Tartan laundry bag

What does CBCR information exchange have in common with a tartan laundry bag?

Action 13 of Action Plan on Base Erosion and Profit Shifting (BEPS), calls for multinational groups with revenues over 750 million Euros, to produce a ‘country by country report’ (CBCR) detailing their profits earned and taxes paid, in each country of operation. The aims is for revenue authorities to use this information as a risk assessment tool to direct their audit attention. As Pascal St Amans, at the OECD put it

“tax administrations will be able to identify very clearly, in a single document, whether or not they “smell a rat,” such as where, for example, you have all your profits in a zero tax jurisdiction where you have no sales, no employees and no assets”

To date 102 countries and jurisdictions have joined the BEPS Inclusive Framework, and are at various stages of establishing domestic legal frameworks, as well as bilateral agreements to automatically exchange the reports with other revenue authorities. Ultimately this means that some 10,000 bilateral relationships will need to be established. But not all of these linkages are equally important – the critical information flows will be between countries where multinational groups are headquartered and those where their subsidiaries are.

So who is exchanging with whom?

Continue reading ‘Country by Country Reports: Who is Exchanging with Whom?’

Reprinted with permission from Tax Journal. (PDF version) 

800X800_Vanish_TwitterReckitt Benckiser (RB), maker of household products from condoms to stain removers, is the latest company to come under fire for tax avoidance. Oxfam published a report on 13 July, saying the company has been ‘making tax vanish’ by shifting profits to its regional hubs in the Netherlands and Dubai. The company refutes this, saying that its group structure is designed to serve its worldwide markets most effectively. RB highlights that in 2016 the group’s overall effective tax rate was 23%, putting it in the middle of the pack amongst its peers. Furthermore, it has published tax principles which commit the company to ‘paying tax where value is created’.

If we are to move beyond this familiar cycle of criticism and rebuttal towards clearer debate, we need to take both sides of the argument seriously. Continue reading ‘Reckitt Benckiser: Profits vanishing?’

In the Guardian yesterday  said that Africa loses more than three times the amount it gets in aid “mainly by multinational companies deliberately misreporting the value of their imports or exports to reduce tax”.

This statement is not true, but it is a reasonable summary of what a report called ‘Honest Accounts‘, which was published last month, says.

Under the heading ‘Corporations stealing wealth’ it states that $68 billion was stolen from Africa in illicit financial flows, and that multinational companies are stealing $48.2 billion alone through ‘trade misinvoicing’ (the figure they give for aid is $19.1; which excludes concessional loans). They then bundle these figures together with other flows in and out (loans, FDI, profits etc…)  to come up with this total.

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I don’t always write about every exaggerated or misunderstood figure on multinational tax avoidance that I see. It gets a bit repetitive. I didn’t write about the Honest Accounts report , but I did send a note (see below) to its authors Mark Curtis  and Tim Jones at Jubilee Debt Campaign and to Nick Dearden at Global Justice Now  to let them know that they had misunderstood and therefore misrepresented the estimates of illicit financial flows it used.

But none of them responded.

The problem is that it is not just Mark, Tim and Nick who should understand why their interpretation was misleading . As with the yesterday’s Guardian article, the misunderstandings get picked up and repeated.  And now I feel bad because I should have explained the issues more publicly and clearly at the time,  and not allowed the great big arrows to be left lying around, for others to trip over. So at the risk of being repetitive, here is  the problem with ‘Honest Accounts’ interpretation of illicit financial flows:

  • There are big problems with the methodology behind the illicit financial flows estimates. They are mainly based on gaps and mismatches in trade data, which can often be generated by ordinary trade patterns through hubs such as Singapore and Amsterdam.
  • The same methodology also generates even larger apparent illicit inflows (which Honest Accounts ignores). This encourages the idea that there must be unfeasibly large hidden margins in natural resources and that multinationals are systematically stealing from developing countries.
  • Global Financial Integrity (GFI) the organisation that developed the illicit flows estimes themselves do not say that they represent stolen money.
  • Nor do they say that that they can identify trade between related entities (i.e. within multinational corporations).
  • It is not accurate to say that ‘misinvoicing’ is the same as ‘mispricing’, as often what the data is picking up are large apparent differences in the quantity of goods reported between pairs of countries. This (if it reflects actual smuggling rather than ordinary trade would not be manipulation of transfer prices, but outright customs fraud.

Negotiating natural resource contracts, developing  fiscal regimes and ensuring that taxes are collected fairly are real challenges for resource-rich developing countries. This is made more difficult by the repetition of misunderstandings .  Such rhetoric makes it harder for the public to judge whether deals balance risk and revenue for all parties,  and can undermine trust in the important work of revenue authorities and minerals monitoring agencies.  The current dispute in Tanzania illustrates why this matters.



Email notes

May 23

Dear Nick, Mark, Tim,

I am disappointed to see the ‘Honest Accounts‘ report resurrected without any improvement to the original analysis, to get beyond the ‘big numbers’ to the underlying issues.
As I wrote to Natalie Sharples at the time of the first report, adding together and netting all these flows off together is fairly meaningless, and the illicit flows estimates are misunderstood and misrepresented.
e.g. P2 $68 billion is taken out in capital flight, mainly by multinational companies deliberately misreporting the value of their imports or exports to reduce tax
– this is a misunderstanding of GFI’s study of trade misinvoicing (which they don’t attribute to multinational companies… http://www.gfintegrity.org/issue/trade-misinvoicing/)
P 4 “The $68 billion stolen from Africa in illicit financial flows amounts to around 6.1% of the continent’s entire GDP. Multinational companies are stealing $48.2 billion alone through ‘trade misinvoicing’, according to figures produced by Global Financial Integrity. Previous research by the UN Economic Commission for Africa found similar figures – that multinational companies stole around $40 billion a year from African countries through trade misinvoicing in the decade up to 2010.
Estimates of illicit financial flows are not accurately described as ‘stolen’ (from who?). In fact GFI estimate $69bn of illicit outflows from Africa and $81 billion of illicit financial inflows (which you would not describe as ‘stolen’ from richer countries).
P9. “$67.6 billion Net resource transfers (balance of outflows and inflows) from sub-Saharan Africa, mainly in the form of trade misinvoicing  by multinational companies,
This is a mistake. As mentioned above GFI do not net illicit inflows and outflows, but if they did the result would be $12bn of illicit inflows to Africa http://www.gfintegrity.org/press-release/new-study-illicit-financial-flows-in-developing-countries-large-and-persistent/

P10 : Endnote 2  & 15 “This is a practice known as trade misinvoicing (sometimes also called trade mispricing”) –

This is a misunderstanding trade misinvoicing is a much broader category than trade mispricing (i.e it is like saying ‘fruit, sometimes also called apple’). The illicit flows estimates include discrepancies of quantity & destination which appear to be larger than price differentials (see http://www.cgdev.org/blog/gaps-trade-data-criminal-money-laundering)

Some of the issues that the report raises such as illegal logging, fishing and the cost of adapting to climate change are significant, but adding together all apparent inflows and outflows is meaningless. The money in/money out lens looks at economies as static buckets into which resources pour in, and leak out, rather than as dynamic systems in which people learn, invest, adopt technology, manage institutions etc…. (which may be related to the ‘leaks’ but not necessarily).


May 25


From your Aljazeera article:
“Some of this is direct, such as $68bn in mainly dodged taxes. Essentially multinational corporations “steal” much of this – legally – by pretending they are really generating their wealth in tax havens “
This is a misunderstanding on multiple levels – GFI’s estimate is not “mainly dodged taxes” – it is a gross figure. Nor is it legal tax avoidance by multinationals. The activities it seeks to measure are customs fraud, misdeclaration and pure smuggling these activities would be illegal, not legal.

Yesterday the Guardian reported that Labour plans clampdown on ‘sweetheart deals’ to close £36bn tax gap

“Shadow chancellor John McDonnell said if Labour wins the next general election it would “close the loopholes through which large corporations swindle the public”. He said the “tax gap” between what companies should be paying and what is actually received by the exchequer amounts to some £36bn.”

Sounds credible, right?  Big companies. Big issue… £36 billion is a fairly big number (around a third of the NHS budget). No one wants to be swindled by loophole jumping tax dodgers making sweetheart deals.

But hold up. Corporation tax raises around £44 billion in the UK (some 7% of overall government revenues). Is John McDonnell really saying companies are dodging almost half of what they should be paying?

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[Chart adapted from IFS, also see national statistics]

Well no. Describing £36bn as “the difference between what companies should be paying and what is actually received” is the Guardian’s mistake.

If you look at the original press release the £36 billion figure does appear but the wording is somewhat more careful: “The “tax gap” between the tax is collected and the tax expected is estimated by HMRC to stand at £36bn.”

This is true. £36 billion is HMRC’s ‘tax gap’ estimate. But just like corporation tax only makes up a small proportion of overall UK tax revenues, corporate tax avoidance only makes up a small proportion of the enforcement gap. Around £3.7 billion relates to corporation tax, suggesting that companies overall are paying 8% less than they should.

It can be argued that this official tax gap estimate does not include the forms of corporate tax avoidance that McDonnell’s policy is concerned with. As HMRC explains it “does not include international tax arrangements that cannot be challenged under the UK law, including some forms of base erosion and profit shifting (BEPS).” But then why does McDonnell attach this particular number to his policy proposals at all?

Is it a good idea to make big companies publish their tax returns in the name of the disinfectant of sunlight? I don’t think so. (Even some members of the tax justice movement who are much more bullish on public tax disclosure think its a bad idea).

If a newspaper can make such a mess of understanding one basic number, just imagine the mess they could make of thousands of pages of tax returns.

Describing arrangements that cannot be challenged by UK law as swindling, loopholes, scams and a chronic lack of enforcement is Kafkaesque. If we don’t think the current laws give good outcomes we should change the law, not conflate compliance with fraud, or attach big random numbers to it.

The potential damage is not just to the reputation of big corporations, who may not demand much sympathy, but to confidence and trust in the tax system and to the quality of public understanding and debate about public policy.

[With thanks to Dan Neidle and Iain Campbell ]

This article appeared in Tax Analysts  (Pdf to download)

Screen Shot 2017-04-13 at 19.00.01Starting this year, large multinational companies will file their first country-by-country (CbC) reports with information on sales, profits, number of employees, and taxes paid for their entities in each jurisdiction where they operate. Businesses are also increasingly recognizing that tax is a reputational issue and are publishing tax policy commitments . These include promises to pay tax where value is created, ensure their structure is aligned with commercial functions, and refrain from creating contrived or artificial transactions.

However, criticisms and exposés of alleged tax avoidance continue to make headlines. Many civil society organizations, including Eurodad, Transparency International (EU), Action Aid, Christian Aid, Oxfam, the Tax Justice Network, and the Financial Transparency Coalition, as well as some politicians and the European Commission argue that the solution is for companies to publish CbC information publicly, so that citizens can see for themselves what tax multinationals pay. They hope that putting these numbers in the public domain will lead to more informed debate and enhance democratic accountability, ultimately improving effectiveness and trust in the tax system. The commission argues that public CbC reporting would deter companies from ‘‘engaging in tax planning strategies that are not in line with their corporate responsibilities and which consumers, investors and broader civil society find unacceptable.’’ On the other hand, some tax professionals fear that public CbC reporting would lead to a cacophony of accusations, misunderstandings, and rebuttals — fueling further public mistrust. They argue that revenue authorities determine tax bills using voluminous rules and detailed tax returns submitted confidentially. They contend that a few headline indicators are inadequate to allow members of the public to second-guess the basis of these calculations.

This is not a debate that must remain purely hypothetical. Continue reading ‘The Zara Report: What can we learn about public country by country reporting?’

(This article is republished with permission from Tax Journal – download it as a pdf)

Starting this year large companies operating in the UK are required to publish an annual statement explaining their tax strategy. The new rules apply to UK companies, partnerships and groups with a turnover above £200m or a balance sheet over £2bn. It will also apply to the UK operations of multinationals, where the group is large enough to be covered by the OECD country by country reporting rules (i.e. has a global turnover of more than €750m). Companies will not be required to publish evidence that the strategy is being applied; however, if their returns appear to be inconsistent with what they say in their strategy, this will raise a red flag for HMRC when it reviews risk.

Many of the biggest UK companies already publish something on their approach to tax, as part of their annual report, corporate responsibility or sustainability report, or in a free-standing statement. Nearly two thirds of the FTSE 100 publish something. Declarations range from haikus to epics.

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How useful are tax strategy statements?

Marks & Spencer take a boiled down approach at half a page: ‘We take our responsibility to pay our fair share of tax seriously and our approach is in keeping with our long standing values and aligned to our shareholders’ interests.’ Others offer a bit more detail. A few companies, such as Anglo American, SABMiller (now part ofAnheuser-Busch InBev), Unilever and Vodafone, produce epics. Continue reading ‘Publishing Corporate Tax Strategies’

Last week I was at a conference held by Tax Justice Norway, Chr Michelson Institute (CMI) and the Norwegian School of Economics (NHH) in Bergen. The conference was called “Lifting the Veil of Secrecy: Tax Havens, Capital Flows and Developing Countries”. It included academics, legal practitioners and campaigners, and covered a wide ground ranging from illicit financial flows and tax evasion to corporate lobbying on tax issues, to implementation of BEPs, to whether a broader shake up to the balance between ‘source vs residence’ in international taxation is needed.

screen-shot-2016-11-28-at-12-37-09I am grateful to the organisers for inviting me and asking me to give a brief presentation on myths and truths about the scale of resources at stake from multinational taxation in developing countries (here is the short version, and here is a  longer version I presented at CMI the following day). I also wrote a briefing for CMI on illicit flows (‘are we looking under the wrong lamppost?’)

There were many insightful and thought provoking presentations. Thomas Tørsløv presented his elegant paper investigating whether lower income countries are more exposed to multinational tax avoidance than more developed countries. Brooke Harrington gave an intriguing talk about her time as a trainee wealth manager (and I am off to buy the book). Len Seabroke and Duncan Wigan from Copenhagen Business School talked about their must-read study of the tactics of the Tax Justice Network (Beserking, cornering, narrating and templating) and PhD student Rasmus Christensen (otherwise known as @fairskat) presented his study of the movers and shakers in the tax professionals corner (‘Octopuses’ and ‘Arrows’). (and many more – You can download  all the presentations  here as a zip file). Continue reading ‘Tax dialogues: getting beyond ‘too hot’ and ‘too cold’’