Tax is now the focus of reputational risk

November 9th, 2010

Vanessa  Houlder has written an excellent article in the Financial Times this morning on the subject of tax and reputational risk. As she notes:

One lesson for companies is clear: tax is becoming an important source of reputational risk. Increasingly, businesses are weighing up whether they are vulnerable to attack and how they should respond if they become the target of a campaign.

The article has, of course, been inspired by the latest Vodafone protests,but it is much broader in it’s focus than that. It does, in particular, look at the tax campaigning undertaken by Christian Aid and it discusses corporate reactions to country-by-country reporting.

And as Vanessa notes, the campaign is working:

Measures to prise open multinationals’ tax affairs are also being considered by policymakers across the world thanks in large part to charities’ emotive campaigns on corruption, tax and capital flight. For example, Christian Aid has challenged companies and their advisers by arguing that a new “country-by-country” accounting standard requiring companies to report profit and taxes in individual countries would make it harder for companies to “shift” taxable profits out of developing countries.

But as she adds:

Unsurprisingly, companies are cool about these initiatives, even if they are sympathetic to the charities’ goals of improving tax collection in developing countries. Unilever, for example, insists that “there are other and better ways to tackle poverty and corruption, for example by building the capacity of tax authorities in the countries concerned”.

One exception is Standard Chartered. The global bank has already made a start on publishing accounts for individual countries, but it wants a level playing field. Dan Mobley, head of government relations, says: “We cannot justify spending a lot of resources if our competitors are not. We need civil society to push on this.”

Perhaps, almost inevitably, the critics are quoted at length. The most notable is Susan Symons, a tax partner at PwC, who is noted as saying:

[A]ssessing whether a company had done anything wrong would require an in-depth understanding of how the business was organised. It could be easily misunderstood or misused, whether inadvertently or deliberately.

With the very greatest of respect to Susan,  who I know, that is nonsense, and she must know it is. If this were to be the reason for nondisclosure of accounting information then no information at all should be put on public record, or be disclosed to shareholders. All accounting information is subject to exactly those same risks. It is patronising and disingenuous to argue actually does.

The same could be said of the comments made by Caroline Dewing, a senior communications manager at Vodafone, who is quoted as saying:

[P]utting the kind of details that are given to tax authorities into the public domain, might strain the bounds of taxpayer and commercial confidentiality

No they wouldn’t. And nor could they,especially if everyone is required to do it,  as we propose.

And nor can be the issue be dismissed, as PwC and their clients would like, by claiming that the tax that is paid on profits is not a relevant issue. PwC have for some years been promoting what they call the ” Otal Tax Contribution” This is a Mickey Mouse form of accounting which adds up all the payments a company makes to a government and claims that these are then the responsibility of the corporate entity that  writes the cheque. This is, of course, completely untrue .  The payments in question include employees tax liabilities, payments made by customers and payments for services received. Extracting such information from a company’s general ledger is hard, and we often hear that this is the basis for corporate objection to country by country reporting. But we do not ask for such nonsensical data, although Susan Symons continues to promote it in the comments she made to the FT.

We ask for accounting data  on a country by country basis: data that shows the activities that a corporation undertakes in a jurisdiction and the payment of tax that flows from that activity. This is coherent, usable, comparable, comprehensive , consistent, and one would hope reliable information on which to form objective opinion. PwC say this could be open to misinterpretation. My response is simple: at least it has the merit that it is intended to be objective when prepared. That cannot be said of PwC’s alternative. PwC’s motive is blatant and clear: they wish to aggregate the payments of tax the company makes as agent and add them to the payments that it makes as principle with the obvious goal of seeking to reduce the liability that the company has to make on its own behalf. This is a blatant, political and abusive act. No doubt this does appeal to the FT community, and that explains the prominence given to the issue in the article, but there is no one, anywhere taking the proposal seriously.  In contrast country by country reporting is on the agenda of the OECD,the IASB and the European Commission. It’s not hard to tell who is winning this debate. The companies that are resisting had better get worried.

Written by Richard Murphy

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