The last twenty years have been tumultuous for the understanding of taxation in the accounts of multinational companies. The investor in this sector has gone around the roller coaster if he has sought to interpret the tax owed by the companies in which he held the shares, explains Richard Murphy, Director, Corporate Accountability Network; Professor of Accounting, Sheffield University Management School; Director, Tax Research LLP; Co-Founder, The Green New Deal; Columnist, The National newspaper.
The two decades can be divided into three periods. The first was until 2012. Indeed, this era was free for all for companies. They were in charge of lobbying. Tax rates have fallen rapidly all over the world. Tax base concessions, which shifted quite strongly to territorial taxation, helped those seeking to evade taxes. The tax profession was more than willing to contribute to this goal. Tax evasion was considered meritorious by both tax professionals and their clients.
Although not immediately apparent, the global financial crisis has been a game-changer in international tax matters. Politicians around the world wanted someone to blame for this crisis, and tax justice advocates have given them the answer in the form of tax havens. From Nicolas Sarkozy to Barack Obama, they took the opportunity to point the finger at tax havens.
If a business is unwilling to put its tax transactions face up on the table, walk away.
Dame Margaret Hodge MP for banking ended this era by making Google, Amazon and Starbucks nervous giving evidence to her committee in the UK House of Commons in 2012. Most Tax directors had a reaction: absolutely no one wanted to sit in the chairs, where these companies had been headquartered.
The mood has changed. The G8 challenged the OECD to tackle corporate tax abuse through tax havens and overt transfer pricing. Efforts by OECD companies to avoid restrictions being imposed on them before 2105 have been significant, but civil society has won.
The accounting system I created, called country-by-country reporting (CBCR), received the approval of the OECD and is now law in ninety countries. The objective was simple: to identify companies which redistributed their profits towards tax havens. Business suddenly faded into the background, and there was only one literal trump card to come. With Republicans ruled in the United States, further tax reform was not on the agenda.
President Biden changed that. He gave the green light to a new global tax deal. It could not be otherwise. It looks like the deal will take place. However, this is deeply wrong. The minimum tax rate of 15% is too low. Failure leaves gaping holes for tax planners to use. And developing countries have every reason to be irritated because the deal is against them and it took a lot of effort to get them to sign. This is a space locking device.
So what does a seasoned investor need to know about taxation now?
First, it is highly unlikely that the investigation into the CBCR’s abuses has gone that far. There are likely to be big surprises ahead, so investors should look for companies that are confident enough about their tax regulations to disclose them and avoid those trying to hide them.
Second, the number of disgruntled countries means that a new round of global negotiations is inevitable. A better deal will be made in the years to come.
Third, the move towards a public CBCR in the EU and beyond will inevitably bring it. I suspect there is much more tax data on the horizon. Smart companies are now adapting.
Fourth, the combination of Covid and the climate crisis makes it difficult for investors to generate sustainable returns. In this case, the fiscal uncertainty will have a significant impact on the valuation of the company.
This means that this journey is not over yet. So what is the investor looking for now?
First, they should strive for full tax disclosure. This indicates three things: good governance, confidence in the company’s fiscal position and a willingness to assume its responsibilities. All point to a controlled risk.
Second, the business must be prepared to explain its tax rate using data. This will require country-by-country disclosures. Few points for greater awareness of a tax trend than voluntary disclosures in this area: early adopters should be rewarded.
And third, since tax can now be hidden in many parts of the accounts, it’s high time to include a full tax reconciliation across all accounts to prove what tax was paid (and ideally where). No one should be left in the dark on this issue, as it happens too often now, as my research shows.
In this case, my idea is simple. If the company doesn’t want to put its tax obligations on the table, walk away. Taxes pose a greater risk to businesses than ever before. Only transparency can mitigate this for the investor.
I hope the wise will invest where the tax facts are known. However, I am aware that it is currently quite difficult to get the correct data. The Corporate Accountability Network, which I lead, is aware of this and is currently studying what an accounting standard for tax disclosure should look like. Our intention is to post a draft for discussion. We would appreciate comments and support from those interested in this matter. The last twenty years have been tumultuous for the understanding of taxation in the accounts of multinational companies. The investor in this sector has gone around the roller coaster if he has sought to interpret the tax owed by the companies in which he held the shares, explains Richard Murphy, Director, Corporate Accountability Network; Professor of Accounting, Sheffield University Management School; Director, Tax Research LLP; Co-Founder, The Green New Deal; Columnist, The National newspaper.
The two decades can be divided into three periods. The first was until 2012. Indeed, this era was free for all for companies. They were in charge of lobbying. Tax rates have fallen rapidly all over the world. Tax base concessions, which shifted quite strongly to territorial taxation, helped those seeking to evade taxes. The tax profession was more than willing to contribute to this goal. Tax evasion was considered meritorious by both tax professionals and their clients.
Although not immediately apparent, the global financial crisis has been a game-changer in international tax matters. Politicians around the world wanted someone to blame for this crisis, and tax justice advocates have given them the answer in the form of tax havens. From Nicolas Sarkozy to Barack Obama, they took the opportunity to point the finger at tax havens.
If a business is unwilling to put its tax transactions face up on the table, walk away.
Dame Margaret Hodge MP for banking ended this era by making Google, Amazon and Starbucks nervous giving evidence to her committee in the UK House of Commons in 2012. Most Tax directors had a reaction: absolutely no one wanted to sit in the chairs, where these companies had been headquartered.
The mood has changed. The G8 challenged the OECD to tackle corporate tax abuse through tax havens and overt transfer pricing. Efforts by OECD companies to avoid restrictions being imposed on them before 2105 have been significant, but civil society has won.
The accounting system I created, called country-by-country reporting (CBCR), received the approval of the OECD and is now law in ninety countries. The objective was simple: to identify companies which redistributed their profits towards tax havens. Business suddenly faded into the background, and there was only one literal trump card to come. With Republicans ruled in the United States, further tax reform was not on the agenda.
President Biden changed that. He gave the green light to a new global tax deal. It could not be otherwise. It looks like the deal will take place. However, this is deeply wrong. The minimum tax rate of 15% is too low. Failure leaves gaping holes for tax planners to use. And developing countries have every reason to be irritated because the deal is against them and it took a lot of effort to get them to sign. This is a space locking device.
So what does a seasoned investor need to know about taxation now?
First, it is highly unlikely that the investigation into the CBCR’s abuses has gone that far. There are likely to be big surprises ahead, so investors should look for companies that are confident enough about their tax regulations to disclose them and avoid those trying to hide them.
Second, the number of disgruntled countries means that a new round of global negotiations is inevitable. A better deal will be made in the years to come.
Third, the move towards a public CBCR in the EU and beyond will inevitably bring it. I suspect there is much more tax data on the horizon. Smart companies are now adapting.
Fourth, the combination of Covid and the climate crisis makes it difficult for investors to generate sustainable returns. In this case, the fiscal uncertainty will have a significant impact on the valuation of the company.
This means that this journey is not over yet. So what is the investor looking for now?
First, they should strive for full tax disclosure. This indicates three things: good governance, confidence in the company’s fiscal position and a willingness to assume its responsibilities. All point to a controlled risk.
Second, the business must be prepared to explain its tax rate using data. This will require country-by-country disclosures. Few points for greater awareness of a tax trend than voluntary disclosures in this area: early adopters should be rewarded.
And third, since tax can now be hidden in many parts of the accounts, it’s high time to include a full tax reconciliation across all accounts to prove what tax was paid (and ideally where). No one should be left in the dark on this issue, as it happens too often now, as my research shows.
In this case, my idea is simple. If the company doesn’t want to put its tax obligations on the table, walk away. Taxes pose a greater risk to businesses than ever before. Only transparency can mitigate this for the investor.
I hope the wise will invest where the tax facts are known. However, I am aware that it is currently quite difficult to get the correct data. The Corporate Accountability Network, which I lead, is aware of this and is currently studying what an accounting standard for tax disclosure should look like. Our intention is to post a draft for discussion. We would appreciate comments and support from those interested in this matter.