Enhancing Tax Transparency

Something very unusual is happening in the world of accountancy. The International Accounting Standards Board (IASB), that establishes the rules on accounting for most of the world, is considering a proposal for a new accounting standard put to it by civil society. This has never happened before.

The proposal is for a cut-down version of what is called “country-by-country reporting”. The cut-down version, explained in chapter six of this IASB document, is more modest. As a first step towards full country-by-country reporting, campaign group Publish What You Pay (PWYP) has asked for country-by-country reporting to apply to just the extractive industries for now. That term applies to those companies that are engaged in the oil, gas and mining sectors.

The intention of the proposal is clear. PWYP, the Tax Justice Network and others who are behind this demand want multi-national corporations working in this sector to be accountable for paying the tax that those in civil society believe they should pay to the societies that grant them the opportunity to make extraordinary profits. And at the same time, civil society wants this data so that they can hold governments accountable for the use they make of that money.

The aim is to reduce, or even eliminate, the risk arising from corruption, and so make sure the people in some of the poorest nations on earth can enjoy the benefits they deserve arising from exploitation of the mineral reserves of the countries in which they live. This is no small issue: tax losses flowing from the extractive industries could make up a big part of the lost tax revenues of developing countries, illegally stripped from their grasp by multi-national corporations. The document estimates that these amount to $160 bn a year -a sum somewhat bigger than the total annual international aid budget.

However, there’s something equally extraordinary going on in the answer made by the International Accounting Standards Board to this proposal. They’re saying they do not care that there could be massive benefits flowing to the ordinary people of the developing countries of the world as a result of this simple (and, as some big firms admit, cheap) accounting reform. Benefits resulting from such things as reduced tax evasion, increased tax payments, less corruption, enhanced governance, greater confidence in the business environment in those countries (encouraging new inward capital, creating more jobs and other benefits) are not, according to the IASB, matters of any concern to them. The IASB says that unless this change in accounting can be proven to change the way investors in a company choose to buy or sell their investments, then the change is not needed.

What it means is that the apparent needs of fund managers (and their largely computer-generated investment decisions -many of them undertaken solely in pursuit of stock exchange index tracking) are paramount for the IASB. And unless those stock brokers and fund managers, who do most of the buying and selling of shares, change their computer programs to assess the information provided on a country-by-country basis on taxes paid, then the IASB say this information is not needed by any user of accounts.

In the process, they deny that the real needs of other users of accounts exist, whether those users be governments, regulators, ordinary citizens, tax authorities, environmentalists, civil society organizations, and many others. The IASB is, in effect, saying that all these other users are also only interested in buying and selling shares, and nothing else.

This is wrong, of course. Worse than that, it has to be knowingly wrong. No rational person could believe this to be true. The IASB is clearly not acting in the public interest. It is denying information that is needed to fulfill the public interest on the extraordinary basis of claiming that the public is made up solely of the buyers and sellers of shares. And, it is ignoring the needs of emerging economies altogether.

However, something is changing. Perhaps the release of IASBs document could spark real change that could increase the amount of tax developing countries receive, and so break their dependency on aid. Certainly, it is time to act on tax transparency.