Country by country reporting is a stupid and expensive conceit
Posted by Christie Malry on June 7, 2011 at 9:26 pm
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 1.
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.
Notes:
- supplemented by some information on a segmental, not country-by-country, basis ↩
[...] Take it away Christie. [...]
Oh good god. That (the gates philanthropy stuff) is the first time I have ever actually clicked on a link to his stuff, I knew he was an idiot, but I'd no idea quite what a hateful little statist he was. No wonder the sane seem to dislike him so much.
Worstall used to make me go to Mr. Murphy's site but I have stopped so as not to bump up his figures. Today, I just had too. Is this a case of the pot calling the kettle black? Mealy-mouthed, damned if you do, damned if you don't. The word scummy comes to mind. So small-minded that he just cannot comprehend the importance of the Bill and Melinda Gates Foundation's work. All he can do is apply his nasty little mind to 'where is the crim' aspect to all this then?'
I hate to think how ungenerous he probably is personally. I have followed the Gates - Buffet gig from the beginning. To give the impression that it is a tax dodge, or only possible because of tax planning is pathetic. The application of almost their whole fortune, (yes I know that the residual going to their kids would make my mouth water), is astounding and absolutely unprecedented. I also know that it is because they can. But they are doing it.
Of course this doesn't fit the discourse. The state should do it. Well actually, the Gates's foundation is applying the very best investment techniques to their spending and getting results that others would die for. I prefer the result of alleviation of illness and poverty (real poverty) rather than the sanctimonious satisfaction of having gone through the tax system (where vast amounts just disappear) and null results other than supporting corruption on a grand scale is very sick countries.
Ritchie is just a media mouthpiece for the real sentiment of the tax collectors of the UK.
You need to try and understand that, as far as they are concerned, businesses exist because taxpayers make it possible.
By extension, therefore, if taxpayers want more tax than businesses are willing to give then that is fine.
Have a look at the comments made by some HMRC staff:
HMRC IS SHITE
I especially loved, emphasis mine:
Although I agree with your overall argument, this particular non-sequitur and its variants have always irritated me as logically all companies are funded by taxpayers. I can see why BBC employees get irritated by the "I pay your wages" argument as well.
How do you even begin to make these guys understand that trade was around along time before taxation?
....I’d rather less philanthropy, less hype, less high profile giving to publicity laden causes and rather more tax paid to ensure that the government in each country in which a multinational corporation trades has the tax due to it to ensure it can supply the public services the people in that country deserve......
That is the most eye poppingly amazing thing I have ever read in my life!
He would rather money be wasted by the government than spent on basic essentials for the most abjectly poverty stricken people on the planet. Hateful, disgusting little man.
"The European Parliament must understand that it simply does not have the necessary accounting and
business expertise to be regulating in this area."
Nonsense, look at the incredibly efficient way it has failed to have the EU's own account signed off for
what, 14 or 16 years now. Surely this proves them to be the ideal organization to oversee the accounts
of everyone else !
Alan Douglas
Essentially Murphy's attitude on seeing a sum of money in private hands is, "I wants it, and I means to have it." Spending not mediated through the hands of his ilk is de facto illegitimate. He is one of the most loathsome excrescences in modern British political life. That someone with such pitiful intellectual gifts has achieved any sort of prominence is a woeful comment on how much the Left has debased the discourse. In a sane world, Murphy would be restricted to peddling his crackpot nonsense by wearing a sandwich board in the High Street.
Hey, has nobody noticed that every company has to report its profits in each country where it operates to the tax inspectors of that country? So the country-by-county reporting concept is just a waste of paper - unless every one of the low-tax countries are populated with dozens of people like Richard Murphy who have made fortunes out of tax avoidance and now volunteer to stop anyone else making a fraction of their wealth in a similar fashion.
Country-by-country reporting is just a mechanism for Murphy and his friends to get more information with which to beat companies.
They won't look at the underlying business reasons for what they are doing; they will just find companies whose cross-border margins are different to the average and accuse them of tax avoidance. Exactly what Christian Aid did with their tax reports.
[...] because the idea is equal parts expensive, bonkers and useless (for why I think this, read this blog post I prepared earlier). Despite the UK's long tradition of the rule of law, compliance in full with global protocols [...]
[...] corporations, to solve. It's certainly not "irresponsible" of them to seek to avoid a totally ineffective and massively expensive burden, that their shareholders and customers will ultimately have to [...]
[...] I've shown before that country by country is ineffectual at distinguishing bad tax avoidance from good tax planning. So it's similarly useless here. [...]