Corporate tax transparency: Australia's work in progress

Australia is working on transparency and information sharing, and is seeking feedback by April 24 (this Wednesday):

On 4 February 2013, the Assistant Treasurer announced the Government’s intention to improve the transparency of Australia’s business tax system and that the Government would consider the views of the community in assessing what changes are appropriate. 

The Government seeks your feedback and comments on the issues outlined in this discussion paper. As this paper provides details about how these proposals could be legislated, you may wish to comment on law design as well as policy design issues in your submission. It would assist the consultation process if those stakeholders who have any concerns with the proposals could provide practical examples in their submissions demonstrating the implications of these proposals and how any alternative approaches could operate.

Highlights from the discussion paper:

On 4 February 2013, the Assistant Treasurer announced the Government’s intention to improve the transparency of Australia’s business tax system with a view to introducing necessary legislation later this year. ... 

This paper outlines three proposals that could give effect to this announcement. ...These proposals could complement existing corporate disclosure requirements and enhance the administration and regulation of Australia’s tax system and capital markets. ...

• Transparency of tax payable by large and multinational businesses. 

– The objective of this proposal is to enable the public to better understand the corporate tax system and engage in tax policy debates, as well as to discourage aggressive tax minimisation practices by large corporate entities. 

• Publishing aggregate collections for each Commonwealth tax. 

– The objective of this proposal is to enable better public disclosure of aggregate tax revenue collections, even when the identity of particular entities could potentially be deduced. 

• Enhanced information sharing between Government agencies. 

– The objective of this proposal is to build on existing information sharing arrangements and enable greater information sharing between the Australian Taxation Office (ATO) and the Department of the Treasury with respect to foreign acquisition and investment decisions affecting Australia.

Australia's Treasury seeks to consider views from "the community"--not defined so no reason that can't mean the global community.  Address written submissions to: 

General Manager
Tax System Division
The Treasury
Langton Crescent
PARKES ACT 2600

TaxTransparency@treasury.gov.au

Thanks to Miranda Stewart for passing this along.

Public disclosure of global corporate tax info, coming soon in the US?

I was happy to see a rather lengthy discussion in Tax Analysts[gated] a little while ago, authored by Randall Jackson on the emerging US corporate tax transparency rules. These rules derive from a global movement to counter corruption, called the Extractive Industries Transparency Initiative (EITI). The US rules were enacted as a hasty and rather stealthy last-minute addendum to the Dodd-Frank Wall Street Reform Act of 2010, and have yet to be implemented, in part because of intense industry pressure. That pressure continues, especially from the American Petroleum Institute, even though that organization expresses support for EITI in principle. Jackson describes how the disclosure rules came about under Dodd-Frank, and what information is set to be disclosed when the first US companies begin making their disclosures thereunder (February 2014 at the earliest):

Dodd-Frank section 1504 amends the Securities Exchange Act of 1934 by adding a new section 13(q), "Disclosure of Payments by Resource Extraction Issuers," which requires country-by-country (and project-by-project) reporting of all payments, including taxes, made to all foreign governments and the U.S. federal government. (Analysis of Dodd-Frank .) 

The legislation requires companies engaged in the commercial development of oil, natural gas, or minerals that file a yearly report with the SEC to file an additional detailed annual report (new Form SD, which is separate from countries' 10-K annual report) listing all their payments, including taxes, fees (including license fees), royalties, production entitlements, bonuses, dividends, and payments for infrastructure improvements. Payments of at least $100,000 during the most recent fiscal year must be listed.

...Reports must be detailed and specific, listing payments to each foreign government, foreign subnational government, and the U.S. federal government. (Payments to subnational U.S. governments, such as state governments, need not be reported.) The reports will be publicly available online. 

More specifically, the reports must separately list each project and the types and totals of payments made in connection with each project; the types and totals of amounts paid to each government, including a separate list of the governments that received payments; the total payments by category; the currency in which the payments were made; the relevant financial period; and the business segment of the company that made the payment.

Jackson discusses the origin of the inclusion of the EITI addendum in Dodd-Frank (by means of an amendment by Senators Cardin & Lugar, whose prior attempt to pass EITI as a stand alone bill failed in 2009) and the subsequent industry pressure in some amount of detail. He includes a description of API's attempt to unwind the legislation via a legal challenge. API is arguing that the SEC failed to undertake a sufficient cost/benefit analysis of the rules, failed to study how the rules and costs would impact US companies doing business in other countries, and failed to create exemptions in cases where foreign law would prohibit the required disclosure. Jackson quotes the complaint: "the Commission did not even bother to determine how many countries had laws on the books prohibiting disclosure." He also quotes the SE's response:

[T]he SEC wrote that it had rejected commentators' suggestions to exempt firms operating in countries where the required disclosure is prohibited because the agency is skeptical that such prohibitions actually exist, and allowing exemptions would violate the spirit of the law. Furthermore, it said that allowing that kind of exemption could encourage foreign countries to pass anti-transparency laws or to interpret existing laws in a harsher fashion.

To which Cardin and Lugar responded:

"API wants to push us back to a time when the U.S. had few tools to add accountability and stability to the inherently unstable energy sector," Cardin said. "Congress and the SEC carefully crafted a reasonable and very manageable reporting requirement that will bring greater transparency to the oil, gas, and mineral sectors." 

"The U.S. economy and our values substantially benefit when our companies are working in oil-, gas-, and mineral-rich states," Lugar added. "But the benefits will not be realized if investments serve to entrench authoritarianism, corruption, and instability. With oil prices high and volatile, our economy needs more transparent markets, not less.

Cardin and Lugar, along with Senator Levin, have submitted an amicus curiae brief in support of the SEC, which Jackson quotes:

"Resource companies can believe whatever they wish and make any communication they wish about their payments to foreign governments, 'the resource curse,' or the benefits or costs of transparency; they have done so throughout this process. What resource companies may not do is impede the power of the legislative branch to require disclosure of objective information to fulfill compelling public policy objectives, including the strengthening of American national and energy security and investor protection."

It remains to be seen whether industry will be successful in pushing back the EITI regime; if not, we should start seeing the additional disclosure I believe by September of this year. So here is a question. How many multinational extractive industry companies are there in the world, and how many will be covered by the US EITI regime? In other words, if and when the US rules are in place, how many extractive industry companies will not have their information revealed through these disclosure rules by virtue of affiliation with US companies? Is it a few, many, or most? If anyone knows whether this is known or could be ascertained, I'd like to know.

Corporate tax: why disclosure is the key to reform

Two columns of interest emerged today on the issue of corporate tax disclosure, plus another interesting public hearing in the UK, this time with the big four in the hot seat.  Put all of this together and we can see very clearly the intense connection between tax reform and public understanding of the status quo.  With the latter as to corporate tax being woefully inadequate and relevant information intentionally hidden from public view, the former can be neither informed nor meaningful.  The answer is corporate tax transparency, particularly for multinationals, i.e., on the order of country-by-country reporting for listed companies.  First, on the columns, both from the FT.

In this one, John Gapper says "Companies are complying with laws that governments could change if they wished," and then explains:

Starbucks’ supposed immoral act is not to pay UK corporation tax that it does not owe, and would not owe even if it did not license its brand from the Netherlands. It obeys both the letter and the spirit of global tax law, which governments could reform if they wished.

That's 100% correct. And if you think there is some "spirit" in the transfer pricing law that isn't being acknowledged, then you are forgetting that the transfer pricing rules were effectively written by the industry they are meant to police. So I think the spirit is pretty much being well given its due. Gapper also nicely illustrates what I call the mercenary tendency of the tax state in an economically integrated world: agree with whatever seems politically expedient in principle, defect in practice:

I look forward to Mr Cameron naming and shaming companies such as Google (also a target of British politicians) if they are drawn from Ireland to the UK by his tax arbitrage. 

...Governments must decide which regime is fair, and companies and individuals must comply. 

... most companies that place operations or intellectual property in low-tax countries – or even in tax havens such as Bermuda – are not breaching the spirit of global tax law. They comply with a structure established under the League of Nations in the 1920s. 

This allows – indeed, encourages – multinationals to split their operations among countries, paying taxes as if they were separate entities, in order to avoid double taxation. They have to make transactions at “arm’s length” – as they would deal with others. 

It worked for a long time but is under strain because of the growing value of brands, intellectual property and intangibles to global corporations. “Ideas are their biggest asset, and what generate profits, and it is far easier to shift intangibles than factories,” says Jeffrey Owens, of the Institute for Austrian and International Tax Law.

Well, this is mostly right, at least close enough for its purposes. However, I am just not sure what principles we should expect to emerge when reporters turn, as they too often do, to Mr. Owens, former director of the OECD's tax arm and the man who presided over the demise of the corporate tax on a global scale under the nurturing constancy of the OECD's business-driven tax policy making machine, a person moreover who has publicly called for governments to "avoid like hell" any taxes on corporations. He would seem to be the last person you would ask about how to make a corporate tax system function, again, unless we are talking about that movie.  Gapper concludes:

Politicians thus have the choice of indulging in easy rhetoric against companies that obey the laws they have passed or struggling to reform the tax regime for little reward, with lots of disruption. In their position, I might posture too.

If that's not an argument for greater public accountability of how transfer pricing works out in practice, I am not sure what is.

That brings me to the second column of the day from the FT which illustrates why the public ought to know more about how these regimes work in practice, this one by Bruce Bartlett in which he asks, can publicity curb corporate tax avoidance? He lays out the case nicely for the runaway corporate tax base and he concludes:

[L]ittle in the way of real economic activity, such as jobs or tangible investment, has shifted anywhere. All that has shifted is the tax base. 

...This makes the international tax regime a ripe target for reformers.

... With reports of low domestic taxes paid by large profitable corporations such as Starbucks in the UK, the time may also be ripe for an international agreement to curb tax shifting. The US has recently implemented a law called the Extractive Industries Transparency Initiative that requires companies to disclose their payments to governments from oil, gas and mining assets. Allison Christians of McGill University argues that the expansion of such information reporting to the transfer pricing of all multinationals is the first step towards capturing the revenue now lost to the shifting of business costs to high-tax jurisdictions and revenues to low-tax jurisdictions. 

There is growing evidence that corporations are sensitive to the public outcry when they are caught avoiding taxation excessively. Starbucks, for example, recently agreed to pay more taxes in the UK than legally required to quell the controversy over its virtually nonexistent tax bill. The same shaming technique may have broader application to multinationals generally. 

As Justice Louis Brandeis of the US Supreme Court once put it, “publicity is justly recommended as the remedy for social and industrial diseases”.

First, thank you for the shout out, Mr. Bartlett! Second, this column demonstrates clearly the strong connection between tax reform and public understanding of the status quo, as I suggested above.  Tax reform is not going to come from the only party that has all the info it needs right now, namely, the IRS. Tax reform comes from public expression.  Right now, observers of tax policy need more information in order to offer meaningful reform proposals, and that information is being hidden because governments do not require it to be disclosed, plain and simple.  That is a matter of regulatory choice, and these columns show the choice is bad for policy analysis.

That then brings us to the UK's hearings today in which the public accounts committee taking on the big four accounting firms, trying to suss out what the letter and the spirit of the law is with respect to corporate tax on multinationals.  What emerges is the "perfectly legal" nature of all of this tax avoidance, again confirming the editorials by Gapper and Bartlett.  Here is the BBC's take on the hearings, worth reading in full.  Richard Murphy declares it a win for the PAC but the question is whether that translates to a win for those who do in fact pay taxes in the UK and elsewhere.

That question will be answered affirmatively if instead of killing EITI, which is currently apparently a high priority for many, we expand it to cover all listed companies.

Finance minister annoyed about transparency, on his way to Davos

Canada's Finance Minister Jim Flaherty is annoyed with having a Parliamentary budget watchdog that asked too many questions and sought too much budget transparency, going beyond the job description:

What the government wanted was “a sounding board, a testing board,” said Mr. Flaherty, before heading to Davos, Switzerland, on the weekend for the World Economic Forum.

That's rich!  Too much transparency is bad for politicians. Easier to do your thing in elite networks behind closed doors.  All that disclosure is going to ruin everything.

UK PAC vs Starbucks and HMRC: Driving recursive cycles of change in tax law?

An interesting real time example of the recursive cycle of lawmaking, as described e.g. here by Halliday and Carruthers, is unfolding in the ongoing drama of the UK Public Accounts Committee's hearings on tax avoidance by Google, Starbucks, and Amazon. Richard Murphy has posted a press release issued by the PAC today in which they hit a lot of core tax policy notes: what "fairness" requires in taxation, the duty of taxpayers to the state, the state's duty toward taxpayers as a group, the problem of taxpayer morale when perceptions of unfairness abound, the role of morality in taxation.

But it also draws a picture of contestation in both the domestic and the global lawmaking spheres, drawing in ideas about and challenges to the rule of law, standards, and norms, and involving legal and nonlegal actors. Halliday & Carruthers point to four mechanisms that drive the recursive cycle forward and lead to phases of legal change: the indeterminacy of law, contradictions, diagnostic struggles, and actor mismatch. The press release suggests we have all four of these drivers in play. Excerpts:

"Global companies with huge operations in the UK generating significant amounts of income are getting away with paying little or no corporation tax here. This is outrageous and an insult to British businesses and individuals who pay their fair share. 

...There is little credible information about what is going on. The evidence we took from large corporations was unconvincing and, in some cases, evasive. HMRC also lacked clarity when trying to explain its approach to enforcing the corporation tax regime. The inescapable conclusion is that multinationals are using structures and exploiting current tax legislation to move offshore profits that are clearly generated from economic activity in the UK. HMRC should be challenging this but its response so far to these big businesses and their aggressive tax planning has lacked determination and looks way too lenient. Policing the tax system must be at the heart of what HMRC does.

So we see the PAC taking on a role as a fiduciary for the people and claiming that the state revenue authority has failed in its own duty to act in that capacity: the result has been indeterminacy of law, contradictions and diagnostic struggles as per H&C.

The PAC calls for naming and shaming of "offenders" (difficult when all these companies claim full compliance with all applicable laws), and for transparency and fairness in the administration of the tax regime by HMRC, that "Government has a responsibility to assess and collect tax due from all taxpayers, without fear or favour," and that "[i]f companies do not pay their fair share of tax, other taxpayers have to pay more." As a result, the PAC says "[b]oth HMRC and corporate taxpayers are failing to meet the legitimate public expectations from the tax system."

This essentially frames multinationals as lawbreakers with HMRC in an accomplice role, whether intentionally or out of neglect. The PAC says "it will always be an unequal fight between HMRC and multinational companies," but calls on the revenue authority both to be more agressive in chasing MNCs and to do more to publicly explain why these companies pay so little. We can interpret this to mean that the PAC seeks to involve more public input into this cycle of legal change, i.e., introducing more actor mismatch.

 You can read the rest of the press release at the link above. Will be interesting to see what comes of it, whether the PAC succeeds in driving forward legal change and whether we will be able to identify a beginning and end of a particular recursive cycle of tax lawmaking (H&C say this is generally very difficult to do, since so many variables are involved in legal change). So far on the part of Starbucks, the result seems to be PR/damage control, in the form of public assertions of willingness to pay a bit more. That just underscores the effectively voluntary nature of international taxation when it comes to MNCs--Starbucks is negotiating with the state--and won't address any of the issues raised by the PAC, so the contestation should continue and may bring in more actors and more struggle.

Colbert's latest civics lesson

A little while ago, Stephen Colbert gave America another civics lesson on the the topic of campaign finance, as he decided what to do with all his unspent donation revenues (if you missed it, definitely watch it--here).  The show featured Colbert's lawyer Trevor Potter, who essentially suggested that Colbert could 'disappear' the money left in his current super PAC structure simply by adding another layer of secrecy. I confess, I watched the whole thing with incredulity. So I contacted Lloyd Mayer, who knows much about campaign finance law, election law, charities, etc. (you can read one of his many articles on the subject here), and who moreover worked as a legal associate at Potter's firm.  Lloyd had this to say in response:

I believe what is creating this "disappearing money" trick is an at least arguable disconnect between the federal election law rules for PACs and the federal tax rules for 501(c)(4)s.  Under federal election law, a PAC (including a SuperPAC, which is not an actual legal category) must report the name and address of the payee for any disbursement of more than $200, along with the purpose of the disbursement, the date of payment, and the amount.   

In this case, the payee would be the entity on the initial check - the first 501(c)(4) - reading this requirement literally.  Under federal tax law and principal-agent principles, however, the "agency letter" Trevor described would arguably render both the first and second 501(c)(4)s mere conduits for the funds and so those funds would not show up on their returns as either income or expenses because those funds are really those of the principal (the SuperPAC).   

My unresearched take is that this is an aggressive position, but probably defensible on audit. Note this trick works in part because PACs do not have to file IRS Form 990 or to make any other filings under federal tax law that would require reporting the disbursement using the tax rules (which presumably would require the ultimate recipient of the disbursement pursuant to the agency letter, not the payee listed on the SuperPAC's check).

Thank you Lloyd!  So it's not incredible to him, but then again, neither is it straightforward. Another legal scholar recently posted Campaign Finance Disclosure and the Information Tradeoff, with the following abstract:

Campaign finance law is in shambles, and American politics, by many accounts, is dominated by wealthy, shadowy interests. Reformers have rested their hopes on disclosure – mandated, public disclosure of what individuals, corporations, super PACs, and others spend on politics. Reformers argue, and the Supreme Court agrees, that disclosure provides valuable information to voters. Opponents, on the other hand, vilify disclosure for chilling speech and infringing speakers' First Amendment rights. Both positions – disclosure informs voters, disclosure chills speech – have become conventional wisdom.

This paper challenges that wisdom. First, it shows that disclosure does not necessarily inform voters. ... Second, the paper argues that disclosure does not necessarily chill speech. It can thaw it. By providing potential speakers with information about the positions and credibility of candidates, disclosure can prompt actors to speak when they otherwise would not. When disclosure thaws speech, there is no information tradeoff. Voters gain information in two ways – source revelation, more speech acts – and lose it in none. When disclosure thaws speech, it promotes exactly those First Amendment values it is thought to undermine.

I don't know whether disclosure would explain Colbert's disappearing money trick, and if it did, whether that would chill or thaw speech or which of those two options is preferable. But I like disclosure as a means of bringing to light what Lloyd describes as the unintended and possibly absurd consequences of ill-coordinated regulatory regimes. Perhaps disclosure would not create a means of achieving public accountability for those consequences. But I'm all for any sunlight that can be shed on the subject, even if it does come from the comedy channel.

Finnish Tax Research Project?

I am wondering if anyone is working on the corporate tax data published by Finland last month.  I can't read Finnish, so can't make anything of the charts or pdfs, but I assume someone somewhere is gleefully playing with this new data source--I think the first of its kind in all the world. If you're working on it, please contact me, I would really like to know about it.

What we know and can't know about MNCs and their taxes (a.k.a., why don't we know what Google actually pays?)

In Through a Glass Darkly: What Can We Learn About a U.S. Multinational Corporation's International Operations from Its Financial Statement Disclosures?, three accountancy profs explore what we can and can't discern from SEC disclosure about the taxes MNCs pay.  Here is the abstract:

We discuss the accounting rules that apply to reporting a U.S. company’s international operations. We use examples to illustrate diversity in accounting and offer caveats for policy makers, standard setters, analysts, and researchers regarding their interpretation and use of financial accounting information.

This is an important topic because it highlights a few of the many reasons why we might benefit from Dodd-Frank-style disclosure in the face of media stories about the low, low taxes paid on a global basis by companies like Google, Apple, and Microsoft.  The authors use case studies of SEC disclosures to highlight some of the book/tax differences that show why companies' reported tax rates are nowhere near their actual taxes paid.  For example, in the case of Google:

• Google’s “expected” provision at its federal statutory tax rate of 35 percent is a“hypothetical” federal income tax that Google would owe if all of its pretax book income was reported on its U.S. corporate income tax return.  
• In 2011, Google reported “income before income taxes” of $12.3 billion.  At a 35 percent tax rate, Google would owe $4.3 billion in taxes
• But Google reported an income tax provision (an amount it says it owes) of $2.5 billion, for an effective rate of 21%.  
• The difference between the headline 35% rate and the 21% effective rate is explained by book/tax reporting differences for various taxes and credits, some of which are permanent differences (will never be reconciled) and some of which could be reconciled in the future, but the big difference is explained by its "foreign rate differential," which is short form for what Google saved by reporting its income as earned outside of the US.

Much more in the paper.  The basic story is not new, but it's nice to see how the policy choices that go into corporate tax disclosure play out in practice and how they inform our understanding of how the tax system works.  The authors have a few suggestions for how non-accountants (including journalists) should understand and interpret what they find in SEC documents.  

I have been told that one of the reasons corporate managers resist greater tax disclosure in their SEC filings, such as is contemplated under Dodd-Frank and its impetus, the EITI regime (and country by country reporting more broadly) is the fear that people will misunderstand the information and therefore draw incorrect conclusions.  The authors acknowledge the validity of this fear and explore how companies make disclosure decisions with public perception in mind. Yet this paper itself provides an antidote to that fear.  It shows that tax data disclosure is capable of being correctly understood and interpreted.  We may need experts to help us do that in the face of flexible rules and ambiguous cases, but there is no shortage of experts.

Tax transparency: EU development

Richard Murphy points to a press release from Global Witness regarding developments in country-by-country reporting for the extractive industries in the EU:

Global Witness welcome today's European Parliamentary committee vote requiring that EU oil, gas, mining and timber companies publish their payments to governments to help deter corruption.  

The vote brings Europe one step closer to shining a light on payments worth billions of Euros by extractive companies to governments, which have previously remained secret, enabling corrupt government officials to siphon off or misappropriate natural resource revenues.

...The text also contains thresholds for payments that align with similar US 'sunshine' rules for US listed extractives companies set at the end of August.

...a final version of the directive goes to all MEPs for a European Parliamentary vote later in the year.

Arlene McCarthy MEP, the Parliament Rapporteur on the Transparency law, said after the vote in the legal affairs committee: "With this vote we now have a strong negotiating mandate to force the Member States and Commission to accept the Parliament's amendments, putting us on track to create strong global transparency standards, with equivalent rules in the EU and the US." 

More at the link.  

Tax Transparency, California style

California is considering a new bill that would have the FTB "publish a list of the 1,500 largest corporate taxpayers per taxable year, including each taxpayer's tax liability and income apportionment information..."  The 1,500 are "as measured by gross receipts, less returns and allowances, that filed a Form 10-K with the federal Securities and Exchange Commission for that taxable year."  Industry reps consider this a privacy violation for corporate taxpayers.  Maybe, but maybe not.  This involves public companies that have disclosure requirements because they are publicly traded, and it involves information they already disclose to the SEC, only with extraneous (non-California) information removed.  It's not at all clear to me why public companies need privacy rights when it comes to taxes paid.  Why are taxes paid and basic measures of how they are calculated so different than all the other financial information these companies already have to disclose in the interest of illuminating their public shareholders about their financial health?

There is no real difference, but tax disclosure presents a very real social/cultural problem for public companies that are paying very low rates of tax--which apparently includes most or all public companies.  The real worry therefore is not a loss of privacy at all but the legitimate worry that sunshine will lead to bad press as data emerges regarding how public companies arrange their tax affairs.

The latest action on the bill, AB 2439, was a second read plus a third reading ordered in the state Senate.  From the Aug. 8 Senate Floor analysis, we get this:

Existing state and federal laws generally prohibit unlawful disclosure or inspection of any income tax return information. ... the FTB may publish statistical data related to taxpayer information so long as nothing specific to a single taxpayer is disclosed.  Notwithstanding these provisions, the Legislature directed FTB to publish a list of the top 500 tax delinquencies over $100,000... 

ARGUMENTS IN SUPPORT: According to the author's office, this bill will ask for the FTB to post one specific data point on its website which corporations already have: corporation taxes paid to California. It simply disaggregates the amount already reported in their SEC 10-K form to be California-specific.  This simple data is urgently needed for several reasons.  First, California recently made significant changes in its corporation tax system, adopting "elective single sales factor apportionment." This new system means that corporations have a choice of how to apportion multi-state income to California. The FTB has estimated that this choice will cost the state nearly $1 billion annually, beginning in tax year 2011. With this bill, we will be able to accurately determine the distribution of benefits and costs from this drastic change.  

ARGUMENTS IN OPPOSITION: The opposition expresses concerns that this bill will result in misleading information that provides no context for a taxpayer's disposition and will provide no objective evaluation of the single sales factor. For many multi-state corporations, their finality tax liability may not be resolved for years after their return is actually filed so the information in this bill may not be accurate. Furthermore, the opposition states that breeching [sic] taxpayer confidentiality is punitive to the individual taxpayer but will not provide further information to the state to determine whether specific tax policies made sense. 

Regarding the "arguments for," I don't know that the legislature's ability to "accurately determine" things requires the data to be publicly disclosed.  The legislature could as easily simply require public companies doing business in California to include the information on their confidential tax returns, which are typically available to state legislatures to review in the aggregate for policy purposes.  Someone needs to make an argument about why public disclosure is necessary.  There are plenty of available arguments, one need only review the CBCR and PWYP campaigns (or you can read my chapter which examines these arguments).

Regarding the "arguments in opposition," I am not sure why the information is misleading unless companies are reporting false or misleading data to the SEC; if that is the case, we have bigger problems.  No, it is not that the data is misleading.  On the contrary, it is more likely that the data is likely going to be painfully and inconveniently accurate.   True, returns are subject to contestation by the FTB.  I would submit that in the name of the rule of law, the process and outcome of agency contestation ought also to be public information  (it is not, unless the matter ends up in court).  But that is no reason why the original claim is somehow misleading, unless intentionally so by the author.  It is the company's stated position at the time it is made.

Interesting typo alert: it is "breaching" not "breeching" that belongs in that last sentence, but the visual of corporate confidentiality as a baby trying to emerge wrong-way around is quite fascinating.  Still, they've made the right point--the case has not (yet) been made for public disclosure.

Tax transparency activism-Australia

Via TJN, a new campaign in support of country-by-country reporting in Australia called Shine the Light, introduced in this video:



More at the link.

Dodd Frank Regs & Getting the Gov to obey the law

Davis Polk has charted the progress of Dodd Frank rulemaking to date:

Source: FT Alphaville

The extractive industries corporate tax transparency regs would be within the red band in category "investor protection/securities laws," as we know these are hotly contested by industry and have been shamefully delayed over a year now since the deadline for their issuance (April of 2011).

Oxfam, one of the activist groups in the corporate tax transparency movement, filed a lawsuit against the SEC in respect of the failure to issue regs as the law requires.  From the press release, available at the financial task force:

International relief and development organization Oxfam America has today filed a lawsuit against the Securities and Exchange Commission (SEC) for unlawfully delaying the issuance of a Final Rule implementing a provision of the Dodd-Frank Act that requires disclosure of payments from oil, gas and mining companies to the United States and foreign governments. ...[T]his provision would provide information to investors and citizens in resource-rich countries, help stem corruption, and encourage the accountable use of billions of dollars in annual revenues from the oil, gas and mining sector. 

Congress set a deadline of April 17, 2011, for the SEC’s promulgation of the final rule that is needed to bring Section 1504 into effect. The SEC has now missed this statutory deadline by one year and one month. Oxfam America notified the SEC on April 16, 2012 that it would file suit if the regulatory agency did not issue a final rule within 30 days. As Oxfam America’s lawsuit states, “the extractive payment disclosures that Congress mandated nearly two years ago will not take place unless and until the SEC issues a Final Rule. Unfortunately, the SEC’s pattern of delay gives no assurance that it will ever promulgate a Final rule without the involvement of this Court.” The SEC issued a proposed rule on December 15, 2010.

A while back I posted the story about UK Uncut suing the UK tax authority for cutting generous deals with Goldman Sachs.  I wondered how they could do that, is there taxpayer standing etc.  Thanks to some of you reading this I have a clearer picture of how that can be now, will post more on this after I see what I can find out about the Oxfam suit.

BOA duped its SHs on advice of counsel

This is what lawyers do when preparing the proxy statement in advance of a merger or acquisition: sit around taking about the various aspects of the deal's likely costs to the company, and make decisions about what has to be disclosed and how to write the disclosure in such a way as to prevent setting off any alarm bells, in other words, how to sugarcoat as much as possible all the risks involved at the time the proxy will be released.  The interests of the underwriters and the executives are well represented in these conversations; the shareholders are not.  The SEC requires the executives to disclose anything that is material.  What does that mean?  Anything that is likely to have a significant impact?  No, that's too broad.  Anything that will probably have a significant impact?  How probable does it have to be?  The conversation focuses on the relative probabilities and significance of various possible scenarios. At the end of the day lawyers try to include as little info as possible while staying on the right side of the SEC.  BOA is back in the news because its shareholders are saying that in its presentation of the Merrill deal it strayed well past the line, on advice from Wachtell.

"The bank’s purchase of Merrill, struck during the depths of the financial crisis, was the culmination of an acquisition binge by Mr. Lewis that transformed Bank of America from its base in North Carolina into a financial behemoth that could compete head-to-head with the biggest institutions on Wall Street. 

But the transaction, which was ultimately encouraged by government officials who were concerned about the impact on the financial system of a foundering Merrill Lynch, also saddled the bank with billions in losses and required an additional $20 billion from taxpayers on top of an earlier bailout it received in 2008.

Bank of America officials declined to comment. Andrew J. Ceresney, a lawyer for Mr. Lewis, also declined to comment on the filing, but he referred to a motion filed on behalf of Mr. Lewis on Sunday contending that the former chief executive did not disclose the losses because he had been advised by the bank’s law firm, Wachtell, Lipton, Rosen & Katz, and by other bank executives that it was not necessary."

Ryan Chittum comments that he'd like to see some follow-up stories that "focus on just how lawyers could advise that not disclosing billions of dollars in new losses was okay."

The SEC has already said that it was not ok; see Exhibit A.   BOA paid a $33 million fine to the SEC.  This is a tiny sum compared to the billions at stake in the deal; Chittum calls it a slap on the wrist and he's not alone in that characterization.   Of course BOA neither admitted nor denied wrongdoing in accepting the SEC fine, so it remains for a court to decide in this private action what executives and underwriters should have disclosed to the shareholders contemplating the proposed Merrill acquisition.

This is about as clear an illustration as it gets regarding the many problems of flexible disclosure rules and the high cost of information asymmetry.  

Do we need to know more about our public companies?

In a new Tax Notes Int'l column this week (pdf here), I discussed the media coverage of Apple/GE/Google etc and explored the appropriateness of tax confidentiality with a brief discussion of disclosure rules past and present, and the current call for broader disclosure via country by country reporting.

Tax transparency and confidentiality: The case of nonprofits and political spending

Lloyd Mayer explores the social costs and benefits of privacy protections for the nonprofit sector, in his new paper, Nonprofits, Politics, and Privacy.   The focus is on the increasing deluge of cash flowing into politics in the U.S., well shielded by confidentiality laws.  Mayer says "the time is ripe for a deeper consideration of the policy concerns that underlie disclosure requirements and the related issue of privacy."  I think we are seeing this pressure very clearly at the intersection of federal tax law and the globalization of capital and trade; Mayer shows the same pressure at work at the intersection of federal tax law, federal nonprofit law, and federal election law.  Different intersections, same basic issues:

The concept of privacy is one that is instantly recognizable and yet theoretically, much less legally, hard to define.  ... [T]here are at least two competing approaches with respect to privacy. One approach takes a cost-benefit approach. It judges disclosure requirements based on their quantifiable costs and benefits, including among those costs the harm to privacy, however measured. The other, less frequently used approach is a right-to-privacy approach that considers privacy a fundamental right that can only be abridged if there is a relatively strong interest for doing so and then only to the extent required to further that interest. 

Mayer examines how existing "rules are sometimes but not always based both on the cost-benefit approach to disclosure, in which privacy harms are but one possible cost, and on the right-to-privacy approach."  He considers recent proposals for disclosure rules relating to nonprofit organizations engaged in political activity, and argues that disclosure of financial information of the organizations themselves can survive either approach, but for individuals disclosure is more difficult to justify under right-to-privacy norms.   Mayer is specifically focused on nonprofit organizations, for which there might (or might not) be a better argument for public scrutiny than that for strictly for-profit companies.  But for those of us thinking about tax transparency in the international context, such as through country-by-country reporting for example, this paper is of interest.

Civil Society to Congress: End Anonymous US Incorporation

TJN posts on a letter from civil society groups to Congress urging their support of a bill to end anonymous incorporation in the US:

Increased corporate transparency would curb corruption and tax evasion, promote an equitable market economy, reduce the opacity of corporate campaign contributions, help ensure a fair and level playing field for small- and medium-sized businesses, foster global development and enhance national security…

Investigations continue to reveal that American and foreign terrorists, narco-traffickers, arms dealers, corrupt foreign officials, tax evaders, individuals targeted for financial sanctions and other criminals easily and regularly set up U.S. shell companies, without providing any information about who owns or controls such companies...This enables criminals to disguise their identities behind the anonymity provided to U.S. corporations and launder dirty money through the U.S. financial system.

Read more here.

TJN talks about how anonymous incorporation contributes to the US status as a tax haven:

Corporate secrecy fundamentally undermines U.S. laws to combat money laundering and tax evasion, as well as U.S. efforts to tackle global corruption. A recent World Bank report found that the U.S. was a favorite destination of corrupt politicians trying to set up shell companies to access the financial system. Once corrupt and other illicit funds have been moved through an anonymous corporate vehicle into the financial system, it is much harder to track them down. Shining a light on the ultimate owners of companies, would make it easier for law enforcement to do its job. To date, eight law enforcement organizations, including the Fraternal Order of Police and Federal Law Enforcement Officers Association, have endorsed the legislation.

More at the link.

Tax transparency, democracy and "expertise"

Transparency is being fully contested in international tax circles:

The hosts were expecting a heated but constructive debate, and for most of the nine-hour conference delegates heard in turn the impassioned arguments of campaigners for country by country reporting and the deliberations of tax professionals whose main argument centred on the complexity of international tax.

The complexity issue is that if regular, uninformed people are given all the data, they will misinterpret it and hang effigies of the innocent.  This is an unconvincing argument that the OECD tried to imply with its consideration of the matter in 2011: “the issue of whether greater transparency could aid public debate on appropriate tax policy” would be “very difficult to assess” because the political discourse would involve “differing arguments, [that] can be used more or less responsibly.”  This is an argument that tax compliance is so subjective, no one could ever make sense of it definitively, so it's best not to argue it in public.  Only experts should do so, and then only in quiet rooms.

I was happy to see Sol Picciotto mentioned in the article, he's a terrific thinker and scholar on international tax:

During a discussion on tax dispute resolution Sol Picciotto, Emeritus Professor of Law at Lancaster University, interrupted James Bullock’s defence of modest meals shared at meetings with HMRC to say that the level of transparency being proposed was ‘quite clear – that taxpayers should declare what tax they pay in each country’.

Picciotto added: ‘As regards disputes, the terms of a settlement should be public. We’re not talking about sandwiches, we’re talking about the transparency of what tax people pay where. If a dispute goes to the tribunal, it’s public. If there’s a settlement, it should be public.’

Later, Judith Freedman, University of Oxford tax prof, said that publishing details of settlements ‘would not be that helpful’ to people: ‘What are they going to make of them? I want to have a properly instituted organisation which has independent experts who can scrutinise those settlements. That’s far better than leaving it to whoever happens to be able to pick up on this, the press …’

‘That’s democracy,’ a delegate shouted from the audience. Freedman continued: ‘I believe it’s the job of properly constituted organisations, rather than the press, to examine this because that would give us integrity and confidence in the system. These are very, very difficult things to understand.’

That statement is distressing on grounds of the expertise question alone.  Who decides what constitutes "a properly constituted organisation"?  Professor Freedman?  The Oxford Center for Business Taxation?

The article closes with a mention of a twitter feed associated with the conference, in which it was tweeted ‘It has to be admitted that few tax experts have oratory skills or passion comparable to [those of] tax campaigners and politicians.’


Perhaps, but it's a matter of backing and platforms, isn't it.

Murphy on country-by-country reporting

If you're following the corporate tax transparency movement, you'll have heard of Richard Murphy, who takes the credit for creating the concept of country-by-country reporting.  He has a post today on his blog in which he recreates a recent speech explaining the origins and developments of the movement:

When, almost ten years ago I wrote the first ever version of country-by-country reporting in response to one of the first ever questions John Christensen asked of me I thought the entire audience for the idea would amount to just two people – John and Prof Prem Sikka, who had just introduced us. How wrong I was! It seems a good idea has a life all of its own.

...Country-by-country reporting is, and was always intended to be, a full blown and completely new view of the trading of a multinational corporation, ideally required by an International Financial Reporting Standard, but failing that by international regulation. 

What that accounting standard would demand is a full consolidated profit and loss account for each and every jurisdiction in which a multinational company trades.

And when I say full I mean 'full', including sales, costs, an analysis of labour costs and head count and full tax notes – including  a deferred tax analysis.

And in some ways I mean more than full when it comes to this profit and loss account – because country-by-country reporting would also require disclosure of all intra-group sales and purchases, all intra-group hedging and derivative trading and the disclosure of all intra-group financing activity too.

Let's be clear about why country-by-country reporting does this. It's based on a series of solid assumptions. The first is that multinational corporations might act globally but they do not float above the global economy. Their actions are all ultimately geographically located. Country-by-country reporting recognises that. It makes globalisation accountable locally.

Second country-by-country reporting recognises that it is impossible to say that existing accounts for multinational corporations can possibly give a true and fair view of business when up to 60% of world trade – the part that takes place on intra-group basis – is totally lost to view in existing financial statements. It is ludicrous that we don't account for that trade in a globalised world.

More at the link.

Council of Europe: Stop Tax Havens with Corp Tax Transparency

From Europe, we see movement on corporate tax transparency in the form of a council resolution:

Strasbourg, 27.04.2012 – The Parliamentary Assembly of the Council of Europe (PACE) has demanded a series of steps to end what it calls “massive tax avoidance, evasion and fraud” caused by secrecy jurisdictions, tax havens and offshore financial centres. 

Adopting a resolution ... the parliamentarians said tackling global distortions due to harmful or predatory tax practices – including bank secrecy, lack of transparency and effective public oversight, regulatory dumping, predatory tax arrangements and abusive accounting techniques within multinational companies – was “a moral duty” because they drain public finances and cause serious harm to the public interest. 

The resolution calls for the following corporate tax disclosure items:

• country-by-country reporting by multinationals wherever they operate, across all business sectors
• a ban on anonymous accounts, off-balance-sheet bookkeeping and bearer shares
• disclosure of the ultimate beneficial ownership of all business entities, notably trusts and funds
• moving towards the automatic exchange of all tax information

With this kind of disclosure, that NYT story on Apple would not be so maddeningly imprecise.


h/t Richard Murphy, for whom this is "another campaign win"--quite so.  

Apple

It's not news that big multinationals face low, low effective tax rates, but I was very glad to see that this NYT report acknowledges that we are working in the dark really, in confirming just exactly how low those rates are.    This is because countries simply do not collect the data, and if they do, they don't require enough disclosure for any kind of accurate analysis.  From the article:

"Neither the government nor corporations make tax returns public, and a company’s taxable income often differs from the profits disclosed in annual reports. Companies report their cash outlays for income taxes in their annual Form 10-K, but it is impossible from those numbers to determine precisely how much, in total, corporations pay to governments. In Apple’s last annual disclosure, the company listed its worldwide taxes — which includes cash taxes paid as well as deferred taxes and other charges — at $8.3 billion, an effective tax rate of almost a quarter of profits. 

However, tax analysts and scholars said that figure most likely overstated how much the company would hand to governments because it included sums that might never be paid. “The information on 10-Ks is fiction for most companies,” said Kimberly Clausing, an economist at Reed College who specializes in multinational taxation. “But for tech companies it goes from fiction to farcical.”

Yes, it's pretty much speculation.  But it makes for good theater: NYT has put together an accusing graphic to provoke a sense of outrage:

Feel outraged?

More to come on the subject.