR

Sadly, the OECD approach demonstrates just how the undermining of a transparency measure can exacerbate inequalities and weaken accountability.

First, the power of lobbying saw the idea of public reporting knocked on the head – so at least in the OECD standard, there’s no commitment to allow investors, analysts, journalists or activists the opportunity to hold multinationals accountable.

Second, things went even further into reverse when the OECD agreed – almost unbelievably – not to support individual tax authorities asking for CBCR from multinationals operating in their jurisdiction.

Think about that for a moment: so successful has been the lobbying against potential accountability, that something tax authorities could have done unilaterally before the OECD got the CBCR mandate, would now be seen as counter to the international standards.

Instead, tax authorities of host countries are expected to apply for the information to be provided by the tax authority of the home country – if the latter has it, if there is an information exchange protocol in place, if the host country has committed to confidentiality (no way back into public openness here).

New evidence

EY CBCR implementation graphAnd now accounting firm EY has published the results of a survey on implementation of CBCR. The new evidence appears to confirm strongly the fear that each watering down of CBCR at the OECD will be to the detriment not only of openness and accountability, but also to the taxing rights of non-OECD members.

The full report (pdf) is well worth reading. Most striking visually (and a big tip of the hat to Christian Hallum at Eurodad for this) are the two maps that summarise key findings.

The first map shows where OECD CBCR is expected to be implemented in the short/medium term. As you might expect, given the global distributions of tax authority capacity and of multinational company headquarters, implementation is expected in almost all OECD members (see figure also); and in barely any non-OECD members.

EY CBC expectation map Sep15The second map shows the jurisdictions which will be able to take part in CBCR information exchange – that is:

  1. Signatories of the multilateral competent authority agreement for automatic exchange of information based on Article 6 of the Multilateral Convention on Mutual Administrative Assistance in Tax Matters (as of 1 August 2015), as well as other countries expected to participate in the automatic exchange of CbC report information based on the results of our survey (“additional jurisdictions”); and
  2. Countries that underwent the “peer reviews” of the Global Forum on Transparency and Exchange of Information for Tax Purposes (as of 1 August 2015) and were found to be “compliant,” “largely compliant” or “partially compliant” with the confidentiality standard.

EY CBC info exchange map Sep15

While there are interesting variations, and some developing countries do stand to benefit, the overall picture is a depressing one.

The most recent IMF research suggests that the impact of multinational avoidance on revenues is around three times as high for developing countries (the authors provide an ‘illustrative calculation’ of 1.7% of GDP) as it is for OECD members (0.57%).

In general, the approach to CBCR will ensure better information on multinational tax risk for the richer countries, mainly OECD members. Now in this case, there can be no doubt that information is power.

As a result, the major inequality in the distribution of taxing rights between countries rich and poor is likely to be exacerbated by OECD country-by-country reporting. 

Where do we go from here?

Consider two more positive points. First, the widespread adoption of OECD CBCR among jurisdictions where most multinationals are headquartered means that questions of compliance cost should be behind us.

Where, we may now ask, are the transparency champions? Which multinationals will step forward, and lead their counterparts by making public their data? With carrots like the Fair Tax Mark available… Watch this space.

And second, there are active processes in a range of jurisdictions including the EU, to determine whether to make their CBCR fullly public.

Given the failure of OECD CBCR to level the playing field – in fact quite the reverse – the only way to meet the G8 and G20 commitment to developing countries is for them to require public CBCR.

Once again, transparency champions will be required to lead the way. Facing an opposition newly seized of the tax justice agenda, might the UK government follow through on its 2013 leadership?

 

Taxing multinationals: A research agenda for #FFD3

There have been substantial advances over recent years in both policy and research on taxing multinationals, especially in developing countries, so with the Financing for Development conference gearing up in Addis, it’s a good time to step back and think what current priorities for the research agenda might include.

Arguably, we understand more now than we have ever done about the revenue losses of developing countries in particular; but there’s much more to be done in relation to not only the scale but also the distribution and impact of those losses, and more besides. Here are a few ideas in three areas that stand out: scale; practical success; and national-level data.

Scale and impact

There have been important new contributions to the literature which estimates revenue lost due to profit being recorded elsewhere than the location of the economic activity giving rise to it. But there remains a great deal more to do, both to identify the scale and pattern of revenue losses, and to prioritise policy responses for individual African countries and at regional and continental level.

The aim of the Base Erosion and Profit Shifting (BEPS) initiative – the major international effort led by the OECD over 2013-2015, at the behest of the G8 and G20 groups of countries – is to reduce the ‘misalignment’ between profits and real activity, in order to ensure tax is paid in the right place.

A significant problem for the BEPS process relates to Action Point 11, which requires the collation of data in order to establish a baseline for the extent of profit ‘misalignment’, and the tracking of progress over time. As the most recent BEPS 11 output highlights, currently available data – whether from corporate balance sheet databases (see e.g. Cobham & Loretz, 2014), or from FDI data – is not sufficient for the purpose.

Within the limitations of existing data, however, this year has seen two important new studies of the extent of profit ‘misalignment’. First, UNCTAD’s World Investment Report 2015 includes a study on the effect on reported taxable profits in developing countries of investments being channelled through ‘tax haven’ or ‘SPE’ jurisdictions. They put the total revenue loss at around $100 billion a year (see also the critique which suggests this may be substantially understated). Second, researchers in the IMF’s Fiscal Affairs Department have looked at the broader issue of BEPS and find a long-run annual revenue loss for developing countries of $212 billion.

POSSIBLE RESEARCH PROPOSALS: SCALE AND IMPACT

  1. Extending current work. In neither case have the estimated revenue losses for individual countries been published. As such, a valuable piece of policy research would be to take the two studies, replicate the results and strengthen them where possible, and then to assess the country-level findings in order to support the potential prioritisation of counter-efforts. Further extension could involve strengthening the current, tentative results on the linkages between tax revenues (of different types), and important development outcome (e.g. health).
  2. FDI surveys. An additional approach using existing data would be to use the national-level survey data compiled by a number of countries (including the USA, Germany and Japan). One such study with US data is currently underway at the Tax Justice Network.

Practical success

A second area in which there is substantial scope for research with clear policy value is in the analysis of practical success in taxing multinational companies. Research on the scale of the problem, as discussed in the previous section, has the potential to identify the relative intensity of revenue losses and therefore the countries which should prioritise some form of response – but may not point more precisely at solutions than, for example, to blacklist certain jurisdictions as inward investment conduits.

Three types of study offer the potential for more specific policy recommendations.

POSSIBLE RESEARCH PROPOSALS: PRACTICAL SUCCESS

  1. Identification study. A useful first step would be to take the ICTD Government Revenue Dataset (the ICTD GRD, the best available international source), and to identify those country-periods in which significant progress has occurred in raising corporate income tax revenues; along with any major common features.
  2. Survey. The second step would then be to conduct a survey of revenue authorities, exploring the differences in tax policy, political support and administrative approaches, to identify systematic differences – or their absence – between those cases where significant progress was seen, and not.
  3. Event study. A further step would be to identify major policy changes – most obviously the introduction of a large taxpayer unit at the national revenue authority, or the provision of technical capacity-building measures from bilateral or multilateral donors, and any other features to emerge from the first two steps – and to explore whether there were systematic benefits in revenue-raising across the broad panel of GRD data.

National-level data

The third area in which research proposals could be taken forward can be grouped loosely according to the involvement of national-level data. Two specific proposals can be identified. In each case, such research might be best led by, or conducted in collaboration with, a regional tax body such as ATAF.

POSSIBLE RESEARCH PROPOSALS: NATIONAL-LEVEL DATA

  1. Transaction-level trade analysis. Leading estimates of illicit financial flows (e.g. those of Ndikumana & Boyce, GFI and ECA) include a major component related to trade mispricing. However, these rely on national-level, or commodity-level trade data. Among other potential methodological issues, the bulk of estimated IFF are likely to relate not to multinational companies but others; although the exact proportions cannot be identified.

The gold standard is to use transaction-level data (e.g. the pioneering work of Simon Pak), and as a recent study for the Banque de France reveals, with identifying data on whether transactions are between related parties (i.e. they occur within a multinational group) or not, it is possible to identify the scale of mispricing attributable to multinationals (in the French case, causing an estimated $8 billion of revenue tax base loss each year).

Accessing such data from customs authorities would allow the equivalent assessment to be made for a range of countries, also allowing comparison across countries and potentially the combination of data to identify fraudulent mis-invoicing at each end of the same transactions. The Tax Justice Network, with Professor Pak, is currently in the initial process of such an analysis with one African revenue authority.

  1. Country-by-country reporting (CBCR). Since the fanfare of the G8 and G20 groups of countries calling for the OECD to develop a standard for CBCR by multinationals in 2013, the optimism about its value has faded. Sustained lobbying has removed not only the explicit intention of the original Tax Justice Network that the data be made public, but even that it be provided to host country tax authorities. Instead, it will be provided – if requested – to home country tax authorities, which may then provide it under information exchange agreements to host country authorities. However, the latest draft of the Financing for Development outcome document (7 July 2015) is explicit about the provision of this information directly to tax authorities in the locations where multinationals operate.

A requirement for publication is one possibility; another is for tax authorities to share the data privately amongst themselves, for example through an equivalent mechanism to the IATI registry of aid (a proposal developed in Cobham, 2014) in order to allow broader analysis and identification of revenue risks. This could happen at a regional level; but the latest noises from the OECD suggest that there will be no international collation, and hence it will be impossible to meet BEPS Action Point 11 and either to construct a broadly accurate baseline or to demonstrate the extent of progress.

Working with tax authorities, however, researchers could deliver basic results equivalent to those from CBCR. This would involve combining data reported to tax authorities through national accounts for members of a multinational group, with the global consolidated accounts of that group, in order to compare the relative shares of activity and taxable profit and hence to identify potential high revenue-risk operations.

  1. Investment data and vulnerabilities. There is substantial scope to improve both the reporting and use of bilateral investment stock and flow data, in order to pursue a range of types of studies. One particular opportunity, pioneered in the Mbeki report, is for the creation of measures of vulnerability to ‘tax haven’ secrecy in countries’ bilateral economic and financial relationships. Per the findings in the Mbeki report, present data are sufficient to allow significant analysis to be done, and it would be valuable to extend this to explore whether particular costs or benefits – in particular, in terms of tax revenues from multinational companies – are associated with the recorded vulnerabilities. (NB. This also points to a possible extension of the UNCTAD and IMF results in proposal 1 above.)