A new era of corporate transparency is dawning

A new era of corporate transparency is dawning

A new era of corporate transparency is dawning

The G7 finance ministers’ tax deal is a step on the road to a better global tax system. If we have got this far, it is because of pressure from citizens who have realised how broken the current system is. That is why this week’s move by the EU to force big corporations publicly to break down their profits on a country-by-country basis is as important as the G7 deal.

The good news is that public country-by-country reporting will now be extended to all the biggest companies based or operating in the EU. The bloc already requires it for extractive companies (as does the US) and banks. This is welcome and long overdue.

The bad news is that the new rules are so full of holes as to put sieves to shame. The €750m revenue threshold for being required to report is far too high; and companies are given too much leeway to dodge the rules by claiming commercial sensitivity. Worst of all, companies only have to break down profits and taxes by EU member country and a handful of listed tax havens — an invitation to regulatory arbitrage by aggregating profits in conduit entities in non-covered countries.

Some lobbyists argue it is unnecessary to make public what the taxman knows confidentially. But as the G7 deal shows public exposure of dubious tax manoeuvres has created a political drive to fix global tax rules, resource tax authorities properly and take legal action against abuse.

What about the claim that more transparency makes European companies less competitive, supposedly because they lose bargaining advantage if disaggregated profits are publicly knowable? Leaving aside the unhealthy notion that corporate Europe should seek advantage by keeping its customers in the dark about getting bad deals, there is no evidence that this has happened where public country-by-country reporting already applies.

I find these arguments so poor I can only conclude they are made in bad faith. In a few cases, they probably reflect a desire to persist with foul play. In most, they simply try to defend a deeply ingrained attitude that one’s business is nobody else’s business — least of all the public’s. 

But time is up for that view of the world, because of the much bigger change of which this limited advance in tax transparency is a small part. We are living through a remarkable shift in what democratic societies expect in terms of openness. 

Corporate profits and taxes are far from the only example. Climate change is driving an extraordinary pressure for companies to collect and publish data on their activities’ impact on the environment.

Until recently, this sort of demand was limited to investors with special reasons to care — such as Norway’s sovereign wealth fund, which has a mandate to invest responsibly. Now investing based on climate change readiness has gone mainstream — with governments and the financial industry in a race as to who will define the yardsticks by which such readiness is measured. Indeed the G7 finance ministers also call for mandatory climate-related financial disclosures.

In another example, countries are beginning to make companies report on human rights in their supply chain, and a common EU rule is imminent. Everywhere you look, the direction of travel is towards what used to be thought of as private business information being placed in the public domain, often by force of law.

And how could it be otherwise? The digital revolution has made information much easier to find, share, and process: just look at public engagement with data in the Covid-19 pandemic. That inevitably raises the expectation that if data of social importance exists, it should not be hidden. Citizens are learning that the corporate sector hoards data on them; they will demand to know at least as much about what companies are up to. And whatever one thinks of unauthorised leaks, from the WikiLeaks and Snowden dumps of government secrets to a string of exposed tax haven activity, they reveal the futility of thinking that most institutional activity can be kept out of the public eye. 

An era is dawning in which most of what can be known, will be known. Resilient institutions will get ready for this future. That means delineating the very narrow areas, such as personal privacy and genuine corporate and government secrets, where confidentiality is necessary while accepting, even embracing, that most information does not fall into that category. Successful companies will be those who can do their business as well in the open as in the dark.

martin.sandbu@ft.com