The Twitter age is about to chalk up its first success in the grey world of corporate accounting. It has been reported
that the European Union will seek to make large companies disclose the
taxes they pay and profits they make on a country-by-country basis.
This is part of the crackdown on corporations avoiding their
obligations. The concerns are driven by tax avoidance, as companies have
sales, employees and assets in one place, but end up booking them in
jurisdictions with comparatively few employees, sales and assets. The
idea behind country by country (CbC) reporting is to enable citizens to
scrutinise corporate practices and ask critical questions.
The EU proposals mark the beginning, but CbC is a much broader idea.
It supplements the traditional model of publishing profit and loss
account, balance sheet and a cash flow statement. These statements
relate to the company as a single economic entity and do not provide any
disaggregated information. So these statements do not reveal the taxes a
company may have paid in each country, or the profits and losses made
The traditional approach in accounting circles has been to require companies to publish “segmental reports”,
in which company directors offer a commentary on major operating
segments, products and services, the geographical areas in which they
operate and their major customers. Such reports are too general and do
not focus on each country.
In contrast, CbC requires companies to publish a table showing sales,
costs, profits, losses, taxes, loans, subsidies and employees for each
country of its operations. It could even be used to demand information
about carbon emissions and other corporate footprints in each country.
Such a table would show that a location has relatively few employees but
is reporting very high profits, or that a country has a high proportion
of a company’s sales and employees, but pays little or no tax. Armed
with this information, citizens may be able to construct shadow accounts
and question conventional accounts offered by corporations – the ones
that say, “we are good citizens, we pay taxes and really care for the
CbC is the culmination of a decade-long campaign by civil society
organisations. When fully enacted, it will be the first accounting
standard formulated and developed by civil society rather than the
traditional accounting standard setters. It represents the first time
activists have demanded and secured an accounting standard that the
establishment was not keen on in the social media age.
In 2003, in my capacity as director of the Association for Accountancy and Business Affairs (AABA),
I encouraged Richard Murphy, a chartered accountant, to draft a
proposal that could highlight flight of capital, profits and the
mismatch between profits, employees, assets and tax.
The first draft was published in 2003 and has continued to be refined.
Initially, meetings were sought with the more traditional accounting
standard setters, such as the International Accounting Standards Board
(IASB) and the Financial Reporting Council (FRC), but they showed no
There was considerable opposition from the professional accountancy
bodies. For example, the Institute of Chartered Accountants in England
and Wales was vehemently opposed to it. Major accounting firms and corporations were also opposed to CbC.
For example, Deloitte
said “we do not believe that imposing incremental country by country
disclosure in financial statements prepared under IFRSs is warranted”. A
in 2010 did not show much enthusiasm for CbC among FTSE 100 directors.
The usual arguments were that disclosure would be costly, even though
companies should already have the information about the performance of
their subsidiaries in each country of their operation. The cost of
publishing this internally held information is negligible.
The main turning point was the support given by NGOs, such as
Christian-Aid, Publish What You Pay (PWYP), War on Want, Tax Justice
Network, Oxfam and many others, not only in the UK and the EU, but also
in developing countries and the US. The credit for this must go to
Richard Murphy. This campaign was joined by some Members of the European
Parliament (MEPs) and also Labour MPs.
Much to the dismay of the accounting establishment, their pressure persuaded the EU to launch a consultation exercise in 2010 and has now resulted in partial implementation of CbC. No doubt, there is more to come.
The story of the country by country reporting is that in the digital
era, it may well be possible to mobilise alternative centres of power,
at least in crafting new accounting disclosure rules. This announcement
has been a victory for those of us who campaign for greater transparency
on tax. Let’s hope it’s the first of many.
Prem Sikka is senior adviser to Tax Justice Network.
This article first appeared on The Conversation website