Taxation

Acknowledging the negative effects of tax havens and other countries with harmful tax regimes, there have been several international initiatives to address this issue.

Government tax measures

Although aimed at governments trying to attract corporate investments by offering favourable tax regimes, the following guidelines do offer some guidance for banks and other businesses as well.

The European Union in 1997 adopted a Code of Conduct on business taxation, which focuses on taxation measures which "affect, or may affect, in a significant way the location of business activity in the community". More specifically, the Code states that "tax measures which provide for a significantly lower effective rate of taxation, including zero taxation, than those levels which generally apply in the member state in question are to be regarded as potentially harmful and therefore covered by this code".

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In 1998, the OECD initiated a project against harmful tax practices. The OECD makes a distinction between tax havens and countries with a harmful preferential tax regime. In contrast to tax havens, which are often very small countries that almost fully depend on income from tax related practices, the latter are characterised by a diversified economy and normal tax system, but with certain, often very lucrative, exceptions for specific activities or types of corporation.

In 2000, the OECD identified 38 jurisdictions as tax havens. In the past nine years the OECD has published progress reports on the level of implementation by these jurisdictions of the international agreed tax information exchange standard, which requires exchange of information on request in all tax matters for the administration and enforcement of domestic tax law. Since May 2009, all 38 tax havens have committed to working with OECD members to improve transparency and to establish effective information exchange.

Nevertheless many tax havens are still active in practice, which was why at the G-20 Pittsburgh Summit in September 2009, proposals were made to further sanction tax havens. Tax information exchange has been a priority. However, as the information exchange required is only on request, and not automatic, few exchanges will ever be made and there is still little real progress on this issue.

In 2009, the Tax Justice Network published Mapping the Faultlines, which identified 60 locations in the world as serious secrecy jurisdictions, including the UK and USA, and ranked each by the opacity they offer. It shows that initiatives promoted to date have made little impact in breaking the secrecy that facilitates illicit financial flows including those related to bribery, crime and tax abuse.

Tax planning

A first important international standard on the issue of tax planning by companies are the OECD Guidelines for Multinational Enterprises. Chapter X on Taxation states that "enterprises should comply with all tax laws and regulations in all countries in which they operate and should exert every effort to act in accordance with both the letter and the spirit of those laws and regulation".

The Tax Justice Network and the Association for Accountancy and Business Affairs have issued a Code of Conduct for Taxation. The code states that "taxable transactions are recorded where their economic benefit can be best determined to arise." This means that companies should report income to tax authorities where it undertakes economic activity and refrain from shifting income earned in the country to locations with lower tax rates to avoid taxation. Section 3 of this Code of Conduct for Taxation provides general guidelines on how companies should deal with the issue of tax planning:

• Tax planning seeks to comply with the spirit as well as the letter of the law;
• Tax planning seeks to reflect the economic substance of the transactions undertaken;
• No steps are put into a transaction solely or mainly to secure a tax advantage.

The British investment manager Henderson Global Investors has published Responsible Tax, a very useful publication that describes a set of principles that should guide tax decision-making at leading companies, proposes ways of improving disclosure on tax to investors and others, and suggests a framework companies could use to assess their approach to tax.

Transparency and country-by-country tax reporting

Apart from paying their due share of taxes, companies should also report on the amount of tax they pay annually. Generally, only companies listed on a stock exchange are obliged to publish their tax payments in their annual reports. The problem is that these tax figures are only presented at the group level (on a consolidated basis) and not for every country in which the multinational is active. As a result, it is difficult to determine whether a company is shifting profit to low tax jurisdictions in order to avoid tax, or to what extent it is involved in other forms of tax avoidance or evasion.

This issue has gained some attention within the extractive industry under the Extractive Industries Transparency Initiative, a coalition of governments, companies, civil society groups and investors that have established criteria for full publication and verification of company payments and government revenues from oil, gas and mining. The Publish What You Pay coalition has a similar focus and also advocates that all extractive sector companies publish what they pay in tax and other ways to each government to whom they have liability. The Revenue Watch Institute suggest that the transparency of these data should be enhanced within the extractive sector by requiring that the contracts for oil, gas, mining and forestry sectors should all be on public record.

This call for companies to disclose country-by-country data on commercial performance and taxes can be applied to all companies and sectors. Global Witness, the Tax Justice Network and the Task Force on Financial Integrity and Economic Development have all taken a lead on this issue, supported by many NGOs around the world. The latest publication of the Task Force on Financial Integrity and Economic Development explains the benefits of country-by-country reporting and calls for certain tax information to be published by a multinational corporation.

The accounting world is slowly moving in this direction as well. In November 2009, a new reporting standard named International Financial Reporting Standard (IFRS) 8 Operating Segments, developed by the International Accounting Standards Board (IASB), became mandatory. The IASB did not include country-by-country reporting in their requirement but promised to examine its merits in the future.

The G3 Guidelines of the Global Reporting Initiative have a performance indicator on tax that also stresses the need for country-by-country reporting. Companies should report: "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 organizations operating in more than one country, report taxes paid by country. The organization should report which definition of segmentation has been used."

The following elements should be incorporated in the bank's tax policy:

The bank will, in its own operations:

• Ensure that all banking services and products offered by the bank will be in compliance with the letter as well as the spirit of tax laws;
• Not incorporate branches in - or use in any other way - tax havens in locations identified as secrecy jurisdictions by the Tax Justice Network;
• Refrain from offering offshore banking services to its' private clients;
• Refrain from assisting companies in tax planning, with the main (or only) goal to secure tax advantages.

Furthermore, the bank will not invest in companies that:

• Were convicted for tax evasion and have not strengthened their procedures to ensure tax compliance in the future.

The bank will only invest in companies that:

Publicly disclose country-by-country data on the following with respect to income and taxes:

• The name of each country in which the company and all its affiliates operate;
• The company's financial performance in every country, including sales and purchases (both third party and intra-group transactions), labour costs and employee numbers, financing costs and pre-tax profit;
• The tax charge included in its accounts for the country in question;
• Details on the cost and net book value of its physical fixed assets located in each country;
• Details of its gross and net assets in total for each country in which operates;
• The tax charge for the year split between current and deferred tax;
• The actual tax payments made to the country's government in the period;
• The liabilities (and assets, if relevant) owing for tax and equivalent charges at the beginning and end of each accounting period;
• Deferred taxation liabilities for the country at the start and close of each accounting period.

Publicly disclose the following when active in the extractive industries:

• All its exploration and production contracts;

A full breakdown of all those benefits paid to the government of each country, specified to oil, gas and minerals