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24 Sep 2009
International accounting rules could become a new powerful weapon in the fight against corruption in developing nations.
The International Accounting Standards Board is preparing a discussion paper that may eventually force global mining and oil companies to declare financial information on a country-by- country basis.
If the rule comes into effect, income received by resource-rich developing nations from multinational companies could, for the first time, be made public.
The move has the potential to expose the so called “corruption gap” - the difference between the money a country receives and the amount it spends.
The IASB’s aims are not primarily humanitarian. The organisation is exploring whether the new standard would result in reputation risk and country-specific investment risk being flagged in companies’ financial statements.
It’s this argument which has won some support from the analyst community who believe the measures may help to disclose previously undeclared risks.
Senior officials and humanitarian activists have made strange bedfellows in the negotiating rooms, but headway is being made according to those close to discussions.
Vanessa Herringshaw, London director of New York based lobby group Revenue Watch, has spent the last year sitting across from BP, Shell and Eni representatives.
“Here are industries producing vast amounts of revenue, but that revenue disappears into black boxes and citizens have no way of working out how much money comes out and where it goes,” she said.
“It is important for citizens to know how much money they are receiving and how much is spent on health and social services and to stop the money disappearing.”
The issue has resulted in a rare alignment of goals in the finance and humanitarian communities.
“Investors want to see this sort of disaggregated information, they want to see the risk profile and part of the risk profile comes from your exposure in difficult countries and at the moment you can’t see that information,” Herringshaw said.
At present, companies aggregate their data across their basis of operations and it is near impossible to find out how much is actually spent in an individual country.
The IASB said it will continue to talk with Revenue Watch and will next year release an analysis of the proposals.
Concerns are being voiced from both the financial and humanitarian camps. Preparers of financial statements fear the new rules may be too onerous and of little value. The IASB and other regulatory bodies have been trying to demystify company reporting by simplifying and shrinking reports, and there’s a fear the new measures will only lead to more red tape.
At the other end of the spectrum some humanitarian groups argue that the proposals don’t go far enough.
Christian Aid would like to see the program expanded to incorporate all sectors, and not just extractive industries, as is currently being proposed.
Dr David McNair, the organisation’s senior economic justice adviser, said as much as $160bn (£98bn) in tax revenue is lost each year as a result of transfer pricing abuse and false invoicing.
“If we don’t deal with this in a comprehensive way and equip revenue authorities to target companies who are abusing the transfer in all sectors, the abuse of the system will just shift,” he said.
IN OUR VIEW
The IASB risks attracting criticism if it pushes ahead with country-by-country reporting for the wrong reasons. There needs to be a clear benefit for investors. Laudable as the aims of Revenue Watch might be, the argument in the IASB will inevitably be won or lost on financial and not humanitarian grounds.
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Visitor comments Add your comment
Lack of evidence for $160 billion avoidance
You quote Dr David McNair of Christian Aid repeating the claim that $160 billion has been been lost through transfer pricing abuse and false invoicing by multinationals. What Christian Aid and the other agencies are trying to achieve is very worthwhile, but their figures do not stand up to scrutiny.
I investigated the $160 billion claim when preparing for a debate with Christian Aid and Tax Justice Network on the subject at the Greenbelt festival a month ago, and found the evidence to be very shaky. It is based on an estimate by Raymond Baker in "Capitalism's Achilles Heel", based on interviews he carried out some 15 years ago.
However, Baker specifically says that he was only investigating transactions between multinationals and third parties, in the context of the sort of corruption which the rest of your article discusses. Baker had not formally investigated transfer pricing within multinationals. Yet this figure is being quoted as if it was based on detailed current evidence. It is not, and in my view should be withdrawn by Christian Aid until it can be better substantiated.
Mike Truman
Editor, Taxation magazine
Posted by: Mike Truman, 24 Sep 2009 | 00:00
Christian Aid response to Mike Truman
Christian Aid's estimate is that $160 billion a year is potentially lost to developing countries in tax revenues, due to the mis-pricing of trade. As I told Accountancy Age, and the article and our original research reflects (see links below), this includes both abusive transfer pricing and mis-pricing on trade between unrelated entities.
We have now obtained this estimate in two different ways. The first, to which Mr Truman refers, is based on the widely-cited work of Raymond Baker - whose estimates of illicit flows have been referred to approvingly by, inter alia, the World Bank's Stolen Asset Recovery Initiative. Raymond Baker bases his estimate of mis-pricing on 550 anonymised interviews with purchasing managers for companies, across a range of different (richer and poorer) countries. We used these estimates to establish a baseline figure for the total implied tax loss in our report Death and Taxes:
[http://christianaid.org.uk/images/deathandtaxes.pdf]
We then sought to confirm or challenge our estimate by appeal to an alternative, more rigorous academic technique. For this we relied on the work of Prof Simon Pak of the Univeristy of Pennsylvania, whose methodology is widely published in peer-reviewed journals and he has used it, inter alia, in consultancy work for the US government in assessing their problems in the area of trade mispricing.
The approach relies on using highly detailed trade data to assess the actual difference in reported trade prices from an established 'normal' range (that used by the IRS to consider whether pricing is arm's length or not). The implied developing country tax loss using Prof Pak's approach for US and EU trade data is consistent with the $160 billion figure used in Death and Taxes, although in fact this is may be somewhat of an underestimate since it assumes that trade between developing countries and tax havens is no 'dirtier' than trade with the US and EU. The work is presented in our report False Profits:
[http://www.christianaid.org.uk/Images/false-profits.pdf]
There was considerable discussion of the $160 billion a year figure at the recent World Bank conference on illicit flows, and with the exception of one participant who suggested (to some amusement) that 'zero' would be a better estimate, no alternative was offered and no compelling challenge made.
There are clearly difficulties in making any estimate of something which is by definition (and by intention) hidden, but we feel confident that no better estimate could currently be generated from the data which is available and using established techniques. The relative consistency of the estimates generated using two completely different methods is also reassuring, and suggests that the number is a reliable indicator of the scale of the problem. We are therefore devoting considerable resources to campaigning for change, because of the potentially huge effects this could have on the prospects for poverty eradication.
We hope that more readers of Accountancy Age will continue to join us in considering how to grapple with what we recognise are hugely complex, technical issues involved in the transfer pricing aspect in particular. In addition to our proposed measures to allow greater transparency of multinational accounts and between jurisdictions, we are keen to begin a dialogue about the ethics of transfer pricing, to consider with the profession which approaches are appropriate ? and which may be less so.
Posted by: Dr David McNair, 01 Oct 2009 | 00:00
Global rules
I investigated the $160 billion claim when preparing for a debate with Christian Aid and Tax Justice Network on the subject at the Greenbelt festival a month ago, and found the evidence to be very shaky. It is based on an estimate by Raymond Baker in "Capitalism's Achilles Heel", based on interviews he carried out some 15 years ago.
Posted by: Peter, 27 Sep 2010 | 00:00