Investors responsible for trillions of dollars of assets have called on the OECD to ensure that the country by country reporting of multinational companies is made public. With leading experts, standard setters and civil society groups fully in agreement, the only remaining opposition to this most basic transparency measure comes from multinationals and industry groups that benefit from opacity that allows them to hide the extent of profit shifting, and the professional services firms that advise them.
In 2013, the G20 group of countries mandated the OECD to produce a country by country reporting standard. This marked a crucial turning point in the work of tax justice campaigners, some ten years after the Tax Justice Network published the first model accounting standard. The standard came out in 2015, with a commitment to review it in 2020. A call for submissions closed on 6 March, and in a world not facing a global health crisis, this week would have seen the OECD host a public meeting to discuss the different views. While that meeting has been cancelled due to coronavirus concerns, the submissions have been published and we can now present a summary of the findings.
As context, it’s worth noting that there was criticism from all sides of the consultation itself – and in particular, of the very short window for submissions. And while some objected to the length and detail of the consultation document because it identifies too many possibilities for the standard to change, others highlighted the complete absence of provisions to address many of the larger questions. Despite this, the results are clear – as are the divisions.
There were 80 submissions to the OECD review. Of those, half came from multinationals such as Astra Zeneca and InterContinental Hotels, and industry groups including the French Banking Federation and US Chamber of Commerce. A further 16 came from professional services firms including the big four accounting firms and various law firms and others. The remaining submissions came from investors, academics, individuals, labour organisations and other civil society groups – oh, and 33 US Senators and members of Congress*, including erstwhile Democratic presidential candidates Elizabeth Warren, Bernie Sanders and Cory Booker.
In addition to the submission from UN PRI (Principles of Responsible Investment) group, whose members have some $90 trillion under management, other investor submissions included Norges Bank, with $1 trillion, Australia’s HESTA (US$37 billion), and a joint submission from US groups with assets conservatively stated at $847 billion.
As the figure below shows, there was a decisive split in the responses to the consultation. On three key points, there was near perfect alignment between investors, experts and civil society – a result that is all the more striking in light of the fact that the OECD’s weighty consultation document did not even mention the first two.
1. Make the data public
[W]e believe it is time that members of the OECD Inclusive Framework move at all deliberate speed towards full publication of large companies’ CbC reporting to provide us and other investors the information we need to make sound decisions when evaluating a corporation’s ongoing profitability and financial risk on a country by country basis. This is an important strategic and policy matter for investors interested in long-term value creation.– Submission to OECD: Group of investors representing investments totaling $847 billion.
Multinationals and their professional services firms used to argue that compliance costs made country by country reporting unthinkable. When the International Accounting Standards Board convened a meeting on the issue a little before the global financial crisis, a representative from one of the big four accounting firms claimed that it could double the cost of auditing. But since the G20 directed the OECD to create a standard, and the world failed to stop, that argument has been largely replaced by another.
Today, we see entirely voluntary reporting of country by country data, typically to the OECD standard or better, from major multinationals in a variety of sectors – from Vodafone to Shell, for example, and from Anglo American to NN Group.
Some multinationals, however, have simply switched out the compliance cost argument for others. Some have told civil society activists that while they are not necessarily opposed to publication of their country by country reporting in principle, there are still costs to doing so and these would not be justified if the data is not going to be well used. There are so many calls for sustainability reporting, they have said, among which they have to prioritise, that if investors are not asking for the data to be available then it won’t happen.
With the comprehensive response of investors to this consultation , that argument too has been eliminated. Investor submissions show they are increasingly aware of the evidence that shows they bear the risks of companies engineering lower effective tax rates, but receive no compensating return. At the same time, submissions from the labour movement reflect their clarity that the processes that hide profits from tax authorities are also used, all too often, to skew the starting point for wage bargaining. Broader civil society concerns are fully aligned with both, on the basis that public country by country reporting is crucial for the accountability of both tax authorities and major corporate taxpayers. Evidence that tax payments have increased by around ten per cent where the measure is already in place for EU banks and financial institutions confirms the potential scale of effects.
It should be clear to policymakers worldwide that the tipping point for public country by country reporting has been passed: the alignment in favour of this basic transparency measure is broad indeed.
2. Use the Global Reporting Initiative standard
Reporting standards should be aligned with the Global Reporting Initiative (GRI) model
GRI sets reporting standards used by 78 percent of companies in the Dow Jones Industrial Average and 75 percent of NASDAQ 250 companies […]. GRI developed this standard in consultation with multinational corporations, accounting firms, academics, and other stakeholders in addition to investors. Broadly speaking, aligning the various country by country standards would ease record-keeping burdens for businesses and present a clearer picture to users of these reports.– Submission to OECD: 13 US Senators including Elizabeth Warren and Bernie Sanders, and 20 members of Congress.*
If support for public country by country reporting – despite its absence from the consultation document – is striking, it also follows many years of campaigning and awareness-raising. But the degree of support for the GRI standard, which was only launched at the London Stock Exchange (video available here) in January this year, reflects the remarkable level of backing that is already in place from the various stakeholder groups including investors.
Fiona Reynolds, CEO of PRI (Principles for Responsible Investment), the global investor network with over 2,600 signatories who collectively manage in excess of U$89 trillion, said: “Tax avoidance is a leading driver of inequality and as such a responsible approach to tax by business is essential. The PRI has been leading efforts to drive more meaningful corporate disclosure. GRI’s new Tax Standard marks an evolution in tax transparency and provides a much-needed and ambitious framework for corporate tax reporting.”
The GRI standard is the product of wide consultation over two years, and many, in-depth and occasionally heated but always respectful discussions in a technical committee comprising individual experts from reporting companies, investors, accountants, labour organisations, academia and civil society. That process has led to a standard which addresses, flaw by flaw, all of the technical shortcomings of the OECD standard – including but not limited to three key points raised by multiple submissions:
- Failure to ensure reconciliation with global, consolidated group accounts
- Failure to deal with intra-group transactions on a consistent basis
- Lack of a requirement for entity-level reporting for ‘stateless’ entities
Convergence to the GRI standard in this review period would allow the OECD to piggyback on that work, and at the same time to eliminate for participating companies the costs of complying with multiple standards.
An interesting pointer on business expectations was provided by the World Economic Forum in January. Just weeks after the GRI standard launched, the World Economic Forum International Business Council (IBC) launched a report at Davos which “proposes a common, core set of metrics and recommended disclosures that IBC members could use to align their mainstream reporting and, in so doing, reduce fragmentation and encourage faster progress towards a systemic solution, perhaps to include a generally accepted international accounting standard. To the maximum extent practicable, the report incorporates well‑established metrics and disclosures for the express purpose of building upon the extensive and rigorous work that has already been done by those who have developed the existing standards. The objective is to amplify those standards and more fully harness their synergies rather than create a new standard altogether.”
The IBC report states, exceptionally, that it was “Prepared in collaboration with Deloitte, EY, KPMG and PwC”. While the big four’s (separate) submissions to the OECD review largely duck the issue, the IBC identifies GRI country by country reporting as a ‘core metric’.
The OECD should acknowledge the breadth of support for the GRI standard, and the fact it addresses in detail the technical flaws in the OECD standard, and make the decision now to converge.
3. Extend the coverage
The current threshold of having country by country reports applying to MNEs with a turnover minimum of EUR 750 million should be revised… While the objective of this is to include the majority of tax revenue whilst keeping burden on companies limited, what is ignored is that this high threshold is inappropriate for many smaller economies. In smaller economies, multinational companies with a much lower turnover are responsible for larger shares of economic activity and large– Submission to OECD: ActionAid International.
shares of tax liabilities. The OECD itself suggests that 85-90% of the world’s multinational corporations do not meet the threshold… there is a need to consider a threshold which would allow coverage of the highest percentage of MNEs.
The remaining area of common ground among investors and civil society groups is on the need to extend the coverage of the OECD standard – specifically, to abolish or greatly reduce the revenue threshold, so that many more multinationals are required to provide this basic transparency.
Here, many submissions cited existing US, EU or Australian thresholds for ‘large’ enterprises – typically in the range of around $20 million – $100 million for turnover. But other submissions noted that this would still exclude many businesses with important operations in lower-income countries, and that a threshold of just a few million would be much more appropriate.
An approach consistent with the GRI standard would be to require such reporting where the underlying substance (i.e. corporate income tax in this case) is material to the business. Given existing tax rates and an accounting materiality threshold set at 5%, this brings all businesses with any significant second (or further) country operations into scope. The effect is to shift the ‘threshold’ from one of scale, to one of substance – so the question is whether a business operates multinationally, rather than with what revenue it does so.
[We] believe it is too soon after the introduction of CbC reporting (“CbCR”) to implement major changes…– Submission to the OECD: Business at the OECD (BIAC).
It is too soon to be able to evaluate how useful the information is and how effective it is as a risk assessment tool.– Submission to the OECD: EY.
Lastly, we can consider the positions of those who, broadly, have opposed improvements to the OECD standard (some of whom were also involved in lobbying to introduce, from the outset, some of the weaknesses now widely recognised). There are many businesses and industry groups, to say nothing of staff at the big four accounting firms, that are supportive of tax transparency in broad terms (for example, the B Team), and of public country by country reporting in particular (not least, the multinationals named above; and the big four contributors to the World Economic Forum report).
As none of these groups made submissions to the OECD review, however, the overall position of submitting multinationals, professional services firms and industry groups, was largely negative. In addition to outright opposition to transparency, those represented largely focused on the detailed, technical questions posed by the OECD. There is a more detailed analysis to be done of these responses, which show considerable variation. But for the present purposes of assessing the main thrust, it is notable how often a particular response appears across the groups.
The single counter-argument around which oppositional submissions have coalesced is the idea that 2020 is too soon to make changes to a standard mandated in 2013 and finalised in 2015, for use thereafter. Indeed, the argument in practice relates to 2021 which is the earliest that any changes could come into force. It is tempting to conclude that this is the final evolution of the counter-arguments – and a pretty thin one at that.
The OECD review of its standard may well turn out to be the tipping point towards public, country by country reporting of high quality and broad coverage. While the institution itself faces heavy lobbying against taking these steps, the sheer weight of investor and other support seen in the public submissions to the review may turn out to be enough to move policymakers at the EU and elsewhere, to leapfrog the OECD and mandate public reporting.
It would be in the interests of both reporters and users of the data if there was clear convergence to the GRI standard, not only of the OECD standard but also the other existing standards such as the CRD IV requirement that applies to banks and other financial institutions in the EU already. The extractive sector would need to retain their own standards in a number of areas specific to their activities, including for project-level reporting, resource values and for other payments to governments; but would also benefit from converging to the GRI standard in the relevant areas.
The year 2023 will mark two decades since both the formal establishment of Tax Justice Network, and the publication of the first draft accounting standard for country by country reporting. Will we have full, public data by then? Watch this space.
* This article was updated on 20 March 2020 to reflect that the submission published as ’33 US Senators.pdf’ is signed by 13 US Senators and 20 members of Congress. Thanks @danielbunn!