The SEC should use its regulatory power to require that large U.S. multinational companies publicly disclose data they already collect regarding tax obligations in each country where they operate, a transparency advocacy group recommends in a report.
Mandatory public country-by-country reporting, or PCbCR, would give investors needed insight into an American multinational’s financial condition, addressing metrics such as free cash flow, corporate governance and operational practices, and geopolitical risks, according to the July 28, 2022, report from the Financial Accountability and Corporate Transparency (FACT) Coalition. The nonpartisan alliance of state, national, and international organizations describes itself as working toward a fairer tax system by addressing global economic challenges and promoting policies to fight corrupt financial practices.
Its report, A Material Concern: The Investor Case for Country-by-Country Reporting, calls on the SEC to “exercise its clear rulemaking authority” under Sections 12(b) and 13(b) of the Securities Exchange Act of 1934 to require PCbCR to be filed under Regulation S-X for identified filers.
“The SEC PCbCR rule should require disaggregated information regarding related-party revenues, third-party revenues, net profit (loss), tangible assets, employee headcount, corporate income cash taxes paid, and corporate income tax accrued” on a jurisdiction-by-jurisdiction basis, the FACT Coalition said.
The report also recommends that a SEC PCbCR rule apply to all industries and jurisdictions, and that disclosure be required to ensure uniform standards for all applicable filers so that investors gain access to data that’s comparable and useful in analyzing securities for possible purchase.
In addition, PCbCR information should be presented with any additional disclosure that multinational filers deem necessary to explain their tax contributions and their strategic operations, provided such disclosure doesn’t otherwise violate any requirements under other SEC rules, the FACT Coalition said.
It called on the SEC to signal to the FASB that it should accelerate its project to provide guidance on tax disaggregation under U.S. GAAP and make clear that greater country-by-country disaggregation applies to all publicly filing companies, in a way that supports and complements the SEC’s PCbCR rulemaking.
“At a time when the international tax system is undergoing major change, investors don’t necessarily know how much a risk a corporation is taking with their money by making aggressive use of foreign tax havens,” Sen. Chris Van Hollen said in recorded remarks at a webinar to present the report. The Maryland Democrat is the chief Senate sponsor of the Disclosure of Tax Havens and Offshoring Act, which would mandate PCbCR for U.S.-registered multinationals with over $850 million in annual revenue. The Senate bill awaits action more than a year after the House of Representatives passed its own version in June 2021.
Through a strategy of offshoring and tax secrecy, American multinationals suck revenue out of the U.S. economy and send jobs overseas, creating risks for investors, Van Hollen said, adding that his legislation would “shine a light on the games big corporations play to move profits overseas, and the magnitude of their dependence on these tax games.” In seeking to have large multinationals disclose basic financial data for each country in which they operate—covering taxes, profits, and the number of employees in each jurisdiction—multinationals would be making public information that’s already collected and privately reported to the IRS, the senator stressed.
“There is no new recordkeeping burden,” Van Hollen said. “Among its many advantages, releasing public information on a country-by-country basis will provide investors with the information they need to better understand the tax strategies and risks taken by the companies in which they’re buying an ownership share.” But until the bill passes, he said, the federal government “should be making full use of every tool at our disposal to improve transparency for investors and the American public,” including the SEC rule change sought by the FACT Coalition.
Katie Hepworth, responsible tax lead at U.K.-based Pensions & Investment Research Consultants (PIRC), described during the webinar her firm’s work in coordinating resolutions this year by Danish pension fund AkademikerPension and other shareholders of Microsoft Inc. to persuade the tech giant to allow a shareholder vote on PCbCR. The Danish fund had asked Microsoft’s board to issue disclosures based on tax standards set by Global Reporting Initiative, a nongovernmental organization that advocates sustainability reporting. Three additional institutional investors in Microsoft collectively managing over $350 billion filed the proposal with the company as well.
The PIRC-led campaign at Microsoft and a related effort directed at Cisco Systems Inc. persist despite the defeat in May of a shareholder vote at Amazon.com on implementing PCbCR for the online retailer. “Through these proposals, we want to get more companies to voluntarily publish their country-by-country reporting,” Hepworth said. “But our broader hope is that the momentum that we build through these proposals really makes the case for a broader push to have this type of reporting mandated to ensure that there is consistency across all companies, and that we’re not really seeing these laggards falling behind.”
This article originally appeared in the August 1, 2022 edition of Accounting & Compliance Alert, available on Checkpoint.
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