- 1 - ANNEX : Eurodad submission to the European Commission Directorate General for Internal Market and Services

- December, 2010 -

1. Would it be useful to have common EU rules on the disclosure of financial information on a country-by-country basis?

Yes No No opinion

In March 2000 the Lisbon European Council decided that a single financial market would be a key factor in promoting the competitiveness of the European economy and that an integrated market, properly regulated, will lower the cost of capital for companies of all sizes, deliver major benefits to consumers and contribute to developing stronger economic and social cohesion throughout Europe.

The adoption of harmonised country-specific reporting requirements across all EU member states would greatly contribute to level the playing field for European companies and to making transparency an international norm. The financial information, if delivered consistently across Europe, would be the basis to ensure that comparison can be made between reporting entities, which is a key attribute essential to successful interpretation of accounting data.

Low harmonisation across the EU because of different national financial reporting requirements would not make comparable information available to the market and will increase the cost for cross border investors.

Recitals 1 and 2 of the EC Transparency Obligations Directive state: “Efficient, transparent and integrated securities markets contribute to a genuine single market in the Community and foster growth and job creation by better allocation of capital and by reducing costs. The disclosure of accurate, comprehensive and timely information about security issuers builds sustained investor confidence and allows an informed assessment of their business performance and assets. This enhances both investor protection and market efficiency. To that end, security issuers should ensure appropriate transparency for investors through a regular flow of information.” The objectives pursued by the Transparency Directive are important to financial markets and recognised by international standard setting bodies, such as IOSCO and the OECD.

The current financial crisis evidenced that the disclosure of accurate and comprehensive information about securities issuers was essential in order to build sustained investor confidence and allow an informed assessment of their business performance and assets. The De Larosière report identified the lack of transparency as one of the factors which contributed to and aggravated the financial crisis and recommended to enhance transparency in different areas of financial markets, in particular with regard to financial information provided to investors.

In addition, the European Commission communication on Tax and Development: Cooperating with Developing Countries on Promoting Good Governance in Tax Matters states: “The G20 countries agreed to work on the international application of rules of transparency in financial and tax matters and have repeatedly called on the standard setting institutions to come up with a single set of high quality global accounting standards. The EU is seeking from all countries, and in particular its partner countries, agreement on the basic cooperation principles of good governance in the tax area (transparency of the tax system, exchange of information and fair tax competition) that its Member States have already achieved. This would enhance the capacity of EU Member States and their partner countries to address international tax evasion and avoidance, building on complementary international initiatives.”

1 Please, note that this is the Eurodad submission to the EC DGMarkt. Feel free to use this as a template for your own contribution. Please take into account that submissions should be sent in an online basis with different answers to fill in. 1 The existing disclosure requirements do not provide sufficient transparency

The current accounting rules of the EU do not supply data on a country-by-country reporting basis.

- Even if the Accounting Directives do require issuers to identify subsidiaries, jointly controlled entities and associates, many fail to make that disclosure as currently required by law. A 2009 study for the Tax Justice Network showed that of the 100 largest companies in the UK just 33 filed the information required by UK company law stating the names of each of their subsidiaries and the country in which they were located. This deficiency would be overcome if the information was to be included in the audited financial statements and would not be a consequence of the creation of a new reporting obligation in the EU. Similar obligations do already exist in other countries e.g. the US. - IFRS 8 segment reporting on a geographical basis has largely disappeared. In addition segments are usually defined on the basis of the majority of revenue earned from sales to external customers, and thus not requiring the disclosure of intra-group sales. The OECD suggests that such intra-group trade may comprise more than 60% of world trade.

Country-by-country financial reporting would reconcile the fact that current disclosure requirements do not provide information at the country level yet multinational corporations operate at the country level and should be accountable to a range of stakeholders on this basis. These include:

 The equity investor group (shareholders);  The loan creditor group (banks and bondholders);  The analyst-adviser group who advise the above groups;  Business partners;  Consumers;  Employees;  The surrounding community i.e. the public at large;  Civil society organisations; and  Governments and their institutions.

Accounting data is not within the scope of Corporate Social Responsibility (CSR)

CSR is voluntary disclosure that will not create the necessary level playing field for European companies

Although some companies, especially in the extractive sector, have taken voluntary steps to increase their financial disclosure, the only way of achieving common EU reporting rules and obtaining comparable, consistent and credible data for users of financial data is reporting country specific information in the financial statements of multinational corporations.

Moreover, current CSR standards as Global Reporting Initative (GRI) A+ already require the disclosure of economic indicators as the “Direct economic value generated and distributed, including revenues, operation costs, employee compensation, donations and other community investments, retained earnings, and payments to capital providers and governments,” and defines payments as “all company taxes (corporate, income, property, etc.) and related penalties paid at the international, national, and local levels. This figure should not include deferred taxes because they may not be paid. For organisations operating in more than one country, report taxes paid by country.” GRI A+ requires the reporting on the indicator or explaining the reason for its omission. However, it is difficult to find sustainability reports holding this certification, reporting on this performance indicator.

Consequences for EU economy

The introduction of country reporting requirements through the EU would create a level playing field for companies consistent with general EU pro-competition law.

2 - Regarding the US Dodd-Frank Act which requires all extractive companies (e.g. minerals, oil, or natural gas) registered with the Securities and Exchange Commission (SEC) to publicly (online website) report the different types of payments they make to host governments on a country- by- country and project-by-project basis. In terms of competitive disadvantages for EU companies, not all EU based companies active in the extractive industry are listed in the US and will not therefore in the future be subject to this, unless the EU pushes for alignment with those requirements. - Moreover, the International Accounting Standard Board (IASB) is currently working on a possible country-by-country reporting requirement which could be incorporated within a replacement standard for International Financial Reporting Standard 6 (IFRS6) for the extractive sector. Around 20% of comment letters submitted to IFR6 public consultation process stated that the consideration of country-by-country reporting requirements should applied to all industrial sectors and not only extractive industries. - In terms of security of energy supply, already in November 2008, the European Commission approved and published the Communication from the Commission to the European Parliament and the Council “The raw materials initiative - meeting our critical needs for growth and jobs in Europe” which includes among its recommendations in order to promote a sound investment climate that helps increase supply: a) increasing transparency of mining deals and revenues. b) promoting sound taxation systems under which all economic activities – including mining activities – contribute a fair share to the revenues of States.

Repercussions for corporate governance

It is essential that country specific data, rather than consolidated, is available for the use of the board of directors of the multinational corporation for tax governance purposes and compliance with relevant legislation e.g. Sarbanes Oxley in the US, that requires senior executives to take individual responsibility for the accuracy and completeness of corporate financial reports.

For all the reasons mentioned above and the specific benefits of the country-by-country reporting for corporate governance, our view is that this requirement should have a universal scope and apply to ALL countries in which the company has operation (being defined as the country where the company has a permanent establishment for taxation according to international norms), unlike it is suggested in the introduction of the consultation that excludes from the definition of third countries those within the European Union. Considering the need for audited and standardised financial disclosure to be issued in financial statements there is no rationale to develop specific disclosure for a certain category of countries in accounting terms.

2. Would the disclosure of financial information on a country-by-country basis by multinational companies be meaningful to investors in the company concerned?

Yes No No opinion

Country-by-country reporting

The conceptual framework underlying the country-by-country proposal that we support is designed to meet simultaneously all the following purposes:

- being useful for investors and other users of financial statements - improving tax governance and mitigate tax avoidance and evasion - fighting corruption.

The Taskforce on Financial Integrity and Economic Development has proposed that country-by-country reporting must be considered as coherent package of financial data. The proposal suggests the disclosure of the following information:

1. The name of each country in which it operates;

3 2. The names of all its companies, subject to any parent of the consolidation process, trading in each country in which it operates; 3. What its financial performance is in every country in which it operates, without exception, including:  It sales, both third party and with other group companies;  Purchases, split between third parties and intra-group transactions;  Labour costs and employee numbers;  Financing costs split between those paid to third parties and to other group members;  Its pre-tax profit; 4. The tax charge included in its accounts for the country in question split as noted in more detail below; 5. Details of the cost and net book value of its physical fixed assets located in each country; 6. Details of its gross and net assets in total for each country in which operates.

Tax information would need to be analysed by country in more depth requiring disclosure of the following for each country in which the corporation operates:

1. The tax charge for the year split between current and deferred tax; 2. The actual tax payments made to the government of the country in the period; 3. The liabilities (and assets, if relevant) owing for tax and equivalent charges at the beginning and end of each accounting period; 4. Deferred taxation liabilities for the country at the start and close of each accounting period.

In addition, if the company operated within the extractive industries, information on reserves, production and a full breakdown of all those benefits paid to the government of each country in which a multinational corporation operates broken down between these categories of reporting required in the Extractive Industries Transparency Initiative and considered in US Dodd-Frank Act should be disclosed.

Specific information needs satisfied for users of financial statements with the country-by-country reporting proposed are:

- Assessing the performance of individual companies within a group. Many corporations that will be subject to country-by-country reporting are conglomerates by nature and it is hard for an investor to identify accurately the trade it undertakes by location and by name. This information is material for the users of financial statements located in the jurisdictions in which multinational corporations trade - Evaluating the economic function and performance of the entity in relation to society and the national interest, and the social costs and benefits attributable to the entity; - The compliance of the entity with taxation regulations, company law, contractual and other legal obligations and requirements (particularly when independently identified); - The value of the user's own or other user's present or prospective interests in or claims on the entity; - Ascertaining the ownership and control of the entity.

In addition, country-by-country reporting, as proposed, is material to effective decision making by capital providers on a range of issues, including a variety of risks as degree of exposure to geopolitical and reputational risks by company’s presence in certain locations (e.g. some deregulated jurisdictions such as tax havens or jurisdictions with high instability) and balance between short and long term rewards, where good governance issues have special influence.

As capital providers, they need to be sure that the companies they invest in do not engage in illicit or unet hical activities at the same time as they have fiduciary responsibilities to their clients. Moreover most investors would be interested in knowing more in details the trends in geographic spread of the company’s activities over time, indicating diversity or absence thereof.

In 2008, Railpen Investments, the corporate trustee of the various UK railway industry pension funds, wrote to the IASB noting that: “The proposal for a new international accounting standard, requiring companies to report their payments to government, their reserves, production data and costs, and key assets on a country-by-country basis, are important in order to increase transparency in a high risk industry. We believe that such disclosure is very much part of mainstream financial reporting and will provide investors with better information to judge company exposure in different country contexts.”

4 In 2009, 80 institutional investors representing US$ 16 trillion actively supported the development of international mechanisms to address payments transparency as part of EITI. In May 2010, Calvert Investments published a paper strongly endorsing country-by-country reporting of payments to each country of operation. In this they state that country-specific reporting, “could be used by investors to account for material, country-specific, tax/regulatory, reputational risks and would substantially improve investment decision making regarding the extractive industries sector.” This paper also argued against leaving decisions on materiality to companies.

It is also relevant to highlight that all comment letters submitted by investors to the consultation process for a new International Financial Reporting Standard for Extractive Industries supported country-by- country reporting for the reasons already mentioned. Oxfam has spoken to investors who have shown a strong interest in extractive industries financial transparency, through country-by-country reporting. Investor funds as US Boston Common Asset Management and Storebrand, and Spanish faith-based institutional investors as La Provincia Bética de la Compañia de Jesus lent Intermón Oxfam their voice to ask Spanish oil company, Repsol, in its 2009 and 2010 Annual General Meeting, for a commitment with payment disclosure to governments (2009), and to support the country-by-country disclosure in a new IFRS6 (2010). In addition, in June 2010, Chevron investors representing $10 billion in shares supported a shareholder proposal filed by Oxfam America calling on the company to disclose its payments to governments. MNCs outside of the extractives sector such as Standard Chartered Bank have publicly expressed interest in the standard.

An increasing number of companies are identifying tax governance as a growing area of importance to shareholders. This is evidenced by accounting firms such as PWC stating publicly that they are currently advising their clients to consider tax transparency at board level.

3. Would the disclosure of financial information on a country-by-country basis by multinational companies be useful for the purposes of improving tax governments at a global level?

Yes No No opinion

The effect of globalisation is giving companies an element of choice as to where and at what rate their tax liabilities arise. This present a concern for civil society organisations regarding the lack of transparency which may enable companies to evade or avoid tax in developing countries.

- Around 60% of world trade is intra-group. However, not one of those intra-group financial transactions is broken down in the consolidated accounts of the multinationals. The value of intra-group trading between locations is therefore highly material, and likely to be of significant impact on reporting. - According to estimations, 50% of global trade passes through a tax haven and 99% of EU biggest enterprises have at least one subsidiary in a tax haven.

The profit earned by a group in each location as a proportion of third-party and intra-group sales indicates the risk of a transfer pricing challenge arising, particularly if the group is making significant use of tax havens or if the ratios of profit to sales are high in low tax jurisdictions and low in high tax jurisdictions. The flow of finance charges within the group, and the impact these might have on the re-allocation of profits between jurisdictions, also rise the risk of transfer pricing or thin capitalisation challenge.

The most recent and illustrative example of “transfer pricing” tactics is Google which reportedly reduced their tax bill by US$3.1 billion in the last three years, through allocating income to tax havens while attributing expenses to higher-tax countries, through profit shifting transactions among corporate subsidiaries.2 This strategy may have helped Google to reduce its overseas tax rate to 2.4%, while Google’s biggest markets by revenue, US and UK, have corporate income tax rates of 35% and 28%

2 See: http://www.bloomberg.com/news/2010-10-21/google-2-4-rate-shows-how-60-billion-u-s-revenue-lost-to-tax- loopholes.html Need a reference 5 respectively. This income shifting practices costs the US government as much as US$60 billion in annual revenue, according to estimations.

But the effect on developing countries is even more dramatic. It is estimated that around US$1000 bn illicit financial flows leave every year developing countries. This is ten times what they receive in aid. Much of this is estimated to be due to multinational tax evasion. Fighting tax avoidance, tax evasion and corruption would increase domestic resources to reduce poverty.

Country-by-country reporting would enhance the quality of the comparable data which would, in turn, help developing country tax administrations and civil society to raise red flags regarding potential abuse which are worthy of further investigation. This level of transparency would assist in the efficient operation of markets and the enforcement of current international standards on transfer pricing as well as potential alternative methods of taxing multinational companies.

The reporting of each country in which a company operates, whether within or outside the EU, based on those locations in which the reporting entity have a permanent establishment for taxation according to international definitions, and the financial reporting for those countries, whether they host the core business of the company or other activities such financial or assurance services, is crucial to create a global picture of:

- where companies pay their taxes - what are their real operations and profits there - what are the payments made to governments.

Furthermore the provision of country-by-country reporting information to the board of Directors of MNCs on a regular basis would assist in the evaluation of governance risk, enhance internal control, reduce the risk to shareholders and increase the likelihood of legal compliance on the part of major MNCs in the field of tax [tax compliance being defined as seeking to pay the right amount of tax (but not more) in the right place at the right time where right means that the economic substance of the transactions undertaken coincides with the place and form in which they are reported for taxation purposes].

4. Would the disclosure of financial information on a country-by-country basis by multinational companies active in the extractive sector be useful in order to improve domestic accountability and governance in natural resource-rich third countries?

Yes No No opinion

Countries rich in natural resources, which represent 60% of the population throughout the world, have a long history of poverty and corruption, increased in part by the exploitation of these resources. Citizens have little or no information about the terms of deals signed between extractive companies and their governments, neither about the revenues the country gets from the extraction of its scarce resources. This lack of transparency is one of the major factors for what has been called “the resource curse”.

The public disclosure of financial information on country basis by multinational companies active in the extractive sector would reduce the level of secrecy surrounding payments to governments, help fight tax avoidance, corruption and conflict, and increase resource revenues in some of the world’s poorest countries to reduce poverty. For companies, the effect of corruption can also be damaging. A recent survey among global business leaders suggested that corruption increases project costs by an average of at least 10% (GFI 2009).

The US Dodd-Frank Act was passed because it is seen to be of value both to investors (in valuing companies and assessing risk) and to citizens and governments in producing countries who will be able to use this information to improve accountability and governance in natural resource-rich countries. Any provision in a local mineral extraction agreement prohibiting publication of the data would be overridden by the international obligation to publish imposed upon the parent multinational company that is responsible for producing the information as part of its annual financial statements.

6 In terms of tax governance attention must also be paid to the scope of the extractive industry to consider the materiality of applying general country-by-country disclosure requirements to this sector. Among the 10 largest companies in the world, seven are oil companies. And among the fifty most profitable, 18 operate in the extractive sector. The extractive sector represents around 14% of the market capitalisation of the DJ Stoxx Euro 600 index, a broad measure of European stock markets. Mineral companies are often among the most substantial enterprises trading in European markets and 11 of the largest 100 European issuers are extractive companies.

The country-by-country reporting proposal integrates the disclosure required under the Dodd-Frank Act for the extractive industries, providing consistency and accounting contextualisation to it for better level playing field in the sector, without adding further reporting costs or new procedures.

In addition, the country-specific disclosure proposals for extractive sector takes into account the unique characteristics of the industry:

- Extractive companies are different from other companies trading on stock markets in that a key factor in the assessment of their value is their reserves and resources, therefore these figures must be disclosed on country basis. - Given the variety and characteristics of extractive agreements, production quantities and exploration, production and development costs are also to be disclosed on country basis as they are crucial to understand the nature and amount of the benefit streams to governments, paid in kind or in cash.

In fact, these specific disclosures have already been considered by the IASB project team in their proposal for a new reporting standard for extractive industries (IFRS6).

46 mineral companies so far have officially endorsed the Extractive Industry Transparency Initiative (EITI). By supporting this Initiative, companies show implicitly their willingness to publish what they pay to governments. Although we support this initiative, of the 30 EITI implementing countries, so far some have not produced any reports and only 11 have produced reports that include company-specific information. This means that this voluntary initiative is not delivering on available data for the majority of producing countries advocating for global binding disclosure requirements on companies side, and that the existing data is inconsistent and non-comparable across countries and companies.

Country-by-country reporting is complementary with the EITI, providing significant benefits to this voluntary initiative:  Systematic annual reporting

 Disaggregated data on company basis to allow for comparison between individual companies both at national and global levels

 Credibility of data

 Universality

 Accounting consistency underlying the cash flow disclosures.

 Accounting for flows diverted outside the jurisdiction, providing complementary transparency coherence.

5. Would it be useful if financial information on a country-by-country basis by multinational companies would be presented according to predefined standards or formats?

Yes No No opinion

The format of country-by-country reporting data for disclosure should be based on the standard template for disclosure of the profit and loss account, balance sheet and cash flow familiar to all users of financial

7 statements. Thus it should be disclosed as part of the annual audited financial statements of each entity required to report.

To be of maximum value, country-by-country specific disclosure must be introduced in a global and enforceable standard that generates comparable information. Similar information could not be reliably obtained from other sources with the objective of obtaining audited, consistent and comparable financial data as a vehicle for harmonisation.

Within the EU, the adoption of country-specific reporting requirements across all EU member states through binding accounting standards transposed to national legislations, would deliver the benefits from country-by-country to EU companies while, taking into account the EU’s important role in global financial markets would greatly contribute to making transparency an international norm.

6. If country-by-country reporting were to be considered useful, what kind of multinational companies would usefully be targeted?

All issuers of shares in EU regulated markets

Only some issuers of shares in EU regulated markets which meet one or more of the following criteria (click all relevant boxes):

Other (please specify)

None (reporting not useful)

Country-by-country reporting by all multinational corporations would be invaluable. In the short term, greatest benefit is secured from this disclosure by all extractive companies and by large corporations with substantial economic impact without imposing additional reporting burdens to small companies.

Whilst there is undoubted appropriate attention given to the benefits arising from country-by-country reporting in the upstream extractive industries, to require country-by-country reporting from this business segment alone would be exceptionally difficult. It would require a corporation engaged in these activities to separate upstream activities from downstream activities, and its extractive industries activities from all others that it undertakes. In principle this might be possible with regard to some aspects of the trade of the company, but when intra-group transactions are to be disclosed (as is necessary under country-by-country reporting) the problem becomes more complex. Many group services are hard to define in this way, particularly when they relate to the operation of central group management activities or financing activities. As such whilst upstream extractive industries data is of significance, and has rightly been highlighted as a priority because of the risks inherent in this activity, a differential demand for disclosure for one part of one industry makes relatively little accounting sense. As a consequence it is important that disclosure be made by all MNCs falling within the suggested scope of country-by-country reporting irrespective of the industry in which they operate.

7. Please provide information on the cost that you estimate that the introduction of country-by-country disclosure requirements could entail.

While country-by-country reporting may add additional compliance costs, this should not be significant as multinational corporations are likely to have this data already, to be tax compliant. Publishing costs are unlikely to be significant as information could be presented in an XBRL format.

Auditing of this information could pose significant additional costs. However, we argue that the benefits presented by country-by-country reporting proposal outweigh potential costs.

8. Please provide any additional comments you may have that have not been addressed above.

8 Materiality

Materiality has already been addressed above regarding the companies to be required to report on country-by-country basis and the financial data to be disclosed.

Country-by-country reporting is designed to meet public interest objectives. A company’s performance in a jurisdiction is immaterial for the company but material to the well-being of the locations in which it is incorporated or trades.

Regarding the countries for which disclosure is considered material for country-by-country reporting purposes, they must always be assessed in terms of the significance of the activity of the reporting entity in the country or to the country itself.

The scope of an entity’s operations can be measured considering all of these performance indicators:

- Turnover plus financial income (as per pro-forma noted below) in the jurisdiction in the reporting period in amount and as a percentage of the total consolidated turnover plus financial income of the reporting entity during the reporting period. - The net value of tangible fixed assets in the jurisdiction increase in the reporting period.

Accurate thresholds for these indicators would set the different scenarios under which country materiality (assessed from the perspective of the location), disclosure scope and audit requirements are established to be significant for the understanding of the company global activity and for meeting country-by-country reporting objectives.

Given the specific impact of extractive industries in the countries where they operate, all financial data should be disclosed for every country where upstream extractive industries activity occurs. Regarding the different payments that upstream activities origins we find reasonable to disclose those greater than US$1,000 or payments in the aggregate if greater than US$15,000.

9