Playing Devil’s Advocate: Country by Country Reporting.

When I moved to the UK in 2012, it was just after Jimmy Carr had been engaged in that notorious tax scheme scandal. Since then the public’s interest in tax has been characterised by a series of ebbs and flows, rarely moving out of the spotlight and, sometimes, for weeks on end, occupying the Zeitgeist (ed: the joy of running a blog is that you can mix metaphors to your heart’s content) We are currently riding a flow. But at times like this, in the midst of leaked information, speculation and accusation, there tends to be collateral damage. Innocent victims are sucked into the chaos and everything becomes about tax. Policies can be driven by tax considerations without thought for the broader consequences.

Against this backdrop, my mind last week turned to Country by Country reporting. The basic idea is that multinationals should have to share the information which dictates how much tax they pay in each country they operate in. Armed with more information about their tax affairs, revenue authorities can co-ordinate to prevent issues such as (double) non-taxation, lawmakers can better address the flaws in the international framework and citizens can either be confident in the robustness of the system and integrity of multinationals or, if dissatisfied with either, can apply pressure to both to ensure everybody plays the game fairly.

Aside from the issue of taxpayer confidentiality, it seems pretty unobjectionable that there should be co-operation between revenue authorities, who in turn can inform policy makers. The dissemination of the information to the public however may be problematic, but this is precisely what the European Commission is now seeking. This policy, whilst driven by tax considerations, fails to accommodate the knock on effects on competition. In general, it should be stressed, information shared with consumers is unproblematic. However, there can be specific circumstances in which the release of facially benign information can produce co-ordination on the market. In layman’s terms, this means that competitors may be able to co-ordinate their activities so as to increase price. This will depend on the nature of the market and the information itself. The European Commission set it out as follows:

“However, the exchange of market information may also lead to restrictions of competition in particular in situations where it is liable to enable undertakings to be aware of market strategies of their competitors. The competitive outcome of information exchange depends on the characteristics of the market in which it takes place (such as concentration, transparency, stability, symmetry, complexity etc.) as well as on the type of information that is exchanged, which may modify the relevant market environment towards one liable to coordination” (para 58)

The core issue is essentially whether the information exchange will reduce uncertainty as to the future conduct of competitors.

When it comes to Country by Country reporting, it is not impossible to think of situations in which the release of historic, individualised data about companies, where they operate and to which countries they sell (and in what quantity), could reduce prospective uncertainty. There are many duopolistic markets (those with primarily 2 players. For instance, look at Boeing and Airbus) or oligopolistic markets (such as pharmaceuticals, where there are few players, the market is very difficult to access and highly transparent) occupied by large multinationals. Further information in these markets specifying the precise operations of each could allow the competitors to divide up the market geographically for instance. If historic information about the companies indicated a trend in timing of price rises, then each could co-ordinate so as to increase their price at the same time in the same amount.

This is not to say that the proposals are without merit, even if the proponents might be overoptimistic as to the end results of such a regime. As Louis Brandeis once remarked, “sunlight is said to be the best of disinfectants”. More information in the market is generally a good thing. But that does not cover all cases and scenarios. In these turbulent times, it would be unwise to dive tax first into policies without, in the least, an impact assessment which actually considers, holistically, the competition effects of such proposals. This is a very modest proposal. The firms against whom Country by Country reporting is primarily aimed are large multinationals with significant market power. It would be unwise to accidentally give them further scope to extract supracompetitive profits.

**Update: In June 2016, the Impact Assessment was published (see here). Whilst it address many of the different impacts of the proposal, it failed to deal with the problem of potential co-ordination or consolidation of the market.


About taxatlincolnox

Tax law academic. With this blog, I seek merely to contribute to the debate. All thoughts are mine, of course.
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