Nations vary in their approach to transparency about taxpayers. In Norway details of everyone’s income and taxes are published in annual ‘tax lists’. In most countries the information on your tax return is considered strictly confidential to the revenue authority. In recent years countries have agreed to exchange more information amongst themselves – such as on contents of bank accounts, the headline (country-by-country) accounts of multinationals, ownership of companies, and details of tax rulings. Many civil society organisations and some parliamentarians think they should go further and require some of this information to be published. Great hopes have been placed on the idea that this would enable an increase in domestic revenue mobilisation in developing countries. My working paper Beneficial Openness? (published recently by the Chr Michelsen Institute in Norway) looks at two of the most iconic ideas in financial transparency;

  • Mandatory publication of country-by-country reports by multinational corporations
  • Public registers of beneficial ownership (who owns companies and trusts)

In general: considering the benefits and costs of public transparency

The general case for transparency and open government (on anything from environmental statistics to public budgets) is that access to information supports better decision-making and is critical to democratic accountability. Putting more information into the public domain may build trust and enable citizens to scrutinise the performance of government institutions. On the other hand government information can often relate to individuals and businesses, and these private entities have reasonable expectations about privacy and confidentiality. Furthermore information that is confusing may reduce trust in the systems it seeks to strengthen. So the key question is where to draw the line in determining which information should be private and what should be public?

The paper sets out a general framework for considering the potential benefits and costs of enforced transparency in different areas.

Transparency mechanism: benefits and costs

Benefits: effectiveness at achieving objective Costs/harms
  1. Deterring/ exposing individual wrong-doers
  2. Enabling citizens to understand and hold governments to account
  3. Facilitating commercial relations
  4. Building trust in governance
  5. Providing data to support research, learning and innovation
  6. Open data formats reduce cost of accessing, sharing and using information
  1. Direct costs and administrative burden of collection
  2. Cost of publication and dissemination
  3. Loss of specific privacy and confidentiality
  4. Perverse impacts of information disclosure on users – providing false assurance or exaggerating concerns.
  5. Perverse impacts on actors whose behaviour is disclosed: openness can inhibit honesty and experimentation, and drive further secrecy
  6. Distraction of efforts from other means to meet objectives.

Country-by-country reporting

Starting this year, large multinational companies will be required to file country-by-country (CbC) reports with information on sales, profits, number of employees, and taxes paid for in each jurisdiction where they operate. These short summaries supplement the many thousands of pages of tax returns submitted in confidence to national tax authorities. The CbC reports are intended to be a risk assessment tool in order to help direct audits and will be shared between tax authorities, but without making them public. Many civil society organisations, as well as some politicians and the European Commission argue that CbC reports should be published, so that citizens can see for themselves what tax multinationals pay. However there is less enthusiasm from tax professionals who often argue that this headline data is likely to be misinterpreted leading to a accusations, misunderstandings, and rebuttals fuelling mistrust and undermining tax morale. The US and Germany argued strongly against public CbC reporting in the development of the BEPS programme, and in France it has been declared unconstitutional. However the UK passed a finance bill in 2016 which includes an amendment that would allow public country by country reporting to be required in the future.

The debate on the usefulness of public CbC reporting does not have to remain purely hypothetical. Several reports have been published which attempt to analyse corporate tax behaviour based on data which is already in the public domain on a country-by-country basis, for example reports by European Green MEPs, French NGOs and Oxfam analyse country-by-country data published by European financial institutions under the CRD IV regulations, while the Greens/EFA group in the European parliament also published a similar analysis of Inditex (the Spanish clothing group which operates chains such as Zara).

These reports all take a similar approach comparing ratios of profits, turnover, employee numbers and tax in different locations – and their authors believe that they demonstrate profit shifting. Oxfam argue that “The 20 biggest European banks register around one in every four euros of their profits in tax havens” (by which they mainly mean Hong Kong, Luxembourg, Belgium, Ireland and Singapore rather than small islands or zero-tax jurisdictions). They highlight that the ratio of profit to turnover is around twice as high in these places while profit per staff member is three times greater, compared to other locations and conclude that this indicates that profits must be being shifted as this is “disproportionate to the probable level of real economic activity they undertake in these countries”. Similarly the report on Inditex interprets the fact of having profitable commercial functions such as store fit-out, sourcing and e-commerce centralised in the Netherlands, Ireland and Switzerland as ‘aggressive avoidance’.

These reports demonstrate the limitations and difficulties of analysing country-by-country reports, or perhaps simply a difference of opinion about what constitutes ‘aggressive avoidance’ and profit shifting. Given that banks’ operations range from high street branch banking to private banking, insurance and investment banking, it is not surprising that some areas have relatively higher profitability and smaller headcounts than others. Similarly, the calculations Inditex report reflect a much broader interpretation of ‘‘aggressive avoidance’’ than that used by many tax professionals, revenue officials, legislators, and even some civil society organisations. There is no consensus that it is unethical or artificial for a company to pay royalties to a Dutch subsidiary, locate its e-commerce activity in Ireland, or run its sourcing operations out of Switzerland.

In each case it is likely that favourable tax regimes played a part in influencing the companies’ choices on where to locate these activities, but the simple ratios are not adequate for identifying whether they are artificially shifting profits from other places. These early experiences of CbC analysis suggest the need for a careful, open, analytical conversation about the hopes, fears and early lessons from using CbC data, otherwise tax practitioners, civil society activists and the media will continue to talk past each other, contributing to the public growing ever-more cynical (and ever more confused).

Public registers of beneficial ownership

The primary objective of beneficial ownership transparency is to prevent the use of ‘anonymous companies’ to facilitate transnational financial crime such as grand corruption, tax evasion, sanctions-busting, terrorist finance and money laundering. Governments have committed to making adequate, accurate and timely information on the beneficial ownership and control of ‘legal persons’ available to competent authorities globally.

Public registries are an increasingly popular approach; the UK, Norway, the Netherlands and 11 other countries are developing registers, and the European Parliament has voted in support of this measure. The Open Ownership project recently launched a Global Beneficial Ownership Register, which will draw together data from all these sources into a single linked dataset, searchable by individual and company name. But such central registers are not the only way to meet the beneficial ownership commitment. The other main approach is for jurisdictions to impose a duty on corporate service providers (CSPs) to verify true identity of company owners and to make this information available to law enforcement, courts and regulators.

The CSP approach has the advantage of providing a means of verification, whereas central registers are generally passive archives based on self-reported information. Crooks and kleptocrats are least likely to feel compelled to file honest information. The World Bank report ‘Puppet Masters: How the Corrupt Use Legal Structures to Hide their Stolen Assets and What to do About It’ concluded that requiring CSPs to collect and verify ownership information is more effective than relying on self reporting to a central register.

Open self-declared public registers are relatively cheap to operate, particularly if the country already has an online company register, since it essentially involves adding a few extra fields to an existing form. They offer universal access to information and the prospect of ‘many eyes’ checking the data. Other options include combining a central register with CSP verification (as they do in Jersey), or beefing up capacity of the registrar (or tax authority) to spot check and verify the register.

In the paper I set out the different options and look at the pros and cons of each approach in terms of quality of information, ease of access by authorities cost and impacts on privacy, and the risk of creating a false sense of security through encouraging due diligence based on unverified information.

Avoiding transparency for its own sake

Transparency is generally a good thing. But that does not mean that it is always the best solution. There is a strong case for public disclosure of payments to government by companies in the extractive industries, as well as details of beneficial ownership and contracts in the case of public procurement and extractives concessions. However, a case for broader public transparency does not necessarily follow from this. If disclosure requirements are not well targeted there is a danger that transparency can become a hamster wheel; you can always ask for more detailed and widespread disclosures without moving closer to the ultimate goal of more responsive public institutions, more effective markets, trusted institutions and a stronger social contract between governments and their people. Simple, clear solutions are helpful for complex problems to gain political and public momentum. But if transparency is seen as a means to an end we should not allow particular mechanisms to become so iconic that they become unquestioned goals in their own right.

Maya Forstater

Maya is a visiting fellow at the Center for Global Development and a researcher and advisor on business and sustainable development. Her work focuses on the intersection of public policy, business strategy and sustainability including questions around tax and development, financing for low carbon investment and multi-sector partnerships and standard setting.