by Julie Martin
Large multinational corporations operating in Europe would be required to publicly disclose tax information on a country-by-country basis under an EU Commission proposal, unveiled April 12, which is drawing criticism from both business representatives and tax justice campaigners.
The proposed directive would require multinationals to publicly report, on a country-by-country basis, tax information about a group’s operations in the EU and in non-EU countries considered to be tax havens. MNEs must also publicly disclose tax information about activities in third countries that are not tax havens, but this data may be aggregated and reported as one lump sum, rather than on a country-by-country basis, making it less informative.
Tax havens
The Commission’s proposal goes further than an earlier version of the directive leaked last month by requiring country-specific reporting for tax havens. The Commission said it will create a list of non-EU tax havens subject to reporting based on criteria set forth last January as part of its External Strategy for Effective Taxation. It will present the first assessment to member states in autumn 2016.
Commissioner Jonathan Hill confirmed that the release of the Panama Papers strengthened the Commission’s resolve to ensure that taxes are paid where profits are generated. Hill said that public disclosure of the tax information is needed so EU citizens can understand and respond to multinational tax avoidance.
“It should not be the case that smaller companies, that are not able to shift their profits or afford tax advice to minimize their bill, [should] be at a competitive disadvantage to big multinationals,” Hill said.
The proposal applies to all large MNEs operating in Europe, not just European-parented MNEs. The group must have consolidated turnover of EUR 750 million, consistent with the threshold in the OECD/G20 base erosion profit shifting (BEPS) country-by-country reporting agreements.
MNEs headquartered outside the EU are subject to the rules if they have medium to large-sized subsidiaries or branches in the EU. To fit the definition, an undertaking must meet least two of the following criteria: (1) net turnover must exceed EUR 8 million (though member states may increase the threshold up to EUR 12 million), (2) its balance sheet total must exceed EUR 4 million (though states may increase the threshold up to EUR 6 million), and (3) the average number of employees during the financial year must exceed 50. Turnover is the sole criterion to determine if a branch is a medium or large-size.
MNEs must publicly disclose for each jurisdiction the nature of their activities, tax due, tax paid, number of employees, net turnover (including with related parties), profit or loss before tax, income tax due in the country from profit made during the current year, and accumulated earnings.
The report should also include an explanation if there are discrepancies at the group level between the amounts of taxes accrued and the amounts of taxes paid, taking into account corresponding amounts concerning previous financial years.
Reaction
The proposal is not being well-received by business representatives.
Markus J. Beyrer director general of BusinessEurope, said the Commission’s proposal creates uncertainty for business and could harm EU competitiveness.
“[W]e believe that these proposals, by making the EU a lone front runner in terms of public disclosure, risk undermining our attractiveness as a location for investment, particularly from overseas,” said Beyrer.
Catherine Schultz, vice president for tax policy at the National Foreign Trade Council in Washington, noted that EU governments participated in the OECD/G20 BEPS project and that the consensus agreement was to exchange country-by-country reports through tax treaty exchange of information provisions.
“Making CbC information public violates not only the BEPS agreement they signed on to, but also the privacy provisions of the bilateral tax treaties that countries have with the US,” Schultz said.
Moreover, US tax officials have previously said they would not share country-by-country tax information with any government that does not honor the agreement to keep country-by-country reports confidential, Schultz added.
Speaking in her individual capacity, Carol Doran Klein, vice president and international tax counsel at the USCIB, noted that the EU, as a member of the G20, had a seat at the table during the OECD BEPS process.
“The [BEPS] Action 13 outcomes are only in the process of being implemented, the first reports are not yet due, so there has been no opportunity to see the results of those changes and their effect on tax compliance, and yet the EU is changing the rules that were just agreed,” Klein said.
Klein also said that business was an active participant in the OECD/G20 BEPS agreements and that the scope of country-by-country reporting was determined, in part, with the understanding that information would remain confidential. “A very different agreement might have been struck had the agreement been that the information would be released to the public,” Klein said.
Tax transparency campaigners are also not pleased with the proposal, but for different reasons.
Tax Justice Network director of research, Alex Cobham, said the Commission should replace its proposal with full, public, country-by-country reporting.
“The Commission may think it has created a halfway house between the corporate lobbyists’ calls for continued secrecy, and public demands for transparency, but it has not. There is no middle ground here: either there is effective transparency, or there is not. And this is most certainly not,” Cobham said.
Andres Knobel, a Tax Justice Network analyst, disputed rules that allow MNEs to provide only aggregate figures for third-country country-by-country data,
“The lumping together of all non-EU countries into one aggregate will combine developing countries, which tend to suffer most from profit-shifting in relation to their overall revenues, with some of the most egregious non-EU profit-shifting centers such as Bermuda, Cayman, and Singapore. The resulting information will be completely worthless, either in considering EU impacts or for developing countries,” Knobel said.
The Tax Justice Network also said that the EU Commission proposal does not require MNEs to report some information that is required to be provided to tax officials in the BEPS country-by-country agreements, creating an incomplete picture of MNE operations.
Under the Commission proposal, unlike the OECD/G2o BEPS rules, MNE are not required to report stated capital and tangible assets held by the group in each jurisdiction. Also, MNEs do not need to list all entities of the MNE group and provide country of tax residence, country of organization, and business conducted. Groups also do not need to break down a group’s revenue between dealings with related parties versus third parties.
– Julie Martin is a US tax attorney and a member of MNE Tax’s editorial staff.
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