International Momentum for Improved Financial Disclosures Demands SEC Action to Protect Investors

WASHINGTON, DC – The Financial Accountability and Corporate Transparency (FACT) Coalition’s Policy Director, Ryan Gurule, addressed the Securities and Exchange Commission’s (SEC) Investor Advisory Committee (IAC) today as part of a panel on emerging investor expectations regarding tax transparency. The IAC – an independent committee formed to advise the SEC on regulatory priorities and initiatives that protect investor interests – heard arguments from Gurule, investors, and other tax and corporate reporting experts highlighting the need for SEC action toward instituting public country-by-country reporting (PCbCR) requirements for certain large multinational enterprises (MNEs) publicly filing in the United States. In light of international developments, experts urged the SEC to move swiftly to require PCbCR in line with international best practices, consistent with the standards developed by the Global Reporting Initiative (GRI).

“Investors are currently running a race with blinders on with respect to tax and operations risks associated with the international operations of multinationals subject to SEC jurisdiction,” said Gurule. “This lack of transparency reduces investors’ ability to understand a firm’s governance practices and tax and operating risks that impact the bottom line, including as evidenced by international tax reform and enforcement efforts, the Russian invasion of Ukraine, and the Covid-19 pandemic.”

Among other international risks facing multinationals, global tax authorities are increasingly looking to shore up international tax systems to fund responses to challenges like the Covid-19 pandemic and climate change. For example, in October 2021, 137 jurisdictions agreed to create a 15 percent effective rate global minimum corporate tax applying on a country-by-country basis. Implementation of this agreement has been slower than expected, but several jurisdictions are actively advancing implementation of the agreement and discussion around other unilateral and multilateral corporate tax reform efforts have not slowed. These efforts are sure to increasingly impact large multinational U.S. filers in ways that investors, policy-makers and other users of financial statements currently have little insight into. 

“International tax avoidance, and the attendant policy responses of governments to this problem, generates large effects on companies’ bottom lines that are often mysterious to public observers,” said Professor Kimberly Clausing, the former Deputy Assistant Secretary for Tax Analysis in the US Department of the Treasury. “Yet markets work best in an environment where information is available, transparent, and free. Better public data on multinational companies’ financial arrangements would serve the interests of investors, who need to thoroughly understand the economic situations of companies and the risks that they face.”

Investor demand for public reporting of disaggregated country-by-country financial information by large MNEs has steadily mounted in recent years. In May, shareholders representing more than 21 percent of independent shareholders backed a resolution calling on tech giant Amazon to publish more complete tax data. It was the first ever shareholder proposal of its kind, and the SEC supported its inclusion for vote following an Amazon challenge, backed by investors with around $3.6 trillion in assets under management. Following months saw similar proposals introduced against other prominent multinationals, including Microsoft, Cisco, Exxon Mobil, Chevron, and ConocoPhillips. Even as today’s IAC meeting was being held, shareholders met to vote on the Cisco PCbCR proposal.

“Tax aggressiveness is a good signal for a business and board’s risk tolerance.” said Robert Wilson, Investment Officer and Research Analyst at MFS Investment Management. 

“We haven’t been able to spot all the risks and opportunities before they occur.” Because of the current gaps in financial reporting, including the lack of public country-by-country reporting, “MFS is forced to engage with individual companies, which is very inefficient. Investors are unwittingly exposed to risk. MFS is interested in companies that can produce durable growth and returns over the long term.”

Recognizing these growing investor demands, Chair Gary Gensler signaled that the SEC is considering expanded tax reporting requirements for large U.S. MNEs during a September testimony before the Senate Committee on Banking, Housing, and Urban Affairs. The Financial Accounting Standards Board (FASB), meanwhile, is also developing guidelines for greater disaggregation of tax data for multinational filers; a proposal that might represent a meaningful step forward, but that requires greater clarification to be most useful to investors and other users of financial statements, which the SEC can provide through clear PCbCR requirements for large filers.

“Fortunately, the SEC has the authority, as well as the responsibility, to fix this glaring inadequacy in our nation’s public multinational reporting framework today,” said Gurule.

Without a broadly applicable and comprehensive PCbCR regime in place, the United States has fallen behind the global trend towards requiring greater tax transparency from large MNEs. For years, large multinationals have been reporting the data required to generate PCbCR to the Internal Revenue Service, but investors and other users of financial statements have been kept in the dark on this decision-useful data.    

In October, the Australian Treasury released a budget proposal which included a strong PCbCR mandate for multinationals with an annual income above AU $1 billion. The proposal is expected to pass into law and will require reporting from certain U.S. multinationals with Australian contacts for reporting years beginning in summer 2023. A more limited PCbCR requirement was also adopted by the European Union (EU) in November 2021, which will also require reporting from certain U.S. multinational enterprises for reporting years beginning in summer 2024.

“By failing to advance PCbCR, or even by requiring an incomplete reporting regime, the SEC could further pollute information markets for reporting entities and investors alike,” said Gurule. “Lack of a comprehensive, uniform standard would increase reporting burdens as companies struggle to comply with a number of competing regimes, and continue to exacerbate information asymmetries in financial markets regarding whether multinational profits are based on actual competitive operating advantages or dodgy tax strategies.”

“The fact of the matter for U.S. multinationals is that public country-by-country reporting is no longer a matter of if, but when and how,” said Gurule. “The IAC should recommend that the SEC use its existing authority to begin the regulatory process to institute a comprehensive, best-in-class PCbCR requirement for large multinationals filing in the U.S. in 2023. It’s long past due to arm investors, policy makers, and other users of financial statements with the data that they need to make informed financial and regulatory decisions.”

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Notes to the Editor:

• The full IAC meeting agenda can be found here.
• Watch a recording of the public meeting on the SEC website.
• A fact sheet detailing the need for SEC action on PCbCR can be found here.
• Read more about the recent shareholder resolutions calling for greater tax transparency from Amazon, Microsoft, Cisco, Exxon Mobil, Chevron, and ConocoPhillips.
• Less than a year before the introduction of the Amazon shareholder proposal, investors representing a combined $2.9 trillion in assets under management wrote a letter to FASB calling for new guidelines requiring disaggregation of revenue, profit, and tax information on a country-by-country basis for reporting entities.
• A statement by FACT Executive Director Ian Gary in response to Chair Gensler’s testimony before the Senate Banking Committee can be found here.
• For more information on Australia’s PCbCR proposal, click here.
• FACT’s recent report, “A Material Concern: The Investor Case for Public Country-By-Country Reporting”, can be found here.
• The Global Reporting Initiative’s Standards can be found here.
• FASB’s Income Statement Expenses Disaggregation Project can be found here.