EU plans law to push tax transparency on multinationals

12 Apr 16

The European Commission today unveiled plans to force tax avoidance by large multinational corporations into the open, after toughening up its proposals in the wake of the Panama Papers.

The commission will put forward legislation requiring multinational corporations with global revenues exceeding €750m per year to publish detailed, public reports on their operations in each member state in which they operate, as well as any tax havens.

The legislation will apply to all firms operating within the EU, including non-European companies that have a subsidiary in the bloc. As well as detailed country-by-country reports, businesses will have to publish an aggregate figure for taxes paid outside of the EU.

A key feature of the proposal is that the country-by-country reports will be public – a standard tax campaigners have been pushing for and one that goes beyond recommendations made by the OECD in its overhaul of the international tax system, which many commentators agreed fell short.

Commission vice president Valdis Dombrovskis said that close cooperation between tax authorities must go hand in hand with public transparency in the fight against tax avoidance.

He said the proposals make information on taxes paid by multinational groups “readily available to the public, without imposing new burdens for SMEs and with due respect for business secrets”.

Although some of the measures are new, such as requirements to report on operations in tax havens, added amid public outcry over the Panama Papers, much of the proposal put forward today has been in the works for some time.

They were sparked by revelations that a number of large multinational firms, including Starbucks and Fiat Chrysler, had been paying little tax in Europe despite earning substantial profits in its market. 

The commission estimates the bloc loses between €50-70bn every year to corporate tax avoidance, and described the proposals as a simple, proportionate way to increase large multinationals’ accountability without damaging competitiveness.

But while Diane Sheard, interim Europe executive director at The ONE Campaign, welcomed the commission’s recognition of the power of public scrutiny, she said the proposals outlined today miss the point.

“The only way to fight illegal tax evasion is to disclose full country-by-country reporting which covers the activities of European multinationals everywhere in the world, in line with the existing reporting requirements for European banks.

“The commission’s proposal also limits disclosure to certain information and only to the largest companies. Without the bigger picture, this partial reporting will create loopholes and won’t put an end to illicit financial flows.”

Crawford Spence, a professor of accounting and tax avoidance expert at Warwick Business School, agreed that this is just a first step.

“This latest initiative from the EU is a small, but important step towards ensuring multinational companies pay their fair share of tax,” he said.

“Greater transparency is on its own an insufficient condition for recouping greater amounts of tax from companies. Companies could be transparent about paying very little tax yet continue not to pay it.”

He stressed, however, that it is a necessary condition for reform that makes it possible to shame companies into paying more, with a big impact on consumer-facing organisations.

But he added: “There are a lot of other companies who are not consumer-facing and so will be less concerned about public opinion. For those organisations, transparency will have a small impact on how they conduct their tax affairs.”

The ONE Campaign also noted that today’s proposals, much like the OECD’s BEPS reforms, do little for developing countries, which are the biggest victims of corporate tax avoidance, losing an estimated trillion dollars every year.

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