Revenue fuels aid agency’s row with Big Four

A clash between an aid charity and the four biggest accountancy firms over international tax reporting rules has gained new impetus after a top Revenue & Customs official stepped into the debate.

Supporters of Christian Aid are sending postcards and e-mails to the heads of the accounting firms dem­anding changes to international accountingrules. The campaign is designed to tackle what it views as tax abuses that drain developing countries of revenue.

Dave Hartnett, permanent secretary at the Revenue,& Customs told a press conference in Paris on Fridaylast week that it was “an idea that is gathering momentum”.

“There is a growing recognition that country-by-country reporting brings additional transparency, particularly in relation to how multinationals are operating in emerging and developing countries,” he said. But he added that the issue had not been debated at the two-day meeting of 34 tax authorities that discussedon evasion and avoidance.

The Christian Aid campaign has been met with bemusement frombemused many tax experts, who think it is based on a poor understanding of the issues. One senior adviser said: “I think the corporates are losing the debate because it is so hard to explain.”

The charity launched its campaign after meetings failed to win the advisers’ support for its drive to persuade standard-setters to introduce country-by-country reporting standardsrules.

It argues this could address the address “asymmetry of power and information” when it comes to transfer pricing, which determines the allocation of taxable profits between parts of a multi­national.

Advisers are continuing discussions with Christian Aid but believe the change would be a significant extra burden for companies, which that currently compile management information on a cross-border basis. In addition, they doubt it would be a useful extra tool in navigating the complexities of transfer pricing, which is increasingly dominated by arguments over the value of brands and other intellectual property.

The root problem is that some parts of the supply chain have very little value, said one tax specialist. “It is not a transfer-pricing issue. It’s a more fundamental development issue.”

Although tax specialists are largely sceptical that developing countries are particularly disadvantaged, some governments have voiced concern. Trevor Manuel, South Africa’s former minister of finance, said last year: “It is a contradiction to support inc­reased development assistance yet turn a blind eye to actions by multinationals and others that undermine the tax base of a developing country.”

The issue has become more important as globalisation has resulted in the displacement of local brands with global brands. Countries have become more reliant on taxing profits after following advice to remove withholding taxes in a bid to attract more value added work. Vulnerability to corruption is another problem, as agreeing transfer prices is usually a matter of negotiationSome emerging economies - notably India and China - have become increasing assertive in their approach to negotiations, adding to multinationals’ fears they will be increasingly exposed to double taxation.

The Paris-based Organisation for Economic Co-operation and Development said it was providing technical assistance to improve transfer pricing know-how to governments, while the UK’s Department for International Development is also helping developing countries improve the efficiency of their tax collecting.

The campaigners are trying to put more emphasis on generating tax revenues in developing countries rather than relying on aid. The pressure for country-by-country reporting has emerged from a similar but more narrowly-based campaign on extractive industries and a campaign against tax havens.