How UK’s Companies House could be making life harder for tax inspectors in developing countries

I was fortunate enough to spend a couple of days last week in discussion with the head of transfer pricing from a small developing country. One of the obstacles that I hadn’t previously understood was that it is sometimes very hard for tax authorities to prove in court that an offshore company is related to the company they’re auditing. Even when it’s obvious.

Part of the solution is to ensure that the definition of ‘related party’ in domestic law is clear and wide enough, part of it is to require related party disclosures in tax returns (the latter was also a recommendation in the committee’s report), and a further part is to make use of tax treaties that allow for information exchange (which is a last resort, because it’s so time consuming). But in the case of multinational companies, tax officials’ jobs can also be made much easier by the multinational’s country of incorporation.

Making accounts accessible

Yesterday I mentioned some elements of the UK government’s response to the International Development Committee (IDC)’s report on tax and development. That response also notes “some of the advantages of making accounts available from the point of view of increasing transparency and in particular providing information on transfer pricing transactions.”

The Department for International Development (DFID)  followed up the Committee’s request that it test out Zambia’s system for public access to company accounts, and it confirms what we found in many developing countries when I worked at ActionAid: only one of the ten sets of accounts that it tried to access could be obtained, for reasons that were unclear.

But here it added something that I hadn’t thought of:

A staff member of DFID’s Zambia office was able to successfully access summary financial information for one of the major mining companies operating in Zambia, Konkola Copper Mines (owned by Vedanta Resources PLC listed on the London Stock Exchange), through the UK Companies House web-based information service. However, this process required use of a credit card with a UK address, so would not be readily available to most Zambian citizens.

My interlocutor from the developing country tax authority gave a list of foreign information sources, including the US system, which is good, and free. But it had never occurred to me that even tax officials in developing countries will struggle to use the UK’s system, because it requires a UK-registered credit card. Someone should tell them that UK companies’ accounts are available free of charge on Duedil.

Making accounts useful

Here’s how the UK government frames its own attitude to the register of accounts in that response to the IDC:

The UK Companies Act requires limited companies to publish statutory accounts information so that third parties can assess the financial health of the company. The Government would encourage jurisdictions that do not have such a requirement to consider its introduction. The Government believes the wider benefits of this in commercial decision-making justify the costs to companies and to government of fulfilling this obligation.

Setting up a such register is hard, and the UK hasn’t got it quite right. Companies can file electronically now, but it’s still only possible to download scanned PDF files of accounts. This means they can’t be searched, and their contents can’t be copied as text. Contrast this with the US, whose system provides data in an HTML format that can be processed, and even India, where the most recent accounts can be downloaded in the new XBRL format.

Enforcing their own rules

Furthermore, as I found out when at ActionAid, the UK’s Companies House, which is supposed to check that companies have filed their documents correctly, has its own problems. All UK-registered companies are legally required to file a full list of all their subsidiaries and their locations. With this information, tax officials in a developing country looking at one subsidiary could easily prove that another is a related party, as well as learning more out the company’s presence in different jurisdictions.

Yet, despite this being a legal requirement, most companies don’t comply with it. We discovered with a freedom of information request that this is because Companies House doesn’t have a computer system capable of  comparing two different documents filed by the same company, which is what would be necessary to ensure compliance with this law.

The internal correspondence we obtained included a note from an official along the lines that Companies House would have to rely on ActionAid to enforce this part of the law!