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This article was first published in the June 2016 UK edition of Accounting and Business magazine.

The European Commission is looking to gold plate the BEPS (Base Erosion and Profit Shifting) proposals developed by the Organisation for Economic Co-operation and Development (OECD) with country-by-country financial reporting proposals that go beyond the global think tank’s ambitions.

The commission has tabled its proposals for consideration by the European Union Council of Ministers and the European Parliament on 12 April, in the wake of the Panama papers scandal. Those proposals not only include making all large multinationals publicly reveal aggregated earnings data for each EU country they operate in and how much they earn outside the EU, but also making them supply more detailed ‘disaggregated’ data for non-EU tax havens. 

The country-by-country data would include separate entries for each EU member state and describe their business, the number of persons employed in a country, local net turnover (including with related parties), profits before tax, income tax due, and tax payments made to the country’s treasury, along with accumulated earnings. 

For tax haven income declared in their filings, multinational corporations would have to reveal much more accounts data. Although the exact range of information has yet to be specified, the proposal on the table is that related ‘information on operations… should be shown with a high level of detail’.

The proposals would cover all multinationals operating in the EU with a group turnover exceeding €750m a year even if they are based outside the EU. The suggested disclosures go beyond the BEPS proposals unveiled last year by the OECD.

Country-by-country

The commission’s proposals build on an agreement already secured at the EU Council of Ministers to rules tabled in January that multinationals make country-by-country reports to tax authorities on their EU revenues, profits before income tax, income tax paid and accrued, employee numbers, stated capital, retained earnings and tangible assets.

The proposals follow an impact assessment of how a country-by-country system could work. The commission cites the Panama papers scandal as evidence that public scrutiny of multinational corporate accounts is needed.

The leaks of documents ‘confirm once again the importance of this agenda’, says a Brussels memorandum, adding that the ‘commission will continue to pursue it with determination and with particular focus on tax transparency’.

ACCA, however, is not impressed. Chas Roy-Chowdhury, ACCA’s head of taxation, brands the commission’s data release proposals a ‘knee-jerk reaction’ to the Panama papers scandal. Roy-Chowdhury says that the Panama papers triggered more concerns about money laundering and the desire of companies and wealthy individuals to keep income sources confidential rather than tax avoidance or evasion per se.

He says: ‘The commission needs to think about what’s in these leaked papers before it starts having expanded reporting requirements over and above what’s proposed by the OECD.’

Roy-Chowdhury warns that if the commission gets its way major companies could avoid trading in Europe, worrying that their accounts could be picked over ‘in a mischievous way’ by activist non-governmental organisations (NGOs). ‘The EU is setting itself up as a risky place to do business,’ he says. ‘Business will think about going elsewhere and minimising its exposure to Europe.’

Moreover, the tax havens proposal brings scope for discord between EU governments themselves. They would have to agree a list of jurisdictions that ‘refuse to respect good governance standards in taxation and pose specific tax challenges’ – the commission’s proposed test for inclusion on an EU blacklist. Member states such as the UK, the Netherlands, Belgium, Italy and others are far from agreed on what jurisdictions should be included, notes the ACCA taxation chief.

Roy-Chowdhury also warns that more detailed criteria may emerge which might cause some within the EU to claim that some jurisdictions within the US should also be on the list – with all the diplomatic complications that would cause. The US state of Delaware, for instance, has notoriously loose company registration rules.

No escape

However, Olivier Boutellis-Taft, CEO of the Federation of European Accountants (FEE), takes a different line. He argues there is no escaping from transparency. With public opinion firmly opposed to large companies funnelling business through small jurisdictions with special tax regimes, ‘the principle of public disclosure, I would say, is inevitable. Public opinion is very, very strong. The pressure is overwhelmingly high.’

And with hackers able to gather and circulate the best protected information, and non-governmental organisations able to analyse this data and drive a political agenda, even concerns about releasing disaggregated detailed data could be misplaced, he suggests: ‘We’re moving from a world where much is more or less seen as confidential to a world where more is potentially disclosed, whether we like it or not.’ 

Far better that businesses and regulators regain control of this process and create a system of transparency that produces information that political actors and the public as well as financial professionals can understand, he argues. 

‘If we disclose information it has to be information, not just basic data; it has to be relevant; information that can be understood by stakeholders that will not create more problems than solutions.’ In this way, trust in companies and taxation systems that has been undermined by revelations about tax avoidance and evasion can be restored, he suggests. 

This process would be even more effective if tax systems were simplified, according to Boutellis-Taft. ‘A lot of the public outrage is generated by the extreme complexity of tax law today,’ he points out. Combining a simpler tax system with more transparency would help business by helping companies ‘compete on a level playing field’.

Building trust

Speaking in Strasbourg, the EU’s financial stability, financial services and capital markets union commissioner Jonathan Hill justified the proposals by saying: ‘People would be able to see how much tax Europe’s larger multinational companies pay and where they pay it. This will help make companies more accountable and promote fairer competition between companies regardless of their size. 

‘It will, I hope, build trust in Europe’s businesses and the fairness of our tax systems.’

He argued against suggestions that the EU should have gone even further and demanded that multinational companies deliver country-by-country reports for all jurisdictions, not just those in the EU, because of the difficulty of enforcing such a rule and because it could expose EU multinationals to double taxation. It could also force them to release data that could be exploited by competitors from outside the EU, he warned.

As for the difficulty of drafting a list of tax havens that do not comply with tax transparency norms, he argued that the commission’s criteria were solid enough to forge an agreement. He stressed that this includes their transparency in exchanging information, fair tax competition performance, standards set by the G20 group of nations and anti-money laundering and terror finance guidance set by the Paris-based Financial Action Task Force (FATF).

Having made its proposals, the European Commission will send the text to the EU Council of Ministers and the European Parliament for debates and amendments. 

The original proposals will almost certainly be changed before they are approved, but the commission has tried to make sure that some kind of decision will be made by categorising the proposal legally as an EU market regulation rather than a tax proposal. As a result, the directive will be voted on in the EU Council of Ministers through a qualified majority system, which does not insist on the unanimity required to pass new EU tax laws. 

Keith Nuthall, journalist