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EXTRACTING TRANSPARENCY: Why the Devil is in the Detail
High level corruption of the type involving millions, even billions of dollars, requires a sophisticated infrastructure of secretive institutions which enable the proceeds from illicit activities to be laundered into the mainstream global economy. Many of these transactions can proceed with impunity because the reporting standards required of companies and their accountants do not require disclosure of key information which stakeholders, including national authorities, law enforcement officials and journalists, need in order to track dirty money flows.
Accounting standards on disclosure set the framework of rules which enable companies to launder their profits to tax havens and dodge taxes in the countries where they operate. Profit-laundering is a principal means whereby companies routinely cheat tax authorities and rob the poorer nations of their resources. Tax Justice Network is campaigning to tackle the inadequacies of current accounting rules on disclosure, and to require companies to publish details of where they operate, profits made on a country-by-country basis, and how much tax is paid on those profits.
In an excellent study of how the oil industry operates in Nigeria, Professor Prem Sikka is quoted explaining the tricks of the trade of how to cheat countries out of tax revenues: "Oil companies have hundreds of subsidiaries and affiliates" he says, " and they also run a lot of joint ventures. So in principle oil could be extracted from a well in Nigeria and then sent to a refinery. You might say that is a simple transaction, but it may not be because that oil on paper can be sold to an affiliate in Italy, Switzerland, Jersey, or anywhere really, and then eventually brought back on paper to Nigeria. On the way, everyone is supposed to have 'added value', which is a euphemism for saying they got a commission of some kind; the profits are then geographically dispersed." According to Sikka this is one of the ways in which transfer-pricing is used to launder profits to tax havens.
Transfer-pricing is a tax avoidance mechanism used to keep Nigerians - and most other Africans - poor. Networks of subsidiaries operating out of tax havens are used to bleed Africa dry of its financial resources. Tax havens lie at the centre of the offshore economy, where corrupt and secretive legal and accounting practices are deployed to create an interface between illicit activities and the mainstream global economy. Accounting opacity plays an important part in facilitating profit-laundering practices by preventing tax authorities from investigating transfer-pricing abuses. This probably explains why, according to a tax adviser of one major globalised accounting firm, no African revenue authority has raised a successful challenge on a transfer-pricing arrangement, despite the fact that abusive transfer-pricing schemes are rife across the continent.
For the majority of countries around the world the rules laying down accounting standards are determined by a private company called the International Accounting Standards Board (IASB). Extraordinarily, the IASB is largely comprised off representatives from the world's largest accounting businesses, those earning fortunes from setting up offshore tax avoidance schemes. The current rules do not require disclosure of key information relating to how multinational companies perform in the different countries where they operate, especially in respect of profits generated and liability to tax on those profits.
In 2005 a coalition of civil society organisations published a report calling for an International Financial Reporting Standard for the extractive industries. Extracting Transparency argues the case for tackling corruption in that sector by extending the requirements of the Extractive Industries Transparency Initiative (EITI) to include disclosure of the different revenues streams flowing into government coffers: royalties, tax on corporate profits and production entitlements.
In 2006, the IASB outlined steps to reduce disclosure of segmental (i.e. geographically based) information and proposed aligning with US standards which are based on data used by management for decision-making purposes. This proposal would further undermine the already inadequate reporting requirements set by the existing regime. Along with about 80 other NGOs, Tax Justice Network responded to this proposal by calling for disclosure of country-specific information on tunover, profit, taxation and payments to governments.
In September 2006, reacting to public pressure and media coverage, the IASB set up a sub-group of Board members to review civil society's proposals, which they described as "legitimate and serious." This sub-group will consult with a variety of bodies, including the International Monetary Fund, the World Bank, IOSCO and the Financial Stability Forum. Doubtless there will be extensive lobbying by vested interests against greater disclosure. Civil society needs to counteract such lobbying and demonstrate that greater transparency will enable stakeholders, including investors and governments, to assess the impact of companies' activities.