Now what about global corporate tax?

The last twenty years have been tumultuous for the understanding of taxation in the accounts of multinational companies. The investor in this sector has been on a roller coaster if he sought to interpret the tax owed by the companies in which he owned shares, explains Richard Murphy.

The two decades can be divided into three periods. The first was until 2012. Indeed this time was free for all for companies. They were in charge of lobbying. Tax rates have fallen rapidly, all over the world. Concessions on the tax base, which shifted quite heavily towards territorial taxation, helped those who sought to avoid taxation. The tax profession was more than willing to contribute to this objective. Tax avoidance was considered meritorious both by tax practitioners and their clients.

Although not immediately apparent, the global financial crisis has been a game-changer for international taxation. Politicians around the world wanted someone to blame for this crisis, and tax justice campaigners gave them their answer in the form of tax havens. From Nicolas Sarkozy to Barack Obama, they seized the opportunity to point the finger at tax havens.

Others have done the same, and media pressure on companies like Google, Amazon and Starbucks has increased. MP Dame Margaret Hodge delivered the era-ending blow when she made these three companies squirm when she testified before her committee in the UK House of Commons in 2012. Most directors tax authorities had a reaction: absolutely no one wanted to sit on the chairs. where these companies had been based.

The mood has changed. The OECD was tasked by the G8 to tackle corporate tax abuse using tax havens and the obvious transfer fraud. The effort of companies at the OECD to avoid restrictions being imposed on them until 2105 was considerable, but civil society prevailed.

The accounting system I had created, called Country-by-Country Reporting (CBCR), gained OECD approval and is now the law in ninety countries. The objective was simple: to identify companies that were allocating too much profit to tax havens. Business was suddenly on its feet, with a literal Trump card still to play. With Republicans in charge of the United States, further tax reform was off the table.

President Biden changed that. He gave the green light to a new global tax agreement. It couldn’t have happened otherwise. It seems likely that a deal will be delivered. That said, it is deeply flawed. At 15%, the minimum tax rate is too low. Opt-outs leave gaping holes that tax planners can exploit. And developing countries have every reason to be annoyed because the deal is biased against them, and it took a lot of effort to persuade them to sign. This is a stopgap arrangement.

So what should the savvy investor be aware of when it comes to taxation now?

First, it is highly unlikely that the investigations into the abuses exposed by the CBCR have made much progress yet. There are likely to be big surprises ahead, so investors should look for companies confident enough in their tax position to disclose them and should avoid those that seek to hide them.

Second, the number of disgruntled countries means another round of global talks is inevitable. A better offer will emerge in the years to come.

Third, the push towards public CBCR in the EU and beyond will inevitably achieve this. There’s a lot more tax data on the horizon, I guess. Wise companies will adapt now.

Fourth, the combination of Covid and the climate crisis is making it increasingly difficult for investors to find sustainable returns. Tax uncertainty will have a significant impact on the valuation of companies in this regard.

This means that this journey is not over yet. So what is the investor looking for now?

First, they should seek full tax disclosure. This indicates three things, which are good governance, confidence in the company’s fiscal position, and accountability. All indicate a controlled risk.

Second, a company must be willing to explain its tax rate using data. This will require country-by-country disclosure. Few things say better than voluntary disclosure of tax trends in this area: early adopters should be rewarded.

And third, because tax can now be hidden in so many parts of accounts, it’s really time that a full tax disclosure reconciliation to prove exactly what tax was paid (and, ideally, where) should be included. in all accounts. No one should be left in the dark on this issue, as is too often the case now, as my research shows.

My message is simple in this case. If a company is unwilling to bring its tax transactions face to face, walk away. Taxation today represents more than ever a risk for companies. Only transparency can mitigate this for the investor.

The wise will invest, I hope, where the tax facts are known. However, I am aware that it is currently quite difficult to obtain the correct data. The Corporate Accountability Network, which I lead, knows this and is currently studying what an accounting standard on tax disclosure should look like. Our intention is to issue an exposure draft for discussion. Comments and support from those interested in this issue would be appreciated.

By Richard Murphy, Director, Corporate Accountability Network; Professor of Accounting, Sheffield University Management School; Director, Tax Research LLP; co-founder, The Green New Deal; Columnist, Le National newspaper.