New public tax transparency rules for multinationals criticized as insufficient

The European Commission published this week a proposal on new public reporting requirements for the largest companies operating in the EU.

The proposal builds on the Commission’s work to tackle corporate tax avoidance in Europe, estimated to cost EU countries EUR 50-70 billion a year in lost tax revenues.

Supplementing other proposals to introduce sharing of information between tax authorities, it would require multinationals operating in the EU with global revenues exceeding EUR 750 million a year to publish key information on where they make their profits and where they pay their tax in the EU on a country-by-country basis.

The same rules would apply to non-European multinationals doing business in Europe. In addition, companies would have to publish an aggregate figure for total taxes paid outside the EU.

The proposal comes timely in view of the recent leak of millions of documents (“Panama Papers”) from the Panamanian law firm Mossack Fonseca showing widespread tax evasion by shell companies established in tax heavens, especially in the British Virgin Islands.

Accountability and transparency

According to the Commission, this proposal is a simple, proportionate way to increase large multinationals’ accountability on tax matters without damaging their competitiveness. It will apply to thousands of large firms operating in the EU, without affecting small and medium-sized companies.

The proposal, which was announced on 12 April, also provides for stronger transparency requirements for companies’ activities in countries which do not observe international standards for good governance in the area of taxation. The Commission will build on its External Tax Strategy with the aim of establishing the first common EU list of such tax jurisdictions as rapidly as possible.

Vice-President Valdis Dombrovskis, responsible for the Euro and Social Dialogue said: “The fight against tax avoidance is a key priority of this Commission. Close cooperation between tax authorities must go hand in hand with public transparency.”

He added that “today, we are making information on income taxes paid by multinational groups readily available to the public, without imposing new burdens for SMEs and with due respect for business secrets. By adopting this proposal, Europe is demonstrating its leadership in the fight against tax avoidance”.

The proposal will amend the Accounting Directive (Directive 2013/34/EU) to ensure that large groups publish annually a report disclosing the profit and the tax accrued and paid in each Member State on a country-by-country basis.

This information will remain available for five years. Contextual information (turnover, number of employees and nature of activities) will enable an informed analysis and will have to be disclosed for every EU country in which a company is active, as well as for those tax jurisdictions that do not abide by tax good governance standards (so-called tax havens).

Aggregate figures will also have to be provided for operations in other tax jurisdictions in the rest of the world.  The Commission claims that the proposal has been carefully calibrated to ensure that no confidential business information would be published.

The proposal for a Directive is now submitted to the European Parliament and the Council of the EU. The Commission hopes that this will be swiftly adopted in the co-decision process. Once adopted, the new Directive would have to be transposed into national legislation by all EU Member States, within one year after the entry in force.

What do NGOs think about the proposal?

The number of companies doing business in Europe and affected by the new transparency rules is estimated to 6 000. Transparency International commented that the rules would not cover “the activities, tax payments and potential tax agreements by multinationals across most of the world”.

Tamira Gunzburg, Brussels Director at the ONE Campaign, an international campaigning and advocacy organization, said the proposal is missing the point.

Every year, developing countries lose more than a trillion dollar in illicit financial flows; if even a portion of that money was taxed and the revenues invested in services and systems, it could help finance developing countries’ own fight against extreme poverty.

According to the ONE Campaign, the major weakness of the proposal is that it does not require companies to disclose their reporting for all countries in which they have activities, contrary to the reporting requirements that already apply to EU banks that cover the activities of European banks anywhere in the world.

The threshold is also considered too high. The EU proposal only captures multinationals with a turnover of more than 750 million euros, which leaves out 85 – 90 % of multinationals internationally.

Furthermore, the proposal doesn’t include crucial information such as the list of subsidiaries and activities as well as sales and assets.

The Brussels Times (Source: The European Commission)

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