Tax Justice Network says the current regime for taxing multinationals is ‘not fit for purpose’
Increasing tax-raising capacity and expertise is the key to helping developing countries to collect the ‘right amount’ of tax from the multinationals, SABMiller’s CEO Graham Mackay told MPs this week. Country by country reporting of profits and taxes paid could provide an ‘enormous’ amount of detail, but given the complexity of international corporate taxes it would remain ‘extremely difficult’ to judge whether the right amount had been paid, he suggested.
The Commons International Development Committee (IDC) inquiry into taxation in developing countries, meeting on 24 April, also heard evidence from Tim Scott, Head of Tax at Glencore, and representatives of the Tax Justice Network and the Extractive Industries Transparency Initiative (EITI).
The Guardian reported after the meeting that the IDC was ‘likely to press’ the UK government into signing up to the EITI project, ‘forcing oil, gas and mining companies to report how much tax they pay to developing countries’. Several NGOs support EITI but argue that country by country reporting should apply to all multinationals.
Malcolm Bruce, Chairman of the IDC, noted that there was a ‘tension’ for developing countries between providing multinationals with the right incentives to invest and generating a ‘visible’ tax flow.
SABMiller’s brewery business operates in six continents. Graham Mackay told the IDC that as a multinational SABMiller was under intense scrutiny. ‘We pay a very large proportion of all the taxes collected in many of the countries where we operate, and it’s seen to be easy and profitable for the local tax inspectorate to focus on us,’ he said.
SABMiller’s tax affairs have also come under the scrutiny of tax justice campaigners. ActionAid has claimed that ‘every year the company transfers large sums out of Ghana into tax havens’, and that ‘tax dodging like this is standard practice for many multinationals and it’s perfectly legal’.
Addressing Mackay, Michael McCann MP said: ‘The direct allegation against companies like yours is that you manipulate your figures in order that you can minimise the amount of money that you pay tax on’.
He asked: ‘Has your company in any circumstances inflated figures, transaction costs or service costs within your company in order to avoid or minimise tax?’
‘Absolutely not,’ Mackay replied. ‘We operate within the OECD guidelines, which we believe are fair. The arm’s length pricing principle is a fundamental cornerstone of that … and in our particular industry what could be called transfer pricing – essentially, the cost of services across borders – is very, very small … so I absolutely deny that allegation.’
SABMiller did not make charges or set up company structures for the purpose of minimising tax, he added.
Martin Hearson, Tax Justice Campaign Manager at ActionAid, told Tax Journal today: ‘The cornerstone of our analysis is that SABMiller was able to work within the arm’s length principle to minimise its tax payments. Mr Mackay did not take the opportunity to address this point, nor did he address the concerns raised by tax officials in Africa in response to our report.’
A spokesperson for SABMiller said: ‘The charges made to SABMiller’s overseas subsidiaries represent the value for service received, calculated on an arm’s length basis and are not used to artificially reduce profit or tax paid.’
Bruce said the clear objective for developing countries would be to build a tax base ‘across the piste’. Christopher Lenon, Chairman of the Tax and Fiscal Affairs Committee of the Business and Industry Advisory Committee to the OECD (BIAC), told the meeting that governments were ‘always going to struggle’ unless they built sophisticated tax administrations. ‘That is why we believe that capacity development for tax administrations in developing countries is the absolute first priority,’ he said.
Richard Harrington MP noted that Glencore was liable to a revenue-based tax in Zambia at the rate of 6%. While a revenue-based tax might be simpler and more appropriate than profits-based taxes in some of the less developed economies, he wondered whether the 6% rate was ‘sustainable’. ‘It isn’t,’ said Emmanuel Mutati, Chairman of Mopani Copper Mines which is part owned by Glencore. ‘We feel it’s on the high side.’
Glencore’s Tim Scott added: ‘Even without paying profits taxes because of capital allowances and recouping past cost, we’re looking at an effective tax rate of above 50% [of profits].’ New investors would ‘factor that into their investment decisions’. He stressed that stability was ‘more important in some ways than the level of taxation’. Investors needed to be able to calculate post-tax returns with some certainty.
The witnesses were asked for their views on country by country reporting of financial information and automatic exchange of information beween tax authorities. On country by country reporting there were ‘pros and cons’, Scott said. ‘The pros are the transparency. The disadvantages would be in the cost to business of producing this information in a reliable and audited, I presume, format.
‘The second potential disadvantage is that it’s not clear to me that anyone with this information would be any the wiser on the level of taxation paid, or whether the right tax had been paid at all, because one has to look at financial reports in the context of tax law and tax returns. I’m not too sure that this is amazingly useful.’
Christopher Lenon
Michael McCann MP said: ‘Surely the information exists already, and these days we’re not working with slates.’ The electronic transfer of information would not be ‘such a huge burden’, he said. The idea was that ‘shining a light’ would ensure that campaigns such as those run by ActionAid would not be able to make the argument that companies were not paying their ‘proper taxes’.
Scott replied that there was an ongoing debate on many levels. ‘I don’t particularly disagree with you and we’re happy to work with partners in the NGOs and government to take that one forward.’
Mackay said: ‘To say that the information is there, as it is, is not quite true because we don’t produce statutory accounts country by country, all over the world. We run a more fragmented business than most mining companies and we have a lot of small businesses in a lot of countries. I wouldn’t say that cost per se is an insuperable barrier.
‘What I think is more relevant is the question of how enlightened one would be by looking at this. Tax affairs are extremely complicated on an individual country basis, and even more complicated on a group basis. To unravel the picture from the enormous minutiae of detail, and make a confident assertion on a global basis for a company like ours, would be extremely difficult.
‘It’s also a question of who you are doing this for,’ he said. ‘We are completely transparent in our tax affairs. We file tax returns for every government that is able to tax us. So the information is provided to governments. It’s provided to the users of the information. I’m not sure really what purpose would be served by using country by country accounts.
‘There’s also the point that there is little if any consensus on what those accounts should look like and how they should be presented – there’s no accounting standard for them. There doesn’t seem to be an emerging standard either. Our view is that you should say “what is the problem we’re trying to solve, and is there another way of solving the problem?” That comes back to the debate about tax capacity in local countries.’
Lenon said he had led the development of country by country reporting at Rio Tinto, which has declared its support for EITI principles. There was additional work involved because accounting systems were not set up for the additional disclosure, he said. Country by country reporting was useful in showing how much tax companies paid.
‘But it doesn’t actually tell you whether it’s the right amount of tax. It can provide data which allows you to question why it is that a small amount of tax has been paid. The fundamental issue is that international tax – particularly in terms of income taxation – is fundamentally very complicated. It’s really only companies and properly resourced tax administrations who are going to be able to work out whether the right amount of tax is paid.
‘Because tax depends on a series of fairly complicated calculations like capital allowances and so on, you’re not going to be able to say year by year “that is right, that is wrong” and so on. It’s going to give you a broad indication but it’s not going to tell you if the answer is right. The only way you’ll do that is in a thorough examination of all the data that is provided to tax authorities.’
Graham Mackay
John Christensen, Director of the Tax Justice Network, told the IDC later that the issue of the cost to companies was ‘very often overstated’. Figures put to the OECD Task Force on Tax and Development on the additional cost of accounting and related audit ‘were, frankly, very modest indeed’. If SAP accounting systems were modified to accommodate country by country reporting, he said, that would ‘significantly reduce’ the costs.
Jeremy Lefroy MP said he was ‘slightly mystified’ to hear that individual companies were not producing statutory accounts, because ‘presumably in every country there is a legal requirement to file certain accounts’.
‘If that is not the case, should we be saying “let’s get company law up to date”. The UK and South Africa provide excellent examples of company law,’ he said. ‘If SAP are not providing the kind of software which enables this kind of thing to be done I’m sure SAP could, if they were encouraged to do so. And we also have international accounting standards. Surely we should be encouraging all countries to be moving in this direction, as they are seeking to encourge outside investment – which in turn will be far more confident of investing in countries which adopt these kind of standards.’
Lenon said the OECD Task Force on Tax and Development had found that in ‘a large number of countries’ there was no requirement to file statutory accounts. ‘A prime example would be the US, where there is no need. If you require countries to introduce statutory accounts you clearly require that for all limited liability businesses. Now there is a cost to that, and what information are you going to get?’
Lefroy suggested that the UK should be encouraging other countries to introduce statutory reporting requirements for larger businesses.
The phrase ‘the right amount of tax’ had been used several times, Mackay noted. ‘We pay the right amount of tax. We pay exactly what we owe legally in every jurisdiction we operate in – that’s right. If you want to judge what is the morally right amount of tax or the right amount of tax for development or for the long term good of the country, you can’t get that from looking at one year’s accounts because they are far too complex and they don’t give you a pattern. You can’t form a view as to where all of the stuff came from or is going to.
‘Investment allowances are a very good case in point. The fact that you happen to have major investment allowances in a country which drives you into a tax loss position for a couple of years – is that bad? It happens here and in the whole world, and Africa should be allowed to do that too.’
Simply enforcing some level of global transparency would not work, he said. ‘We think raising the tax capacity and capability in a country is the way forward. This transparency drive to achieve a “right outcome”, we believe, is doomed.’
John Christensen told the IDC that there were clearly ‘some companies that wanted to abide by good practice on tax and some companies that do not’.
‘A mandatory approach, an international accounting standard adopted globally, is the appropriate approach to country by country reporting. Good practice needs to be encouraged and not undermined by making this a voluntary approach.’ The arm’s-length principle at the heart of the OECD guidelines on transfer pricing was deficient, he said. ‘Its application to intangibles is an increasing problem and in the long term we need to think about very different ways of taxing multinational companies.’
Bruce asked what kind of international standard could be applied to intangibles. Christensen replied: ‘In the long run we should be moving towards taxing companies on a unitary basis using a formulary apportionment basis for taxation, which is the general trend that the EU is trying to push through its own initiative.’
Asked about his impression of the extent of ‘aggressive tax planning’ by multinationals, he said that if the term was taken to mean putting into a process a transaction primarily driven by seeking a tax advantage, then ‘the vast majority of multinationals’ were engaged in aggressive tax planning.
‘They are using tax haven jurisdictions extensively, primarily for that purpose. My experience is that this is the norm, rather than the exception. The issue is a systemic issue. While case studies are fascinating and always help to spice up stories, we need to recognise that the current global system is not fit for purpose.’
Scott said information automatically exchanged beween tax authorities would be information that taxpayers had submitted to individual tax authorities. Automatic exchange was a good idea, he said. SABMiller would have ‘no problem at all’ with automatic exchange of information, Mackay said, as long as taxpayer confidentiality in relation to the outside world was respected. Improved information exchange was ‘a crucial part of deepening transparency’, Christensen said.
Tax Justice Network says the current regime for taxing multinationals is ‘not fit for purpose’
Increasing tax-raising capacity and expertise is the key to helping developing countries to collect the ‘right amount’ of tax from the multinationals, SABMiller’s CEO Graham Mackay told MPs this week. Country by country reporting of profits and taxes paid could provide an ‘enormous’ amount of detail, but given the complexity of international corporate taxes it would remain ‘extremely difficult’ to judge whether the right amount had been paid, he suggested.
The Commons International Development Committee (IDC) inquiry into taxation in developing countries, meeting on 24 April, also heard evidence from Tim Scott, Head of Tax at Glencore, and representatives of the Tax Justice Network and the Extractive Industries Transparency Initiative (EITI).
The Guardian reported after the meeting that the IDC was ‘likely to press’ the UK government into signing up to the EITI project, ‘forcing oil, gas and mining companies to report how much tax they pay to developing countries’. Several NGOs support EITI but argue that country by country reporting should apply to all multinationals.
Malcolm Bruce, Chairman of the IDC, noted that there was a ‘tension’ for developing countries between providing multinationals with the right incentives to invest and generating a ‘visible’ tax flow.
SABMiller’s brewery business operates in six continents. Graham Mackay told the IDC that as a multinational SABMiller was under intense scrutiny. ‘We pay a very large proportion of all the taxes collected in many of the countries where we operate, and it’s seen to be easy and profitable for the local tax inspectorate to focus on us,’ he said.
SABMiller’s tax affairs have also come under the scrutiny of tax justice campaigners. ActionAid has claimed that ‘every year the company transfers large sums out of Ghana into tax havens’, and that ‘tax dodging like this is standard practice for many multinationals and it’s perfectly legal’.
Addressing Mackay, Michael McCann MP said: ‘The direct allegation against companies like yours is that you manipulate your figures in order that you can minimise the amount of money that you pay tax on’.
He asked: ‘Has your company in any circumstances inflated figures, transaction costs or service costs within your company in order to avoid or minimise tax?’
‘Absolutely not,’ Mackay replied. ‘We operate within the OECD guidelines, which we believe are fair. The arm’s length pricing principle is a fundamental cornerstone of that … and in our particular industry what could be called transfer pricing – essentially, the cost of services across borders – is very, very small … so I absolutely deny that allegation.’
SABMiller did not make charges or set up company structures for the purpose of minimising tax, he added.
Martin Hearson, Tax Justice Campaign Manager at ActionAid, told Tax Journal today: ‘The cornerstone of our analysis is that SABMiller was able to work within the arm’s length principle to minimise its tax payments. Mr Mackay did not take the opportunity to address this point, nor did he address the concerns raised by tax officials in Africa in response to our report.’
A spokesperson for SABMiller said: ‘The charges made to SABMiller’s overseas subsidiaries represent the value for service received, calculated on an arm’s length basis and are not used to artificially reduce profit or tax paid.’
Bruce said the clear objective for developing countries would be to build a tax base ‘across the piste’. Christopher Lenon, Chairman of the Tax and Fiscal Affairs Committee of the Business and Industry Advisory Committee to the OECD (BIAC), told the meeting that governments were ‘always going to struggle’ unless they built sophisticated tax administrations. ‘That is why we believe that capacity development for tax administrations in developing countries is the absolute first priority,’ he said.
Richard Harrington MP noted that Glencore was liable to a revenue-based tax in Zambia at the rate of 6%. While a revenue-based tax might be simpler and more appropriate than profits-based taxes in some of the less developed economies, he wondered whether the 6% rate was ‘sustainable’. ‘It isn’t,’ said Emmanuel Mutati, Chairman of Mopani Copper Mines which is part owned by Glencore. ‘We feel it’s on the high side.’
Glencore’s Tim Scott added: ‘Even without paying profits taxes because of capital allowances and recouping past cost, we’re looking at an effective tax rate of above 50% [of profits].’ New investors would ‘factor that into their investment decisions’. He stressed that stability was ‘more important in some ways than the level of taxation’. Investors needed to be able to calculate post-tax returns with some certainty.
The witnesses were asked for their views on country by country reporting of financial information and automatic exchange of information beween tax authorities. On country by country reporting there were ‘pros and cons’, Scott said. ‘The pros are the transparency. The disadvantages would be in the cost to business of producing this information in a reliable and audited, I presume, format.
‘The second potential disadvantage is that it’s not clear to me that anyone with this information would be any the wiser on the level of taxation paid, or whether the right tax had been paid at all, because one has to look at financial reports in the context of tax law and tax returns. I’m not too sure that this is amazingly useful.’
Christopher Lenon
Michael McCann MP said: ‘Surely the information exists already, and these days we’re not working with slates.’ The electronic transfer of information would not be ‘such a huge burden’, he said. The idea was that ‘shining a light’ would ensure that campaigns such as those run by ActionAid would not be able to make the argument that companies were not paying their ‘proper taxes’.
Scott replied that there was an ongoing debate on many levels. ‘I don’t particularly disagree with you and we’re happy to work with partners in the NGOs and government to take that one forward.’
Mackay said: ‘To say that the information is there, as it is, is not quite true because we don’t produce statutory accounts country by country, all over the world. We run a more fragmented business than most mining companies and we have a lot of small businesses in a lot of countries. I wouldn’t say that cost per se is an insuperable barrier.
‘What I think is more relevant is the question of how enlightened one would be by looking at this. Tax affairs are extremely complicated on an individual country basis, and even more complicated on a group basis. To unravel the picture from the enormous minutiae of detail, and make a confident assertion on a global basis for a company like ours, would be extremely difficult.
‘It’s also a question of who you are doing this for,’ he said. ‘We are completely transparent in our tax affairs. We file tax returns for every government that is able to tax us. So the information is provided to governments. It’s provided to the users of the information. I’m not sure really what purpose would be served by using country by country accounts.
‘There’s also the point that there is little if any consensus on what those accounts should look like and how they should be presented – there’s no accounting standard for them. There doesn’t seem to be an emerging standard either. Our view is that you should say “what is the problem we’re trying to solve, and is there another way of solving the problem?” That comes back to the debate about tax capacity in local countries.’
Lenon said he had led the development of country by country reporting at Rio Tinto, which has declared its support for EITI principles. There was additional work involved because accounting systems were not set up for the additional disclosure, he said. Country by country reporting was useful in showing how much tax companies paid.
‘But it doesn’t actually tell you whether it’s the right amount of tax. It can provide data which allows you to question why it is that a small amount of tax has been paid. The fundamental issue is that international tax – particularly in terms of income taxation – is fundamentally very complicated. It’s really only companies and properly resourced tax administrations who are going to be able to work out whether the right amount of tax is paid.
‘Because tax depends on a series of fairly complicated calculations like capital allowances and so on, you’re not going to be able to say year by year “that is right, that is wrong” and so on. It’s going to give you a broad indication but it’s not going to tell you if the answer is right. The only way you’ll do that is in a thorough examination of all the data that is provided to tax authorities.’
Graham Mackay
John Christensen, Director of the Tax Justice Network, told the IDC later that the issue of the cost to companies was ‘very often overstated’. Figures put to the OECD Task Force on Tax and Development on the additional cost of accounting and related audit ‘were, frankly, very modest indeed’. If SAP accounting systems were modified to accommodate country by country reporting, he said, that would ‘significantly reduce’ the costs.
Jeremy Lefroy MP said he was ‘slightly mystified’ to hear that individual companies were not producing statutory accounts, because ‘presumably in every country there is a legal requirement to file certain accounts’.
‘If that is not the case, should we be saying “let’s get company law up to date”. The UK and South Africa provide excellent examples of company law,’ he said. ‘If SAP are not providing the kind of software which enables this kind of thing to be done I’m sure SAP could, if they were encouraged to do so. And we also have international accounting standards. Surely we should be encouraging all countries to be moving in this direction, as they are seeking to encourge outside investment – which in turn will be far more confident of investing in countries which adopt these kind of standards.’
Lenon said the OECD Task Force on Tax and Development had found that in ‘a large number of countries’ there was no requirement to file statutory accounts. ‘A prime example would be the US, where there is no need. If you require countries to introduce statutory accounts you clearly require that for all limited liability businesses. Now there is a cost to that, and what information are you going to get?’
Lefroy suggested that the UK should be encouraging other countries to introduce statutory reporting requirements for larger businesses.
The phrase ‘the right amount of tax’ had been used several times, Mackay noted. ‘We pay the right amount of tax. We pay exactly what we owe legally in every jurisdiction we operate in – that’s right. If you want to judge what is the morally right amount of tax or the right amount of tax for development or for the long term good of the country, you can’t get that from looking at one year’s accounts because they are far too complex and they don’t give you a pattern. You can’t form a view as to where all of the stuff came from or is going to.
‘Investment allowances are a very good case in point. The fact that you happen to have major investment allowances in a country which drives you into a tax loss position for a couple of years – is that bad? It happens here and in the whole world, and Africa should be allowed to do that too.’
Simply enforcing some level of global transparency would not work, he said. ‘We think raising the tax capacity and capability in a country is the way forward. This transparency drive to achieve a “right outcome”, we believe, is doomed.’
John Christensen told the IDC that there were clearly ‘some companies that wanted to abide by good practice on tax and some companies that do not’.
‘A mandatory approach, an international accounting standard adopted globally, is the appropriate approach to country by country reporting. Good practice needs to be encouraged and not undermined by making this a voluntary approach.’ The arm’s-length principle at the heart of the OECD guidelines on transfer pricing was deficient, he said. ‘Its application to intangibles is an increasing problem and in the long term we need to think about very different ways of taxing multinational companies.’
Bruce asked what kind of international standard could be applied to intangibles. Christensen replied: ‘In the long run we should be moving towards taxing companies on a unitary basis using a formulary apportionment basis for taxation, which is the general trend that the EU is trying to push through its own initiative.’
Asked about his impression of the extent of ‘aggressive tax planning’ by multinationals, he said that if the term was taken to mean putting into a process a transaction primarily driven by seeking a tax advantage, then ‘the vast majority of multinationals’ were engaged in aggressive tax planning.
‘They are using tax haven jurisdictions extensively, primarily for that purpose. My experience is that this is the norm, rather than the exception. The issue is a systemic issue. While case studies are fascinating and always help to spice up stories, we need to recognise that the current global system is not fit for purpose.’
Scott said information automatically exchanged beween tax authorities would be information that taxpayers had submitted to individual tax authorities. Automatic exchange was a good idea, he said. SABMiller would have ‘no problem at all’ with automatic exchange of information, Mackay said, as long as taxpayer confidentiality in relation to the outside world was respected. Improved information exchange was ‘a crucial part of deepening transparency’, Christensen said.
