Taxation and development

Is country-by-country reporting the answer?

David Rooney

Could country-by-country tax reporting help boost revenue for development? The answer is not that simple.

The first time many businesses heard about country-by-country tax reporting (countryby- country) was at the OECD’s Global Forum on Development in January 2010. Much of the discussion at the conference focused on country-by-country, with a political flavour coming from Stephen Timms, the UK tax minister, who hosted a breakfast to discuss the idea. In civil society circles, however, country-by-country reporting has been a live topic for several years. How does it fit with the development agenda?

The most widely known version of countryby- country consists of additional public reporting by multinational enterprises (MNEs) of significant amounts of new financial and tax information. Specifically, the country-by-country proposals advocated by certain NGOs would require MNEs to include information in their annual financial statements on financial performance in every country in which the MNEs do business, including such items as third-party and intra-group sales and purchases, labour related information and pre-tax profit. It would also require the inclusion of tax information such as the tax charge included in accounts for the country in question, together with all liabilities for tax and equivalent charges at the beginning and end of each accounting period.

What is the connection to the development agenda? At its simplest, there is a perception by development NGOs that in order for developing countries to grow and become less dependent on aid, they need to collect more tax revenue from MNEs. Country-bycountry has been put forward by them as a means of addressing this in two ways. First, by making more transparent the revenues that governments receive from MNEs, corruption can be monitored and reduced. If citizens know what their governments receive, then they can also monitor where it goes.

Second–and this is more contentious– it is argued that the low tax revenues of developing countries are probably due to evasion or aggressive tax avoidance by some MNEs, and that country-bycountry reporting would make these firms more likely to pay the correct amount of tax. Transfer pricing abuses, which are caused by manipulating the prices set for transactions between different parts of an MNE so as to minimise taxes, are identified as the root of the lost revenue problem. An eye-popping $160 billion a year is often cited. There are some questions around this number, particularly as it is derived from bilateral trade data that does not distinguish between intra-group and inter-group transactions. But even if transfer pricing abuses were a cause, is country-by country reporting the solution?

Take corruption, for instance. Most MNEs know that in a wide range of countries, corruption is a problem. Largely thanks to OECD work, many MNEs now have stringent anti-bribery policies that are widely known by local officials who no longer ask for a bribe. However, within certain governments not all revenues collected end up in government coffers for public expenditures. So corruption is still a real impediment to development which some form of country-by-country may help address by improving transparency.

What about transfer pricing–or “mispricing”, as it is sometimes called? Here, I part company with NGOs such as the Tax Justice Network and others. Remember that transfer pricing is about the price at which one party within a MNE sells to another entity within the same group (see article by OECD’s Caroline Silberztein, OECD Observer No 276-277, December 2009-January 2010). It is a concept based upon sound commercial practices; a way of getting a market-based evaluation of the contribution of each subsidiary to the profitability of the enterprise.

To be sure, if the sales price is higher or lower than it “should be” (as determined, for example, by reference to prices charged at “arm’s length” in comparable transactions between unrelated parties) then income that is earned from economic activity in one place can be improperly shifted to another (generally lower-tax) environment. International organisations such as the OECD and the UN have for decades encouraged both governments and MNEs around the world to apply the “arm’s length principle” in determining for tax purposes the price at which goods and services may be transferred between related companies.

My personal experience is that MNEs spend considerable time and resources trying to get transfer pricing right for everyone involved–our firm devotes 45 people to it and dozens more who spend significant time on the issues! Many of them are dedicated to producing detailed transfer pricing reports that aim to comply with the laws in both countries involved to meet the main objective of most MNEs, namely that the income earned doesn’t get caught in a fight where the two countries seek to tax the same income twice. Because transfer pricing is an inexact science, inherently dependent on an assessment of the facts, circumstances and available data, there will always be room for disagreement. However, absent unlikely world agreement on a single formula for dividing up income, the arm’s length principle is the best answer, and large MNEs try to get it right.

The problem critics focus on largely involves the extractive industries, such as those for minerals, oil and gas, and the low prices/royalties and the low tax that they pay in certain countries. That may be a problem–or may not, depending, for example, on the riskiness of the investment. After all, if an MNE makes an investment in a politically or physically risky area, it will feel entitled to a higher return as a form of insurance against losing its entire investment. But this is not a transfer pricing problem. There may be imperfect bargaining power leading to a lower-thanmarket price being paid by the MNE to the government under a perfectly legal contract; or deals such as legally granted tax holidays may be too long-lived. But those are not transfer pricing issues.

The NGO insight on the importance of tax for domestic resource mobilisation is a breakthrough, but there’s more to it than corruption and transfer pricing. Another important problem that country-by-country reporting would not address is the undercapacity of local tax authorities. They don’t have the people, or the training, or the funds to adequately develop and administer their tax systems generally. One of the big issues is to provide capacity-building assistance to strengthen their ability to administer their tax laws effectively.

Nor should the tax loss debate be entirely focused on MNEs. Countries often fail to collect taxes due from their own citizens– and particularly the rich. And a final issue is the tax system itself. Do countries need a complex set of rules, or might something simpler do? Building capacity and adapting the design of the tax system to the country’s needs may do even more to mobilise resources than country-by-country reporting. The new OECD initiative on Tax and Development will help direct aid to respond to these issues and provide an opportunity for developing and OECD countries, NGOs and business to work together to achieve a tax system that works for the developing country and encourages inward investment, which must, in the long run, be the main engine of sustainable growth.

So while some form of country-by-country will undoubtedly help improve transparency and reduce corruption, it is less clear that it will reduce tax losses for developing countries. In fact, given the complexity of country-by-country reporting and the lack of capacity in developing countries, many countries would struggle to use the more detailed information, even if it highlighted, say, transfer pricing abuse. Perhaps a simpler, less onerous tax-reporting approach would be more useful for poorer countries. For instance, under the Extractive Industries Transparency Initiative, many MNEs in that field already release certain forms of aggregate data. This type of reporting could be a more suitable model for development, especially if backed up by greater information exchange between developed and developing governments.

Another risk to consider is how firms will respond. There would be a significant financial cost to companies with the increased reporting that full countryby- country would require. Maintaining competitiveness would be a concern. Neither of these issues trumps the advantages of country-by-country, but it does call for care in deciding what level of reporting is absolutely essential for improving compliance with the tax laws by MNEs and the administration of taxes in developing countries. Also, developed countries’ tax authorities could do more to audit MNE accounts at their end, and, particularly, to assure more stringent transfer pricing enforcement, as well as share their experiences with developing countries.

This is where the OECD comes in. The organisation is currently setting up an informal task force involving representatives of all stakeholders–developing and developed countries, NGOs and business– to focus on a number of issues relating to tax and development, including an examination of country-by-country proposals. The OECD, with its reputation for independent standard-setting and rigorous analysis, seems the perfect organisation to bring these potentially disparate interests together, and anyone who is committed to the development agenda should be pleased with this initiative. Regardless of what the eventual outcomes may be, it should be fully acknowledged that the country-by-country advocates have very positively influenced the debate.


OECD (2010), Domestic Resource Mobilisation for Development: The Taxation Challenge, available online at    

©OECD Observer No 278 March 2010

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