Public Country-by-country Reporting

David Drew Excerpts

Wednesday 22nd November 2017 Westminster Hall

[Nigel Mills (Amber Valley) (Con)]

I beg to move,

That this House has considered public country-by-country reporting.

I thank the Minister for being here. Today is a busy day for the Treasury, so I am grateful that he has found the time to respond to the debate. I also thank him for some of the measures that we heard earlier in the Budget, especially on the challenge that the digital economy and large companies pose to our tax system and the further measures to try to ensure that they pay all their VAT. We have been asking for those measures and it is great to see some progress. It shows that we all share the same goal: we want the largest companies to pay their fair share of tax in all the countries in which they operate. Any measures we can bring into force to do that will be greatly welcomed and that is exactly what we are trying to achieve here.

We are pressing the case for the largest companies operating in the UK to publish the country-by-country reporting that they are already required by the Government to do privately for HMRC, so that we can all see exactly where they are making their profits, where they have employees, where they have sales revenues and what tax they are paying on a territory-by-territory basis in all the key territories in which they operate. I strongly believe that the only way we will make real progress on these issues is to make companies publicly accountable so that they have to publish what they are doing and where, so that we can all see it and challenge them. If there are no adequate explanations for why they are reporting large profits in territories with very few employees, very low revenue and very few assets, perhaps we will have to conclude that they are doing that just to avoid paying their fair share of tax. We can all make a sensible buying decision on whether we wish to use those companies at all.

We will not achieve the solution that we want—everyone paying their fair share—by expecting HMRC to do all the compliance work and to challenge every company that is out there operating in the UK. We have to find a way to change the behaviour of the largest companies and to show that we do not believe that the use of aggressive tax avoidance, artificial structures or territories in which they have no substance is an acceptable way to behave. If we can achieve that behaviour shift, it will be far easier for us to collect the taxes that we want. I do not think there is any disagreement on that between hon. Members here who campaign on this subject and the Government; it is what we all want to see. The Government have followed exactly that approach in recent years.

This year, the Government are requiring very large businesses to publish their tax strategy and set out their approach to tax risk, tax compliance and tax planning. The reason for that was not to put an exciting document out there for tax professionals to argue about, but to make the highest levels of management at those companies think through their tax policy and their relationship with HMRC and set those out in a public document that we can all read and challenge. The aim was to improve their behaviour on the basis that the more sunlight we can shine on such issues, the more likely it is that we can change behaviour. We are not asking for a quantum shift from the Government’s existing approach, or for a huge amount of extra work on behalf of those companies, or for companies to put incredibly sensitive commercial data in the public domain. We are asking for an extension of the existing process, so that it includes this most important information: exactly how much money they are making in each territory and how much tax they are paying there.

[Dr David Drew (Stroud) (Lab/Co-op)]

The hon. Gentleman makes a compelling case. I asked two parliamentary questions last month about the Government’s strategy on country-by-country reporting. In both answers, the Government referred to the fact that they are making deliberations within ECOFIN, which is fine while we are members of the EU. Does he know what the Government’s strategy might be when we are no longer members?

[Nigel Mills]

That might be slightly above my pay grade, but I am grateful for the hon. Gentleman’s questioning of that situation. That is the challenge we put to the Minister today.

The Government have already imposed a requirement on the largest companies operating in the UK to give that information to HMRC. Two years ago, they accepted an amendment from the right hon. Member for Don Valley (Caroline Flint) to take the power to make that information public. Today, we ask the Government to set the date by which they will start to require that information to be in the public domain, maybe as a backstop so that if EU discussions on doing it multilaterally have not worked by—I do not know—the middle of 2019, we will require UK companies to start doing it and we will take the lead in that situation. That would be consistent with the timing of our departure from the EU.

I think we all agree that the ideal situation would be multinational and multilateral—preferably an OECD or a G20 requirement—so that most of the developed world was doing it. If we cannot have that, we would like the EU to do it. We would like the EU proposal to do something similar to what we want, but it does not entirely do that because it includes disclosures only for EU countries and countries it prescribes as tax havens. We would like a proper territory-by-territory disclosure of all the countries that are material to a company’s operations. That EU proposal is stuck, however; it is not happening any time soon. We want the UK to set an example and show the EU and the world that we are prepared to lead on this. We are the largest financial centre. We have huge numbers of very large companies listed on our stock exchange. It is right that we set an example and say, “This is the kind of transparency we expect if you want to operate in the UK and be listed on our stock exchange.”

The Minister and his predecessors have argued that public reporting could be a bad thing for the UK for various reasons, such as that it would make us less competitive. I am not convinced by those arguments. I will run through some of the disclosures that we already expect from our largest companies. Under international financial reporting standard 8 on operating segments, large companies must produce in their financial accounts an analysis by the key operating segments of their revenues, profits and all manner of other things. I am sure that before that standard came in they would have argued that that was incredibly sensitive commercial information, which they should not have to produce—but they do. Paragraph 33 of IFRS 8 sets out that companies need to provide

“analyses of revenues and certain non-current assets by geographical area—with an expanded requirement to disclose revenues/assets by individual foreign country (if material), irrespective of the identification of operating segments”.

There is already a rule out there for very large companies, especially those listed on the stock exchanges that use IFRS, that they have to publish that information in some form. We are not expecting them to do something dramatically different, but to publish that in a coherent format where we can see and understand it.

I would go further and say that over the last few years, we have so increased the requirements for what we expect large companies to disclose that that level of information by territory would not be a significant increase. In 2013, statutory instrument No. 1970 introduced a requirement for companies to produce a strategic report that has to include

“a fair review of the company’s business, and…a description of the principal risks and uncertainties facing the company.”

It must be

“a balanced and comprehensive analysis of…the development and performance of the company’s business during the financial year”.

It must also set out

“key performance indicators, including information relating to environmental matters and employee matters.”

To expect companies to come out and say what their KPIs are, how they performed against them, and set out the key risks facing them—they are quite wide-ranging disclosures. It shows that we have moved ever onwards in expecting companies to report on their corporate social responsibility, hence all the requirements that we have imposed on companies such as giving details of their employees and the gender pay gap, commenting on their environmental performance, and the transparency requirements about corruption, bribery and anti-modern slavery. I do not think that most of our constituents regard tax as different from corporate social responsibility; they see paying a fair share of tax as part of a company’s responsibility. If we require companies to report on so many other worthwhile things, why not require them to report how much tax they pay in each territory? If they are paying the right amount, they can show that transparently; if not, they can explain why not.

The concern that requiring public country-by-country reporting would dramatically disadvantage UK companies or scare them off from having head offices here is an overreaction. In fact, it would be a sensible extension of existing requirements, including those for segmental reporting or for a tax note that explains the difference between the rate paid and the statutory rate. The information currently published is so limited, hard to understand, condensed and—some might say—twisted that no one can make any sense of what companies are doing. In cases where a company operates in a jurisdiction with an average effective rate of 25% but pays 3%, that information is not readily available to us.

The advantage of requiring public country-by-country reporting is not only that it would change companies’ behaviour, but that it would restore people’s confidence that our tax system is fair, that companies are paying the right amount of tax, and that we are doing all we can to collect it. If we imposed such a requirement on the large companies that are sheltering their profits in places where they have no real presence, I suspect they would stop doing it. That would boost confidence by allowing us to see from companies’ disclosures whether they have been caught by the rules and required to pay extra tax. It would also show us the exact scale of aggressive tax-abusive behaviour. Most multinational companies are probably not engaging in such behaviour; they probably just want to know the right amount of tax to pay per territory and get on with running and growing their business.

Restoring confidence and belief in our tax system is extremely important, particularly to the UK as an outgoing, exporting, global economy with a lot of intellectual property assets and a commitment to science and research. We do not want the world to move to an aggressive tax that attempts to clobber companies on turnover without looking at their real profits per territory. Our UK businesses will lose if we do not get the level of confidence right. If we cannot find a way of enforcing our rules, changing behaviour and restoring public confidence, Governments around the world will have to take other action to recover revenue. In the long run, it is absolutely in our interests to get this right, which we can achieve only with sunlight and transparency.

I commend the Government for the position paper they published today on the challenge to our tax regime posed by the digital economy. It includes some sensible ideas, such as charging tax on royalties paid offshore. Its second paragraph points out that the Government have taken

“bold unilateral action where needed”

to tackle the issue. That is exactly what we need on transparency: bold unilateral action. If we cannot agree on an EU-wide approach within a sensible timeframe, let us set a date for taking the lead and setting an example. I am not fixated on any particular date—if we need until 2019 or 2020 for negotiations, I accept that—but will the Minister tell us the Government’s backstop date for getting a multilateral deal? If they cannot get such a deal, when will they act, unilaterally if necessary, to impose this policy in the UK?