One of the ideas discussed at the G8 preparatory meeting on Saturday in London which I attended, is what would be the most effective form of tax transparency and disclosure?
To answer this question, one needs to consider what is the primary purpose of tax transparency and thus it’s most effective form. Through my work on the OECD task force on tax and development my views crystallised, in large part through dialogue with African tax administrators. What they wanted was access to the information needed to conduct a risk assessment of tax returns and focus their resources on examining those returns which would yield tax adjustments, or where they needed more information. They wanted this information primarily for themselves not for civil society.
This was the clear message on Saturday, that Capacity Building for Tax Administrations was the key tool. Reference was made to the multiplier return on investment in tax administrations of 350, ie every £1000 spent yields £350,000.
I think this is the best approach, as my concern is that tax authorities need the tools to do their job. They do not want others looking over their shoulders reviewing and criticising what they do. This undermines them and the people who work in them. I believe that information should be primarily provided to tax authorities. Taxpayers have a choice whether they want to make this information available to civil society.
So what form should the tax return disclosure take?
I think it should include the following :
A reconciliation (on a country basis) between accounting records and the taxable profit.
A return of all transfer pricing transactions consistent with the returns to US/Canada/Australian tax authorities (ie form 5471/2 in the US), detailing the form of all major transactions, the value of the transaction and the counter party within the group.
An explanation of the group operating model and how the relevant country fits within this and the key relationships it participates in.
As a risk management tool this is consistent with what the IRS in the US requires in US tax returns. If tax administrations had this information, they should (with capacity building) be able to assess the right tax.
So the two key building blocks are capacity building and information in tax returns.