Andrew Belnap ■ Brass necks and boilerplate: How US multinationals treat UK requirements for tax strategy disclosure

Tax justice reports
Tax justice reports

Brass necks and boilerplate: How US multinationals treat UK requirements for tax strategy disclosure

The UK's Finance Act of 2016 included a requirement for large firms to publicly disclose their tax strategies. This report examines more than 600 US multinational corporations’ disclosures in response to this new requirement. It finds that the quality of the reports is diverse: while some firms provide a high level of information, a large number of firms make very short disclosures with much of the language copied from other firms. The report then identifies 71 firms, or 12% of the analyzed sample, for which the tax strategy could not be located, suggesting that such companies have either made their tax strategies nearly inaccessible or have not disclosed at all, thereby breaking the law.

Research suggests that the UK may lose £25 billion a year in corporate income tax revenues, due to the profit shifting of multinational companies; and that US multinationals in particular impose global revenue losses in excess of US$100 billion a year.

UK policymakers, meanwhile, have taken a range of steps to counter this loss in corporate tax revenue with as yet uncertain impact. This study assesses the impact of one of those steps. The Finance Act 2016 required large firms to publicly disclose their tax strategies. This was an uncontroversial measure for business, closely reflecting the ‘responsible tax’ approach that the big four accounting firms – Deloitte, PricewaterhouseCoopers (PwC), Ernst & Young (EY) and KPMG – have promoted.

Tax justice activists, in contrast, were much more enthusiastic about a related element of the Act, which gave Her Majesty’s Treasury the power to require multinationals to publish their country by country reporting data – a much more meaningful step towards tax transparency, and one long resisted by the accounting firms. But, despite new evidence showing that this transparency alone could raise revenues of £2.5 billion a year, Her Majesty’s Treasury continues not to use this power.

Now Andrew Belnap of the University of North Carolina has analysed for Tax Justice Network the compliance of more than 600 US multinationals with the requirement to disclose tax strategies – and the results are dismal.

First, a whole slew of companies have simply not bothered to comply with the law. After applying a thorough search methodology with a range of elements, it has proved impossible to locate any disclosure for 71 multinationals – or 12 per cent of the whole sample group.

Second, many of the multinationals that have complied have done so in the most cursory fashion possible. Short ‘strategies’ using boilerplate language proliferate, often just a few hundred words disclosing minimal information.

Perhaps the most blatant disregard for the intention of the law comes from two of the very biggest US multinationals, both of which have come under sustained criticism for their tax (avoidance) strategies: Nike and Google. Quite extraordinarily, the two companies’ disclosures are so similar, the only significant difference between the two are the names of the companies and their subsidiaries.

Key findings

  • A large portion of the multinationals’ tax strategies, documents that are required by the Finance Act 2016 to be publicly available, are highly similar to at least one other tax strategy disclosed by a separate US multinational corporation. This suggests that much of the text from these disclosures may have been copied from other companies’ disclosures or jointly provided by a third party.
  • There is high variation in the total content disclosed, as measured by the total number of words, and most tax strategies are quite brief.
  • For 71 out of the 600 multinationals analysed, we were unable to locate a tax strategy online. This finding suggests that these firms either made the disclosure highly inaccessible or did not provide the disclosure at all.

Key recommendations

  • Tax strategy disclosure. A robust and detailed standard is needed. The leading international sustainability standard setter, the Global Reporting Initiative, has now published a draft standard on tax and payments to government, and this includes three key elements for disclosures of management approach to tax. This should be introduced into law, to replace the vague requirements of the Finance Act 2016.
  • Country by country reporting. In addition to disclosure of tax strategy and management approach, multinationals must be required to publish quantitative data on the extent of their economic activity, including profits declared and tax paid, in each country of operation. Without this, there can be no accountability for any claims to eschew profit shifting for tax avoidance. In the United Kingdom, the legislation is already on the books. There is no reason not to put this into force immediately – and billions of pounds of reasons to do so.
  • Enforcement capacity. This study has shown the flagrant disregard of multinationals and their tax advisers for United Kingdom tax law. The same attitude extends to the whole set of interactions with the UK’s sorely underfunded tax authority, Her Majesty’s Revenues and Customs, which recently revealed that multinationals are commonly providing them with false information, even when facing a ‘profit diversion’ inquiry. Outright non-compliance, whether for transparency or tax itself, reflects culture of impunity brought about by the systematic underfunding of the tax authority and of Companies House, where corporate reports are filed for public view. This ‘regulatory austerity’ must be reversed, if taxpayers of all types and sizes are to recover confidence in the system, and for compliance to be enhanced.