Country-by-Country Reporting: The Road Ahead

Sishen ore mine, South Africa. Photo: rogiro/Flickr

Cross-posted from the blog of the Task Force for Global Integrity and Financial Development, whose 2011 conference is taking place this week in Paris.  You can also follow the conference on Twitter and submit questions for the presenters at #TFConf2011 , or #TFConf2011fr  for French.

This fall is shaping up to be a critical season for financial transparency. As the Task Force on Financial Integrity and Economic Development prepares for its annual conference on October 6-7, key decisions on country-by-country reporting are anticipated in the U.S. and from the European Commission. Meanwhile, international attention to tax loss facilitated by financial secrecy continues to grow as the global economic crisis drags on.

Recently, PWYP Norway’s Piping Profits report highlighted the role regulatory gaps can play in shaping the tax strategies of multinational companies, often to the fiscal detriment of the countries they operate in. The report describes the complex web of subsidiaries ten of the world’s most powerful oil, gas and mining companies have created, showing that over a third of their 6,038 subsidiaries are located in ‘secrecy jurisdictions’ or ‘tax havens’.

Piping Profits is a clear demonstration that—beyond corruption—country-by-country reporting is a key element for ensuring greater domestic financing for development and for limiting aid dependency. The report also underscores the need for full contract transparency in the extractives sector to ensure better tax compliance and oversight.

In response to this finding, a spokesman for Glencore International AG—which Piping Profits identifies as “the most opaque mining company” it surveyed—noted that the company provides “all the disclosure required of a FTSE 100 company listed on London and Hong Kong.” This, of course, is precisely the problem. When disclosure requirements don’t go far enough to offer an accurate picture of a company’s activities and transactions, companies can claim legal compliance while disclosing information that is of limited or no real use to stakeholders.

This is why so many have endorsed comprehensive country-by-country reporting rules as the most effective mechanism for ensuring access to the information needed by investors to properly assess risk, by governments to judge company compliance, and by citizens to monitor the value and use of public assets.

In the U.S., a provision of the Dodd-Frank Act passed in July of 2010 made the first step toward increased reporting within extractive industry sectors specifically, by requiring all U.S.-listed companies to publicly report the payments they make to governments in exchange for oil, gas and minerals, by country and per project. The U.S. Securities and Exchange Commission is currently developing final rules to implement this requirement in securities regulation.

At the same time, the European Commission is considering building on this new minimum standard, potentially by bringing additional sectors (e.g. forestry) into the fold, and requiring companies to report not just payments, but full financial information including production, costs, sales and profits. Legislative proposals from the EC are expected in October, while some European governments have expressed their intention to examine country-by-country reporting in the near term.

The determination of U.S. and European officials to implement strong country-by-country standards will be a litmus test for financial integrity. While the G-20 has not made much progress on country-by-country reporting this year, Mexico has indicated its willingness to address these issues during its presidency.

In the midst of a deep economic crisis in the U.S. and the EU, global transparency norms are required to make sure citizens, shareholders, journalists, investors and parliamentarians can hold their governments and corporations to account. The challenge and great opportunity we face now is to convert this conviction into legislative gains with clear development benefits, to serve as the basis for further reform toward a more accountable financial system in the years to come.

Post new comment