As anyone who has read Ritchie's blog for even a short while will know, Ritchie is the inventer of country by country reporting (we'll call it CBC reporting for short). CBC reporting, in brief, is the idea that companies should be forced to disclose certain types of information on a country-by-country basis, rather than on the current consolidated basis .
Ritchie's idea seeks to address the concern that companies are able to abuse their cross-border existence to determine where to make profits, in order to make profits in low tax jurisdictions. Ritchie suggests that CBC reporting will help tax campaigners, such as him, to identify transfer pricing abuse and other forms of tax avoidance more easily. He wants CBC reporting disclosures, which in some countries will be exceptionally voluminous, to be included within the scope of the group external audit. This is likely to be very expensive.
In order to get an idea of how it might work, today he blogged about Microsoft:
... the bulk of Microsoft’s $50.2bn cash mountain is held outside the US. This [is] the result of the SEC’s questioning about what it called a “disproportionate” share of Microsoft’s profits that come from certain overseas countries. Some 62 per cent of the company’s international income came from those countries last year, even though they only accounted for 42 per cent of international revenues.
In a detailed response, the software company said it had benefited partly from a policy of channelling sales through low-tax regional centres in Ireland, Singapore and Puerto Rico.
This had resulted in “a higher mix of earnings taxed at lower rates in foreign jurisdictions”, the company revealed in a footnote to its recent quarterly report with the SEC, which was included as a result of the regulatory prodding.
I was involved in the first revelation of this practice in the Wall Street Journal in 2005.
Of course Microsoft maintains that all it is doing is legal. As the SEC suggests though, it is at least questionable. In my opinion it’s unethical. It is, I think, tax haven abuse to deliberately undermine the payment of taxes in countries where Microsoft really makes its profits, like the UK.
Such practice would, of course, have become apparent much sooner if we had had country-by-country reporting in operation. The need for this becomes more obvious every day. Country-by-country reporting reveals where a company makes its profits and pays its taxes.
Ritchie's hypothesis is that he would be able to look at Microsoft's CBC reporting and ascertain that they are making lower profit margins in some countries than in others. And from that he says he will be able to conclude whether Microsoft is engaging in tax avoidance. Although, you'll notice he's already concluded that they are:
In my opinion it’s unethical. It is, I think, tax haven abuse to deliberately undermine the payment of taxes in countries where Microsoft really makes its profits, like the UK.
He's talking Ritchiebollocks. You cannot deduce any such thing from CBC reporting. It's a stupid idea that simply cannot provide any of the information about tax avoidance Ritchie seems to think it will. And in failing to do this it will cost a small fortune.
In order to demonstrate this, let's consider a real life example of a real company: GlaxoSmithKline (GSK). Their Chief Executive Officer, Andrew Witty, was on Radio 4 the other day talking about how his company is set to partner with the Gates Foundation (see this post for a totally disgusting example of Ritchie's putrid views with regard to Bill Gates's extraordinarily generous charitable work) in providing low cost vaccines to the Third World. Witty said that his company would provide vaccines at cost to the Third World, paid for by the Gates Foundation. But in order that his company can do this, he needs rich countries to pay higher prices for the drugs that they buy.
What would this mean for CBC reporting? The disclosures would show GSK making sales in many countries, but making very low profits in the third world. Can we trust Ritchie to understand the business reasons for these differential margins? Based on his historical business analysis as evidenced on his blog, I do not believe we can.
He would be unable to resist painting this as 'evidence' of GSK's avoiding tax in the third world and 'transferring profits' to lower tax countries. It's simply a conceit that he would be able to interpret the information in any meaningful way when it's painfully obvious that he cannot.
This fatally undermines the only justification that Ritchie has made for CBC reporting. Because it fundamentally fails to deliver the benefit it purports to deliver, and because it would be extraordinarily expensive to implement, especially if disclosed on an audited basis, CBC reporting must be resisted by politicians and regulators. The IASB is approaching it cautiously; the European Parliament is unfortunately charging ahead toward it. The European Parliament must understand that it simply does not have the necessary accounting and business expertise to be regulating in this area.
Filed under: Accounting, Other blogs, Taxation with tags andrew witty, bill gates, country by country reporting, european parliament, gates foundation, glaxosmithkline, iasb, idiots, microsoft, richard murphy, tax avoidance
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