The World's Movement Toward Tax Transparency

In the past few years, there have been countless news stories about aggressive tax strategies and hordes of cash being stashed in offshore havens. The sheer abundance of the stories might obscure the fact that, by and large, there's a lot of information about international taxes that isn't known--either by the public or by tax administrations. Publicly held companies must report tax obligations to their shareholders--including, if they're U.S. companies, how much money they're keeping offshore to avoid paying taxes on it--but that data isn't broken down by country, or even by region. For governments and observers, there's still a lot that's unknown.

But that may be changing.

Four years ago, the United States kick-started a movement requiring the Securities and Exchange Commission to enforce greater tax transparency in the oil, gas and mining sectors--areas that have long been criticized for secretive government deals and payments. The rest of the world is quickly following suit, and in all likelihood country-by-country reporting of tax payments will be a fact of life for this industry in the near future.

But, ironically, the U.S.--with its rule bogged down in the courts, and with the SEC expressing some reluctance about its new role--may end up falling behind in the movement it created.

The initial legislation was written by Sen. Benjamin Cardin (D-Md.) and then-Sen. Richard Lugar (R-Ind.), and was tucked away in the 2010 Dodd-Frank Wall Street Reform and Consumer Protection bill. It followed years of debate, including some Congressional hearings, over the so-called resource curse, the tendency for resource-rich nations to see their economies dwindle rather than thrive. Economists have blamed a toxic stew of poor governance, corruption and profit-shifting tax strategies for this phenomenon.

Tax transparency isn't a cure-all. But advocates for greater disclosure rules--including international non-governmental organizations such as Oxfam--have hoped that public disclosure of the amounts that governments are receiving from resource-extracting companies will help them and citizens hold governments to account when the resources beneath their feet aren't benefiting their countrymen and women.

After Congress took action, the world followed suit. The European Union immediately examined the issue and eventually passed its own similar version, which will include the forestry sector as well. The EU's timeframe gives European countries until 2015 to pass their own national versions of the law. The United Kingdom has vowed to become the first country to comply with the new EU rule, setting an October 2014 deadline for itself. Its version of the rule would include some large private companies, as well as those on its public exchange. Some non-EU countries, such as Canada, Norway and Australia, also have followed suit.

Meanwhile, the U.S. has seen its efforts in enforcement bog down.

More than two years after the bill's passage, the SEC released its own rule carrying out its new mandate. The rule called for public reports that would break down, by country and company, payments from the extractive industry to governments.

The American Petroleum Institute and other industry advocates almost immediately took the rule to court. They argued that the law didn't specify that company-specific data should be published, and that the failure to include an exemption for companies operating in jurisdictions that expressly forbid such disclosures was unfair. A District of Columbia District Court judge at least partially agreed, vacating the rule in July of 2013. The SEC declined to appeal the decision, instead opting to issue a new rule.

Almost a year later, the SEC has yet to issue the new rule. In the interim, SEC Chair Mary Jo White, in an October speech at Fordham University, questioned whether the reporting agency was the right one to enact laws meant to encourage social and political change--however "laudable" those goals are.

"As the Chair of the SEC, I must question, as a policy matter, using the federal securities laws and the SEC’s powers of mandatory disclosure to accomplish these goals," White said, adding that she is nonetheless bound by law to carry out those directives.

"We cannot put it in a drawer or tuck it away," she said. "That would be impermissible nullification of the law and independence run amok. Instead, in such cases, we can, unless no leeway is given, write the rule in a way that best comports with our view of our mission and tries to mitigate the costs, so long as we faithfully carry out Congress’ mandate."

Meanwhile, supporters of the law have grown impatient. Thirteen U.S. senators penned a letter to the agency earlier in May, urging them to issue a new rule before the year's end. The senators have some unexpected allies. Facing the choice of whether to continue to oppose the rules or advocate for them to be enacted in a coordinated and uniform way, some oil and gas companies have leaned toward the latter. Officials from Royal Dutch Shell Plc and Exxon Mobil Corp. also wrote a letter urging the SEC to issue a rule in 2014, so it can influence how the European laws are carried out. After receipt of those letters, the SEC issued a revised agenda that set out a March 2015 deadline for releasing a new proposed rule.

For many companies, "how" is the main issue when it comes to transparency--not "if" or even "when."

The movement in the extractive industry mirrors a larger, broader movement within the Organization for Economic Cooperation and Development to require country-by-country reporting of all tax data--not just the taxes paid, but the income allocated to each jurisdiction. This project, part of an overall effort to curb tax evasion at the international level, would not be public--yet. But many observers doubt that the information could ever be kept secret, and the extractive industry project, if it is successful, could be an example suggesting that broader public disclosure rules aren't impossible.

As Steven Wrappe, of KPMG LLP in Washington, D.C., said during a May conference by the American Bar Association, we're all moving towards a "nothing to hide" world.


Alex M. Parker, Staff Writer, Transfer Pricing Report