What is the rule for the citizens of most countries in the world, is more the exception for global groups of companies: paying taxes commensurate with income. According to International Monetary Fund (IMF) estimates, for the year 2014 alone, developing countries lost US$213 billion in tax revenue because annually, multinational groups spirit past the fiscal authorities 4 to 10% of the taxes they ought to pay. By way of comparison, according to the Development Assistance Committee of the Organization for Economic Cooperation and Development (OECD), the industrialized countries in which most of these tax optimizing global groups are headquartered spent US$137 billion in development aid to the global South for that same year.
World trade without a market
Corporate groups often do not pay their taxes where they generate their profits, but where they will pay the lowest taxes on those profits. "Transfer pricing" is one of the preferred vehicles for shifting profits to tax havens. In these cases enterprises make use of a legal fiction under international tax law known as the "arm's length principle". Tax law assumes that the prices of goods and services in intra-company trade (e.g. goods deliveries, licenses or loans) are negotiated just as freely as on the open market. Yet in intra-company trade, which today accounts for up to 60% of overall world trade, the market is purely fictitious: In it, transfer prices do not result from the interplay of supply and demand, but from management decisions taken with corporate bookkeeping in mind. Profit shifting is often part and parcel of the process.
What happens in practice was recently illustrated by the example of the commodities giant Glencore, which is headquartered in the Canton of Zug (Switzerland). Between 2001 and 2012 the company used questionable transfer pricing to shift US$174 million in tax money from its copper mine in Mulfira in Zambia to the low-tax jurisdiction of Baar (Switzerland). In such a case of "transfer mispricing", the parent company in a tax haven invoices its subsidiary in a developing country excessively high fees, for example for intra-company accounting consultancy. At regular income tax rates, the profits of the subsidiary in the developing country dwindle, while those of the parent company in the tax haven increase.
Country-by-Country Reporting (CbCR) for multinational enterprises could offer a remedy in such instances. The concept was developed in 2002 by Richard Murphy, the current Director of the Tax Justice Network (TJN). The idea is to force companies to disclose specific company data (e.g. transfer prices, profits, income, loans or their headcount) in all countries where they are active. For the first time, this could enable the tax authorities in the countries concerned to form an overall picture of a company group. This would make price manipulations obvious and they could then be stopped.
A rich club working for the rich
Country-by-Country Reporting for multinational enterprises is the most important of the minimum standards for a new international corporate tax regime agreed on by the 34 OECD Member States under their project to combat base erosion and profit-sharing (BEPS), which they approved last October. Switzerland too has undertaken to participate. In late January in Paris the Federal Council signed the multilateral agreement between the competent authorities on the exchange of country-specific reports. The Federal Council will lay out the exact parameters for Swiss CbCR in a draft law that will go into expert consultation this spring.
In all likelihood, however, CbCR based on the BEPS guidelines, which Switzerland too will be following, will not prevent cases such as those of Glencore in Zambia in the future. There is indeed a growing number of developing countries present in various OECD bodies. Yet the organization remains a club for rich industrialized countries where the corresponding interests dominate. Hence, the OECD standards are basically limited to exchange of country-specific reporting among tax authorities. The governments of OECD States have never been and are still not interested in public reporting – that is, accessible to political circles, the media and civil society – as originally envisaged by Richard Murphy and still being called for by numerous development organizations today.
What is more, OECD CbCR regulations require a company group to submit a comprehensive report only to a tax authority in whose country its headquarters are located. This leaves developing countries, where corporations generally operate just subsidiaries, dependent on the willingness of the authorities in the country where the company is headquartered to share the relevant information with them. Switzerland will thus be able to decide unilaterally the countries with which it is willing to share corporate information from country-specific reports under automatic exchange of information (AEOI) arrangements. If Switzerland decides to be guided by the AEOI to be introduced in 2018 for bank customer data, developing countries will come away empty-handed.
In the Glencore case described above, Zambia would therefore be dependent on the discretion of the Swiss tax authorities. If abusive transfer pricing is suspected, the said authorities could supply the data to Southern Africa without being asked. But the OECD requires country-specific reporting only from companies with a balance sheet total of at least €750 million in the reporting year. From a development perspective, this threshold is set too high, as there are many companies domiciled in industrialized countries and which obtain profits from developing countries but whose balance sheet is still below this threshold. These "small multinationals" will be able to continue operating under the radar of the tax authorities responsible for their parent company.
No justice without transparency
Alliance Sud considers it urgent for Switzerland to include not just OECD countries but also developing countries in the automatic exchange of corporate tax data. CbCR must also be public, as this is the only way in which tax authorities in developing countries too will be able to benefit extensively from corporate accounting data. Along with several international non-governmental organizations, the European Parliament also favours such public Country-by-Country Reporting. In contrast, in its draft published in January, the EU Commission is seeking to limit CbCR to the level of authorities. Individual political figures such as the British Chancellor of the Exchequer George Osborne or the EU Commissioner for Competition, Margaret Vestager, do support broader public CbCR. This type of reporting is already in force in the EU for major financial service providers. When it comes to public CbCR, all may not yet be said and done, including in Switzerland.