Daily Tax Report: International

INSIGHT: Do We Need an International Financial Reporting Standard for Tax?

July 5, 2019, 7:01 AM

One of the first things that the Tax Justice Movement created was the demand for country-by-country reporting by multinational corporations. I wrote the first version of that in January 2003. Sixteen years later it is in widespread use for tax reporting.

The Need for a New Standard

I am assured it is working, in the sense that it is identifying where and in what amount tax risk is located within those companies reporting using that standard. But so far, it is only tax authorities that see the benefits of this type of reporting, which has now been proven (despite all the claims once made to the contrary) to be entirely possible.

It is true that the European Commission and EU Parliament are trying to deliver rather inadequate forms of such a standard. And I am delighted that the Global Reporting Initiative (GRI) is now close to issuing its own standard, but it will be voluntary. That means compliance will be patchy, and probably absent in the companies we really need to know about.

The fact that the Organization for Economic Co-operation and Development, EU and GRI have all had to try to create standards points to one common thing: the accounting profession and its accounting standard setter, in the form of the International Financial Reporting Standards (IFRS) Foundation, have so far refused to engage with this issue.

Their justification for not doing so is two-fold. The first is that the demand for this data is political. That claim is disingenuous, since all choices about what to disclose in accounts are, inevitably, political.

The second is that it is of no interest to investors and so not accounting’s concern, since the IFRS Foundation deem that what they call “general purpose financial statements,” and which the rest of us call “accounts,” are produced solely for the benefit of the suppliers of capital to a company and then solely to let them decide whether they wish to engage with the company or not.

This is the issue I wish to address, and at two levels.

The first is that I think it is certain that investors—who are the precise target audience the IFRS Foundation have in mind—do want data on tax in company accounts. Whatever has been claimed in the past, it is now indisputable that tax is an issue with which investors think that they have to be engaged.

As is now apparent to them, bad tax governance has the power to hit future cash flows in two ways. One is by additional tax being due. The other is by creating reputational risk for the companies that partake of risky tax arrangements. Almost half the comments to the GRI on its country-by-country reporting standard came from investors, and most were keen to see the data.

I think this debate should be over: we need a standard applicable to all companies on this issue.

Interested Stakeholder Groups

But we need to go further. And that is because tax is not just of interest to investors.

It has been recognized since the 1970s that there are at least six stakeholder groups with a legitimate interest in the accounts of any (and I stress, any) limited liability entity.

They are:

  • its suppliers of capital;
  • those it trades with;
  • its employees;
  • those who regulate it;
  • its tax authority;
  • those civil societies and communities who host its activities.

Although the IFRS Foundation is set up with a public interest mandate, like almost every accounting institute it is apparent that they very obviously choose to ignore the vast majority of the interested public in undertaking their work.

Knowing about tax would aid all the noted interest groups: and this is true whatever the size of company and whether it is multinational or not. It’s also true whether IFRS applies, or not.

The fact is that current accounting for tax—which has steadily reduced disclosure so that most small company owners would not, for example, have any idea as to the reason why they do or do not pay tax from the accounting disclosure their professional accountants include in their annual reports—needs to be reformed at all levels so that all users of accounts, of whatever the size of entity, have the data they need on tax.

An IFRS for Tax

That is why the Corporate Accountability Network, of which I am the director, is now calling for a new IFRS for tax.

This would embrace country-by-country reporting but is intended to deliver much more. Why a company’s tax bill is the amount it is would have to be explained in much more detail, as would deferred taxation accounting be expanded.

A reconciliation between tax provided and paid would be required, as this can rarely be achieved with existing data. And information on value-added tax paid as well as all taxes paid on behalf of employees would require disclosure, as would all supporting data on turnover and employee pay necessary to make sense of this information.

Accountants have a duty to society to help companies explain their tax payments. It is time they stepped up to the mark and did it.

Richard Murphy is Director, Corporate Accountability Network

The author may be reached at: richard@corporateaccountabilitynet.work