10 Aug 2012

Disclosure discomfort

Campaigners are calling for total transparency, but country-by-country reporting is a step too far for many companines. Gavin Hinks looks at the arguments for disclosure

Surely Bill Gates can’t be wrong? In November last year the Microsoft founder, charity advocate and multibillionaire gave a speech that cited the arcane subject of country-by-country (CBC) reporting. Gates gave it his wholehearted backing, saying, “All G20 countries should require the mining and oil companies listed on their stock exchanges to disclose payments to governments.”

The measure, which aims to force the extractive industries to publish what they pay to the governments of developing nations, has been highly controversial. The US, though still working on the final form, has already voted through its own contentious version. And now the European Union is pushing through similar measures. But will it achieve the aims campaigners set for it? And could opponents still derail it?

Country-by-country reporting, an issue relevant to all multinationals, has become a burning issue for campaigners, NGOs and lawmakers as they try to force big businesses to reveal their financial dealings in developing countries. The underlying motive is to shed light on the payments being made to governments, the tax avoidance practices that might be employed and, in particular, whether sophisticated transfer pricing strategies are moving much-needed revenues away from cash-strapped nations.

The idea dates back 10 years to when NGOs began discussing how multinational companies could be forced to reveal their financial relationship with developing nations. Since then tax and its avoidance has become one of the core issues attached to the corporate social responsibility agenda pursued by many lobby groups, and CBC reporting has become a key demand.

NGOs intent on change include Christian Aid, Publish What You Pay, the Tax Justice Network, Global Witness and Revenue Watch, all calling for mandatory CBC reporting. The issue has also been discussed by the G8 nations at the highest levels and has emphatic support.

In a 2010 paper, Shifting Sands: Tax, Transparency And Multinational Companies, Christian Aid said tax havens were partly to blame for the financial crisis by hosting the off-balance sheet operations of big business. It called for CBC reporting as part of the solution. In the same year US lawmakers surprised observers by including CBC reporting in the Dodd-Frank Wall Street Reform Act.

The campaign’s focus has been to have the measures included in accounting standards set by the International Accounting Standards Board (IASB). Nicholas Shaxson wrote in his book Treasure Islands last year that if companies were made to break down their financial data country by country it would “vastly increase the transparency of markets, informing investors about where their money was being used, helping governments understand how they were being fleeced through offshore strategies and how competitive markets were being distorted”.

Heeding the call, others have acted ahead of the IASB. At the end of October last year, European commissioner Michel Barnier revealed that he would, after a long consultation, include elements of CBC reporting into rewrites of two directives on accounting and transparency. This would apply to public companies in the extractive industries.

At the time he said the commission had with these measures established itself as “an avant garde in promoting transparency and goes well beyond the US Dodd-Frank Act, putting the interests of developing countries at the forefront of this European domestic legislation”.

Contained in Articles 37-39 of the commission’s Accounting Directive, the CBC provisions make tough demands of businesses. They ask that publicly listed extractive companies disclose annual payments made to governments and the type of payments made, among them taxes, royalties and dividends. The directive also orders the disclosure of payments on a project-by-project basis.

There has been a tentative welcome for these provisions from campaigners and big corporates, but neither side is happy with the outcome. CBC supporters claim Barnier’s measures fall short of expectations and will fail to deliver the reforms originally conceived. Companies argue that the directive simply will not create a fair and level playing field on which they can do business.

However, if they believe that the proposals are flawed, there is still much to play for and plenty of time in which arguments can be made.

The two key directives are now in the hands of committees at the European Parliament, where MEPs must debate their merits, take forward changes and give them the thumbs up. The lead body will be the legal affairs committee, although the views of the economics, foreign affairs and development committees will also contribute.

The legal committee wants to have the directives discussed, amended and voted on by July, which gives all sides at least another two months to potentially make their mark on the new laws. Initial views have already been heard and the committee is in the process of accepting amendments, which have to be in by early May. A parallel process will be under way in a working party of the Council of Europe, giving further lobbying opportunities.

And the lobbying is being taken seriously. A group of organisations including mining companies Rio Tinto and Glencore-Xstrata plus energy giants BP, Shell and Total have engaged Brussels-based specialist g+europe to help contact the right politicians and get their arguments across.

But for all the nodding of heads and positive action, many organisations see total transparency as counter to their best interests.