Country-by-Country Reporting

The problem

Would you be surprised to learn that a huge multi-national corporation (MNC) worth billions of dollars was able to lower its tax bill to less than 1%?

Well, that’s exactly what was uncovered in November of 2014 when a trove of documents dubbed “LuxLeaks” gave a rare glimpse into secret tax deals arranged between hundreds of different MNCs and the European state of Luxembourg. Among the list were household names, from Pepsi to IKEA to Disney.

This information doesn’t include business secrets about how they produce the goods or services they sell, so why is it kept secret in the first place?

If the public outcry that emerged from LuxLeaks is any indication, the reason lies in the fact that corporations don’t always want to answer questions about the amount of taxes they are paying (or not paying) and where. These deals, so often secured behind closed doors, were brought out into the open for once, allowing governments, journalists, and the general public to see, in stark reality, the methods that MNCs were using to send profits to low-tax Luxembourg, far from where the actual economic activity was taking place.

While the revelation unearthed a symptom of the system, it’s vital that we address the root problem: a lack of clear and transparent information about the operations of MNCs. Currently, multinationals are able to exploit loopholes in domestic and international tax laws to shift profits from one country to the next, often through tax havens (or “secrecy jurisdictions”), with the end goal of reducing or even eliminating the tax they pay to governments. Without leaks and whistleblowers, even governments only see a small window into the inner workings of companies, which makes proving tax avoidance or evasion nearly impossible. Although MNCs report on their profits, revenue, taxes paid, and number of employees, the global numbers they provide are for the operations of all of their subsidiaries bundled together. This dashes any hope of understanding a corporation’s operations in a specific country.

Country-by-country reporting (CBCR) would require MNCs to share this information for each country where they operate. The information would give governments a much greater ability to spot irregular activity that should be investigated further, including, for example, cases of corruption and bribery. MNCs should be required to publish CBCR information because this global problem has proven too big for national governments to unravel alone. Journalists, civil society organizations and academics have been responsible for making the public aware of the scale of tax avoidance and evasion, and are critical to analyzing not only the problem, but also potential solutions.

Large multinationals have a responsibility to play on equal footing as their small- and medium-sized counterparts. Often small- and medium-sized enterprises (SMEs) are already reporting on a country-by-country level when they only operate in one jurisdiction. Simply operating in multiple countries should not exclude MNCs from having to reveal the same.

There’s strong interest in country-by-country reporting from the perspective of investors who value economic stability. Having publicly available country-by-country financial reports would arm potential investors with information they can use to make sure a company isn’t distorting its bottom line or taking excessive risks.

While LuxLeaks unearthed a symptom of the system, it’s vital that we address the root problem: a lack of clear and transparent information about the operations of MNCs.

Country-by-country reporting (CBCR) would require MNCs to report on their profits, revenue, taxes paid, and number of employees separately for each country in which they operate.

And it’s no secret that countries and communities around the world need this additional revenue stream. Recovering from the impacts of the global financial crisis, governments have struggled to find the financial resources to pay for basic social services in many countries. This kind of tax dodging is a global problem that is enhanced by tax haven structures that facilitate and profit from financial secrecy. The byproduct is a financial system that is devoid of accountability, often depriving governments of much-needed revenue.

Some argue that the cost of implementing this reporting structure would be prohibitively expensive, but most policy-makers, as well as a growing number of businesspeople, understand that this information is vital to really understanding transnational business. A report by the accounting firm PriceWaterhouse Coopers for the European Commission concluded that there could actually be some “positive impact” on the economy if public CBCR became the norm for banks and financial institutions.

The fix

Multinational corporations should be required to submit individual reports with basic financial information such as revenue, profits, taxes, and number of employees for each jurisdiction in which they operate. These country-by-country reports should be made available to the public. Public country-by-country reporting strengthens the financial system for everyone.

It would provide information to a wide range of stakeholders, which will strengthen efforts to monitor corrupt practices, corporate governance and responsibility, tax payments, and world trade flows.

It would help investors determine whether corporations they invest in operate in politically unstable regimes, tax havens, war zones, and other sensitive areas, or if there appears to be additional risk arising from aggressive tax planning that might prompt investors to question an MNC’s management team about the issue.

It would allow public interest groups and investigative journalists to make sure that MNCs are paying their share of tax in the countries where they do business, especially where tax authorities are strapped for resources and don’t have the ability to devote the time necessary to this sort of investigation. If the operations of MNCs were truly transparent, a more equitable financial system would be closer to reality.