The Tax Management Transfer Pricing Report ™ provides news and analysis on U.S. and international governments’ tax policies regarding intercompany transfer pricing.
Sept. 6 — The U.K. has broken ranks and become the first country to include public country-by-country reporting in its statute books, with amendments to its Finance Bill giving the Treasury power to switch on the requirement for public disclosure of tax filings.
The ground-breaking amendment to the 2016 Finance Bill was unanimously approved by politicians across the House of Commons in a Sept. 5 parliamentary vote, following lobbying for increased tax transparency that started with a cross-party group of politicians from eight different parties led by opposition Labour member of Parliament, Caroline Flint.
The group’s efforts were defeated in June due to business uncertainty after the U.K.'s vote to exit the European Union.
The enabling amendment to the bill is contained specifically within rules relating to the publication of a multinational’s group tax strategy. Current rules require publication of the strategy—the amendment voted in now provides ministers with the ability to compel companies to also make their country-by-country reports public, within the context of the group’s published tax strategy.
This power for ministers can be swiftly turned on through a statutory instrument, a legislative mechanism—in the form of regulations or orders—that allows the provisions of an act to be brought into force without Parliament having to pass a new act.
The change comes at a time of increasing tension over calls from politicians and civil society organizations for public disclosure of multinationals’ tax affairs by jurisdiction. Making the information public goes beyond the recommendations of the Organization for Economic Cooperation and Development, which contemplate sharing the information only among tax authorities.
The OECD’s logic recognizes global companies’ lobbying for confidentiality around trade-sensitive information, while still providing a source of data-rich tax details to allow individual tax authorities—where their governments adopt the measures—to plough through reports with a view to raising inquiries in the event of mismatches around tax paid in their relative territories.
The move has surprised those deeply familiar with multinationals’ tax issues.
“We weren’t the obvious country to make this move,” said Richard Murphy, a chartered accountant and economist who campaigns for and researches tax transparency issues.
Glyn Fullelove, group tax director of Informa Plc and chairman of the technical committee of the Chartered Institute of Taxation, admitted that he “did not expect” government to support the amendment but said that “it is important to note that it is only an enabling amendment.”
In a telephone interview with Bloomberg BNA Sept. 6, Fullelove said the government should exercise restraint.
“Although Her Majesty’s Treasury has this power, it shouldn’t rush to use it,” he said. “It should be very careful in exercising the power and making sure that when it does so, it does not jeopardize Her Majesty’s Revenue & Customs’ ability to access documents from other tax authorities whose home governments are less sympathetic to public country-by-country reporting.”
He added that most other governments have focused on the exchange of information among tax authorities, “and rightly so” because “it is this exchange of information that provides the ability for tax authorities to investigate tax returns and they have to have all the information available to them to be able to do that.”
Colin Garwood, head of group tax at InterContinental Hotels Group (IHG) said he understands the amendment to indicate a “possible direction of travel rather than a decision,” as the immediate country-by-country issues multinationals and tax authorities are focusing on are the new requirements for reporting to tax authorities. IHG is the second largest in the hotel sector in Europe with 6.4 billion pounds ($8.5 billion) market capitalization, according to data compiled by Bloomberg BNA.
“There will inevitably be a learning process as the first tax authority reports are produced to try and ensure that those provide meaningful and useful information. The learning from the tax authority process will hopefully be used to inform any later decision,” Garwood said.
Tax practitioners are less enthusiastic about the decision of the U.K.’s politicians.
Rebecca Reading, international tax partner at RSM, said the timing “could not be worse,” coming as it does “at a time of political tension between the EU and the U.S. over tax policy” after the European Commission's decision on Apple's tax affairs.
“Many commentators are unhappy that the OECD's reforms don't go far enough. However, the reality is that it's the only show in town,” Reading said.
In a statement, U.K. partner and head of tax at Crowe Clark Whitehill, Laurence Field, said that in the current environment it is hardly surprising that the amendment has been accepted.
“It won't necessarily be easy for some companies to produce the information as much of the recent controversy has centered around differing interpretations of where profits are generated,” Field said. “I am sure many businesses will wish to publish a commentary around why the results look the way they do. Where this has arisen due to badly designed tax law, it could put pressure on the politicians to up their game.”
Murphy said that the moves, while they have no immediate impact, mean that the Treasury has to now seriously look at the issue of public country-by-country reporting. “They will have to consult on this,” he said, noting that financial secretary to the Treasury, Conservative Jane Ellison, said she is willing to cooperate in a discussion on the matter.
“What we’re seeing here is that country-by-country reporting keeps on ticking people’s boxes. It isn’t just about tax. It’s about the general idea of holding companies abroad to account locally and at the core of that is the relationship between a company and the country that is hosting its activities,” said Murphy.
He admitted that global corporations making public disclosure of their tax affairs isn't a “panacea” but said it gives much better insight as to how capital markets and global companies are working at a time when they are under stress and they need to work out what they are going to do.
Murphy said that in his discussions with large companies, many are convinced that public country-by-country reporting is on its way.
“I’m being told by quite a number that they are desperate to avoid the Action Aid scenario—when in 2011 Action Aid published a list of companies with subsidiaries in tax havens. They are trying to tidy up their act.”
Murphy said that the U.K.’s move will be noticed and will likely give courage to European politicians who are also currently pushing for public country-by-country reporting within the EU.
“It’s an iterative process. It signals very clearly that we are moving towards an inevitable conclusion,” he said.
In a statement, Flint described the vote as “a victory for fairer taxation,” saying it sent “a clear message to those global corporations that shift profits to low tax havens” that the U.K. expects them to play by the same rules as every other business.
“Today we have moved the debate on tax transparency from if, to when. The U.K. government now has yet another tool to use in the campaign against profit shifting that undermines our country and many others, not least some of the poorest in the world,” said Flint.
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