26 Feb 21 | Weekly podcast
The new UK government may not introduce country-by-country financial reporting, but might clean companies actually benefit from more voluntary exposure?
A country-by-country reporting rule took effect in the UK even before the election. The UK Finance Act 2015, which came into law on 26 March, contained provisions allowing the government to bring in country-by-country reporting – though the fleshing out of the obligation for companies has been left to a later date.
Onto the back burner
The surprise Conservative victory in the election is likely to result in the public disclosure issue being kicked into the long grass. The Conservative government is likely to take the view that country-by-country reporting is a valuable tool for tax authorities, but any public disclosure requirement would represent an unnecessary burden on business.
The “Exchequer impact” in tax coming in will rise to £15m in 2019-2020 – or a mere £10,715 on average for each of those 1400 UK companies. These numbers suggest that the government expects to turn up relatively little evidence of unjustifiable profit-shifting.
The likely pull-back from public disclosure of country-by-country information will disappoint campaign groups.
For sustainable investors meanwhile, aggressive corporate tax planning is increasingly seen as a risk.
Sustainability investors RobecoSAM, who work on the Dow Jones Sustainability Indexes, recently introduced tax strategy criteria into their corporate sustainability assessments.
They argued that companies that shift profits around face reputational risks and might have poor relationships with the countries where they try to minimise their taxes, leading to “approval delays or the rejection of projects, for instance, or in the worst case, companies risk losing their license to operate”.
All this evidence begs a question of multinationals that have so far not reported their tax arrangements on a country-by-country basis.
If the UK government, which is considering introducing a rule, expects to find little bad behaviour, and if there are risks to non-disclosure in the eyes of investors, why would companies not consider voluntary country-by-country disclosure?