Country-by-country reporting
Richard Murphy FCA
Director
Tax Research LLP
Copenhagen
September 2010
What country-by-country reporting is
 A system of accounting that requires that
multinational corporations (MNCs) publish accounts
for every jurisdiction in which they trade as part of
their annual financial statements
2
(c) Tax Research LLP
What it says (1)
 Country by Country reporting would require every
MNC to declare
1. In which countries it operates;
2. What it is called in that location;
3. What its financial performance is in every country in
which it operates including
· It sales, both third party and with other group companies
· Purchases, split in the same way;
3
(c) Tax Research LLP
What it says (2)
· Labour costs and employee numbers
· Financing costs split between those paid to third parties
and to other group members
· Its pre-tax profit;
4. How much it pays in tax and other ways to the
government of the country in which it is operating as a
consequence
5. Some balance sheet and cash flow data
6. Additional data for companies in the extractive
industries
4
(c) Tax Research LLP
Why it demands this (1)
 Transparency matters
 All MNC activity is 'on the record' - especially intra-group
trade
 CSR matters
 The relationship between an MNC and its host community is
recorded
 Accountability matters
 You're not accountable unless you can be identified
 Trade matters
 60 + % of world trade is intra-group - now we'll know about it
 People matter
 Employee conditions are important to us all
5
(c) Tax Research LLP
Why it demands this (2)
 Tax matters
 Where do and don't you pay tax?
 Corruption matters
 Particularly holding parties to account for revenue streams in
the Extractive Industries
 Development matters
 Paying tax in developing counties is vital
 Governance matters
 Many corporate failures relate to complex frauds through
massive group structures - CBC exposes the risk of this
 Where you are matters
 There is political risk to trading in some places
6
(c) Tax Research LLP
Why we think we have a right to this
information
The objectives of the IASC Foundation are, according to its
constitution:
 "(a) to develop, in the public interest, a single set of high
quality, understandable and enforceable global accounting
standards that require high quality, transparency and
comparable information in financial statements and other
financial reporting to help participants in the world's capital
markets and other users make economic decisions;
 (b) to promote the use and rigorous application of those
standards;
 (c) in fulfilling the objectives associated with (a) and (b), to
take account of, as appropriate, the special needs of
….emerging economies; and.....(edited)
7
(c) Tax Research LLP
What we'd know if we got it (1)
 The precise structure of multinational corporations
 Who is where
 Under what name
 The importance of each jurisdiction to the reporting MNC
 How much tax is paid where
 So we can hold countries to account for it
 The real value of intra-group trade
 And some idea of where it flows
 How trade is used to shift profits out of developing
countries and into secrecy jurisdictions
 Is it really $1 trillion a year?
8
(c) Tax Research LLP
What we'd know if we got it (2)
 Who uses secrecy jurisdictions to avoid tax, and
maybe by how much
 Could be deeply embarrassing for some
 Who exploits labour
 By comparing labour rates and numbers
 What risk investors face





9
In the tax structures companies use
From the places in which they trade
From their dependence on tax havens
From corruption
From poor governance
(c) Tax Research LLP
What we'd know if we got it (3)
 What risk local businesses face
 Especially if local companies are under-capitalised
 What risk states face from the companies located
within them
 Especially if local companies are under-capitalised
10
(c) Tax Research LLP
What we could do with it
 Massively improve understanding of the tax charge in





11
company accounts
Better appraise likely future cash flows and their
sustainability
Enhance valuation techniques – after all p/e is heavily
tax dependent
Better appraise those companies who make profits
and those who engineer profits
Better assess governance risk
Undertake better risk screening
(c) Tax Research LLP
The benefits that flow from CBC - 1
In summary, country-by-country reporting would:
 Provide a stakeholder view of accounting;
 Create reporting of results by country, without
exception, which has previously been unknown;
 Provide a new view of corporate structures;
 Impart a new understanding of what the business of a
corporation is, and where it is;
 Opens up a new perspective on world trade
because intra-group transactions would be reported
for the first time in multinational company accounts;
12
(c) Tax Research LLP
The benefits that flow from CBC - 2
 Give a new view of world labour markets;
 Create an entirely new tool for geo-political risk
profiling of companies;
 Permit better appraisal of corporate contributions
to the governments that host their activities and in
the process contribute to constraining corruption on
the part of some recipient governments;
 Provide better awareness of the true extent of tax
haven activity;
13
(c) Tax Research LLP
The benefits that flow from CBC - 3
 Allow measurement of tax lost through tax planning
by corporations through the relocation of profit;
 Provide a better understanding of the physical
resource allocation of the corporate world.
14
(c) Tax Research LLP
Why does this pay for itself?
 Because behaviour will change
 Enhanced transparency will give rise to better






15
allocation of economic resources
Corruption will be reduced
Risk – financial, tax, governance, corruption - will be
reduced
Lower risk means a lower cost of capital
That creates a better investment environment
That enhances long term investment returns
That’s why country-by-country reporting pays
(c) Tax Research LLP
Contact details
Richard Murphy
Director
Tax Research LLP
The Old Orchard, Bexwell Road, Downham Market
Norfolk, PE38 9LJ, United Kingdom
richard.murphy@taxresearch.org.uk
+44 (0) 1366 383500
+44 (0) 777 552 1797
www.taxresearch.org.uk/blog
16
(c) Tax Research LLP