Richard Murphy FCADirector

Tax Research LLPCopenhagen

September 2010

Country-by-country reporting

What country-by-country reporting isA system of accounting that requires that

multinational corporations (MNCs) publish accounts for every jurisdiction in which they trade as part of their annual financial statements

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What it says (1)Country by Country reporting would require every

MNC to declare1. In which countries it operates;2. What it is called in that location;3. What its financial performance is in every country in

which it operates including· It sales, both third party and with other group companies· Purchases, split in the same way;

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What it says (2)· Labour costs and employee numbers· Financing costs split between those paid to third parties

and to other group members · Its pre-tax profit;

4. How much it pays in tax and other ways to the government of the country in which it is operating as a consequence

5. Some balance sheet and cash flow data6. Additional data for companies in the extractive

industries

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Why it demands this (1)Transparency matters

All MNC activity is 'on the record' - especially intra-group trade

CSR mattersThe relationship between an MNC and its host community is

recordedAccountability matters

You're not accountable unless you can be identifiedTrade matters

60 + % of world trade is intra-group - now we'll know about itPeople matter

Employee conditions are important to us all

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Why it demands this (2)Tax matters

Where do and don't you pay tax?Corruption matters

Particularly holding parties to account for revenue streams in the Extractive Industries

Development mattersPaying tax in developing counties is vital

Governance mattersMany corporate failures relate to complex frauds through

massive group structures - CBC exposes the risk of thisWhere you are matters

There is political risk to trading in some places

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Why we think we have a right to this informationThe objectives of the IASC Foundation are, according to its

constitution:"(a) to develop, in the public interest, a single set of high

quality, understandable and enforceable global accounting standards that require high quality, transparency and comparable information in financial statements and other financial reporting to help participants in the world's capital markets and other users make economic decisions;

(b) to promote the use and rigorous application of those standards;

(c) in fulfilling the objectives associated with (a) and (b), to take account of, as appropriate, the special needs of ….emerging economies; and.....(edited)

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What we'd know if we got it (1)The precise structure of multinational corporations

Who is whereUnder what name

The importance of each jurisdiction to the reporting MNCHow much tax is paid where

So we can hold countries to account for itThe real value of intra-group trade

And some idea of where it flowsHow trade is used to shift profits out of developing

countries and into secrecy jurisdictionsIs it really $1 trillion a year?

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What we'd know if we got it (2)Who uses secrecy jurisdictions to avoid tax, and

maybe by how muchCould be deeply embarrassing for some

Who exploits labourBy comparing labour rates and numbers

What risk investors faceIn the tax structures companies useFrom the places in which they tradeFrom their dependence on tax havensFrom corruptionFrom poor governance

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What we'd know if we got it (3)What risk local businesses face

Especially if local companies are under-capitalisedWhat risk states face from the companies located

within themEspecially if local companies are under-capitalised

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What we could do with itMassively improve understanding of the tax charge in

company accountsBetter appraise likely future cash flows and their

sustainabilityEnhance valuation techniques – after all p/e is heavily

tax dependentBetter appraise those companies who make profits

and those who engineer profitsBetter assess governance riskUndertake better risk screening

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The benefits that flow from CBC - 1In summary, country-by-country reporting would:Provide a stakeholder view of accounting;Create reporting of results by country, without

exception, which has previously been unknown;Provide a new view of corporate structures;Impart a new understanding of what the business of a

corporation is, and where it is;Opens up a new perspective on world trade

because intra-group transactions would be reported for the first time in multinational company accounts;

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The benefits that flow from CBC - 2Give a new view of world labour markets;Create an entirely new tool for geo-political risk

profiling of companies;Permit better appraisal of corporate contributions

to the governments that host their activities and in the process contribute to constraining corruption on the part of some recipient governments;

Provide better awareness of the true extent of tax haven activity;

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The benefits that flow from CBC - 3Allow measurement of tax lost through tax planning

by corporations through the relocation of profit;Provide a better understanding of the physical

resource allocation of the corporate world.

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Why does this pay for itself? Because behaviour will changeEnhanced transparency will give rise to better

allocation of economic resourcesCorruption will be reducedRisk – financial, tax, governance, corruption - will be

reducedLower risk means a lower cost of capitalThat creates a better investment environmentThat enhances long term investment returnsThat’s why country-by-country reporting pays

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Contact detailsRichard MurphyDirectorTax Research LLPThe Old Orchard, Bexwell Road, Downham MarketNorfolk, PE38 9LJ, United Kingdom

richard.murphy@taxresearch.org.uk +44 (0) 1366 383500+44 (0) 777 552 1797www.taxresearch.org.uk/blog

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