The Lough Erne Summit and the tax justice storyBy Andrew Baker on 24 June 2013
The most important and historically significant lines in the Lough Erne Summit communiqué have received few headlines. Point 25 calling for Country by Country reporting and point 26 endorsing Automatic Information Exchange signal a potential historic sea change, as the moment G8 governments started to get genuinely serious about addressing corporate tax avoidance. But the inclusion of points 25 and 26 in the communiqué are also remarkable for two other reasons.
First, is the story of how the concepts of Country by Country reporting and Automatic Information Exchange travelled from obscurity ten years ago, written off by officials and the big four accountancy firms as radical and maverick. They were barely talked about seriously in international policy circles even a year ago. Now they are the new orthodoxy at the core of the international tax policy agenda. It is a remarkable journey and a tale of how intellectual vision, persistence and tenacity, together with steely campaigning determination can overcome powerful vested interests and eventually shape, lead and refashion political debates and agendas.
Second, even as late as Tuesday morning it was far from clear that Country by Country reporting would be supported and called for in the communiqué. This was no pre scripted, precooked agenda. For those who wonder what the purpose of dragging leaders half way round the world to summit meetings to sign off on statements that are already agreed, the Lough Erne communiqué on tax is the clearest demonstration that real progress can be made at the summits themselves. I have been reading and tracking G7 and G8 communiqués for nearly 20 years. They are usually neither exciting nor inspirational. This was both.
Ten years ago, accountant Richard Murphy, in conjunction with Professor of Accounting at Essex University Prem Sikka, and former Jersey tax official turned whistle blower, John Christiansen, founded the Tax Justice Network. They were concerned that multinational companies were shifting profits between subsidiaries in different jurisdictions, dumping their costs into high-tax jurisdictions, to be deducted against tax, and shifting their profits to tax havens, where they pay little or no tax. This basic practice (transfer pricing) was at the core of the global tax avoidance industry. Under current international accounting rules MNCs are allowed to sweep all their results - profits, tax payments, borrowings, and so on - into a single figure or set of regional figures. Results for “Europe" for example, cannot be unpicked, so as to work out what has happened in each country.
Murphy, in consultation with Sikka and Christiansen, began to develop the notion of Country by Country reporting as something they thought could counter this. It would make MNCs break down their results for each country, including financial performance in each country (sales, purchases, labour costs, employee numbers, financing costs, pre-tax profits, tax charges, costs and value of assets), making it far easier to tax them based on what commercial activity really takes place and where.
For years Murphy campaigned for Country- by country reporting. The proposal was decried as impossible. The big four accountancy firms rejected it out of hand. Governments would not go near it and the OECD had little appetite. But Murphy and his colleagues kept chipping away. On June 12, EU Commissioner, Michel Bernier suggested that something close to Country by Country reporting was on its way in the EU.
Days before the summit, at Queen’s University Belfast at the annual pre G8 summit conference[Jv1] , Sikka told an assembled audience that the EU was losing $1trillion euro each year in lost tax revenue due to avoidance and evasion activities. That simple figure illustrates why in the context of austerity and sovereign debt problems, governments became more interested in the notion of the erosion of the tax base and the need for Country by Country reporting.
On Monday evening, the OECD, the body charged with developing proposals on international tax policy, delivered a report to the G8 leaders calling for Automatic Information Exchange between national tax authorities. This was another concept that had been developed and promoted, by Murphy and Sikka. It is a natural bedfellow for Country by Country reporting that will enable better Country by Country data to be assembled.
On Tuesday morning, Murphy who was blogging for the IF campaign on tax, at the Killyhelvin G8 media centre, attended a press conference on tax and transparency, given by Cameron’s adviser, Professor Paul Collier of the University of Oxford (who also spoke at last week’s Queen’s University conference) and Michael Anderson, Cameron’s special envoy on UN development goals. At 10.01am he pointedly asked whether Cameron was supporting Country by Country reporting of tax affairs. Anderson said the UK had an ambition for Country by Country reporting but the talks were not yet over. Most of us took this as a sign it was unlikely to feature in the communiqué.
On Monday evening I had told listeners to BBC Radio Ulster’s Evening Extra, to look for support for Country by Country reporting and Automatic Information Exchange on tax in the communique. Both would constitute significant historical progress at Lough Erne. Without them Lough Erne would have failed on tax. At 4.45pm on Tuesday evening I was sat in the green room at the BBC studios preparing to tell listeners that the theatrically entitled Lough Erne declaration was a vague aspirational wish list of little consequence. But as I scanned the full communiqué, there they were - full support for Country by Country reporting and Automatic Information Exchange, - points 25 and 26. I hastily revised what I was about to say on air.
Meanwhile, on the banks of Lough Erne, at David Cameron’s press conference, Richard Murphy was sat at the front, clearly within eye shot of the Prime Minister. Repeatedly he tried to ask a question and repeatedly he was ignored. His concepts may now be at the centre of G8 tax agenda, probably the most historically significant thing to have featured in a G8 communiqué for many years, but he was still being ignored, as the belligerent and troublesome accountant.
The true prize for the Tax Justice Network is a system of unitary taxation. Country by Country reporting and Automatic Information Exchange are pre requisites for such a system, but political support for them are significant historical steps forward in strengthening the international tax regime. Ultimately, G8 meetings are about setting agendas, priorities, creating political pressure and a political climate. Lough Erne has done this on Country By Country reporting and Automatic Information Exchange. It has signalled a new direction of travel on international tax policy. That is historic. It does not provide us with a detailed route map to get there and that is what remains up for grabs, but as I have told Richard Murphy, this is as good as it gets from a G8 meeting.