(Note: This is the second in a series of FACT blogs directly connecting our tax justice and anti-corruption work to the climate crisis.)
The ongoing OECD tax deal and the upcoming COP26 Climate Change Conference promise a rare opportunity for tax and climate activists to join forces. With the cost of climate change growing, we cannot afford to waste any time or resources in rising to the challenge of the present crisis: governments need revenues to fund a climate response. Public country-by-country reporting (PCbCR) of corporate tax payments would help reinforce the successes of the historic OECD tax deal agreed to this October to end the global race to the bottom on taxes and provide the needed transparency to gauge progress on our climate priorities. Tax and climate activists must work together to advance this important complementary measure.
PCbCR would serve climate objectives and foster tax transparency in our financial system by mandating multinational corporations publish information on main activities, revenue, taxes, assets, and other key financial metrics broken down on a country-by-country basis. In doing so, PCbCR promises to help investors allocate capital to sustainable firms that abide by global tax rules, give lawmakers the data needed to detect and defeat future profit shifting, and pull back the financial secrecy that enables and rewards the exploitation of our natural resources.
A Tool for Funding Treasuries in the Global Fight Against Climate Change
We have witnessed a decades-long gutting of corporate tax revenues as a percent of GDP since the 1950s. This has been led by both drops in the headline corporate tax rates and multinational corporations’ growing use of tax avoidance schemes to shift profits to low tax jurisdictions. To address this crisis, the recent OECD tax deal promises to help put a stop to this race to the bottom by implementing a 15 percent global minimum tax for multinational corporations applied on a country-by-country basis, raising around $150 billion dollars a year.
PCbCR is an indispensable, complementary enforcement mechanism to ensure the OECD deal lives up to its promises. If multinational corporations are required to publish their taxes and revenues by country, investors will be able to redirect capital away from firms that engage in risky tax avoidance schemes, which can create real risks to capital as a result of potential enforcement or reputational harm. Firms will, in turn, have greater motivation to engage in less problematic tax practices. For example, in the wake of the 2008-2009 financial crisis, the European Union required certain financial institutions to institute a form of public country-by-country reporting (the first system of its kind): the resulting effective tax rate collected from these institutions jumped by 3.7 percent, as they cleaned up the “worst of the worst” of their tax practices before releasing them to the public.
Deterring those exploitative practices will guarantee that governments can effectively raise revenues from corporate taxes. A government’s ability to raise income from corporate taxes determines capacity to which it is able to equitably fund capital, human, and governance investments necessary to combat climate change. Further, empowering governments to collect revenues has been shown to result in greater accountability by governments employing those funds when compared to foreign aid, a key component of effectively responding to climate change.
Blocking Future Profit Shifting and Enabling Policymaking
The scale of the global crisis resulting from profit shifting is hard to pin down — exactly because of the dearth of public information on multinational corporate tax payments. Under an OECD agreement, large U.S. and other multinationals with revenues in excess of $850 million are already required to privately report country-by-country income tax information to tax authorities.
However, developing nations often do not benefit from such information sharing. This is, in part, because multinationals operating in these jurisdictions have smaller revenues that fall under the reporting threshold, and even more so, the private nature of these disclosures makes it difficult for developing country legislatures to provide evidence for needed legislative changes. As a result, investors, many developing countries, policymakers, and tax justice activists are locked out from the data needed to understand the full scope of profit shifting, including as it fits into current global tax negotiations prompted by the OECD minimum tax deal. Public access to this data will ensure that governments and civil society will be able to efficiently address any persistent and material abuses of tax laws if they arise.
Pulling Back the Veil on Unsustainable Business Practices
Increased corporate revenues aren’t the only way that tax transparency will help the climate fight. Time and time again, exposés like the Pandora Papers have confirmed that tax havens and financial secrecy go hand in hand. When bad actors can operate with impunity, environmental exploitation and degradation often follow. One study, published in the wake of the Panama and Paradise Papers, revealed that almost 70 percent of the financing for nine of the world’s largest soy and beef producers’ Brazilian operations were routed through tax havens. These schemes not only subsidize these environmentally unsustainable practices through avoided taxes, they also hide the full scale of damage and deforestation and the extent to which extractive and other companies’ profitability depends on pillaging the environment.
When financing and profit flows are distorted through tax havens, it is difficult for investors, climate activists and academics to follow the money to and from on-the-ground operations. By contrast, public country-by-country reporting by fossil fuel companies would allow investors, investor analysts, and other stakeholders to assess the extent to which tax avoidance and profit shifting affect the balance sheet of these companies. Similarly, establishing a clear link of causality between financing, environmental destruction, and the profits extractive and other industries report will be crucial for holding those corporations and financers accountable for the climate consequences of their actions.
An Opportunity to Capitalize on Growing Momentum
Luckily for tax and climate activists, there is already growing momentum behind PCbCR and the demand for greater tax transparency. We have seen a flurry of activity this year, between international momentum, growing private sector interest, and congressional efforts. For the first time, multinational companies, including extractive giants BP and Newmont, began reporting tax information under the Global Reporting Initiative, creating a voluntary public country-by-country tax reporting standard adopted to varying extents by several large multinationals. Further, the U.S. House of Representatives passed the Disclosure of Tax Havens and Offshoring Act as part of an investor protection package (H.R. 1187)) this summer, which would require PCbCR for large U.S. multinationals; it is now in the Senate. Since large U.S. multinationals already make this information available to the IRS under current OECD agreements, making the jump to real tax transparency through public disclosures would be straightforward for policymakers and low cost to businesses.
The climate crisis poses a singular threat to human wellbeing and the global economy. For too long, tax secrecy and profit shifting has hamstrung government ability to raise the funds for addressing climate change’s existential challenge. Bringing tax havens and corporate profit shifting into the public light through PCbCR is a necessary step toward ending environmentally destructive behavior and crafting responsive climate policies.