By Cédric Maheo, Head of Transfer Pricing, CWA Morocco, Casablanca
The EU directive on public country-by-country reporting for large multinationals, published in the Official Journal of the European Union on December 1, will give tax authorities in the developing world new data on multinationals operating in their jurisdictions that they have not otherwise been able to collect.
Under the directive, entities belonging to multinational undertakings with an annual turnover exceeding EUR 750 million (approximately USD 847 million) and operating in at least one EU member state will indeed be required to publicly disclose certain information in an open format on the internet. This includes information of a general nature (kind of activities, number of employees), as well as of a fiscal nature – such as revenues (notably with related parties), profit (or loss) before income tax, and income tax accrued.
Those elements will be made public for each of the jurisdictions in which the group operates in the EU, as well as in third countries listed on the EU’s grey or black lists of tax havens.
The well-informed observer will have noticed that the information required under the EU directive corresponds to some of the data required for country-by-country reporting under the OECD’s base erosion and profit shifting (BEPS) Action 13.
However, the EU directive is a clear departure from the mechanisms of automatic exchange of information designed and organized by the OECD. It is worth remembering that when states translate the directives of BEPS Action 13 into domestic law, information collection is subject to strict regulations.
Even after the signing of the multilateral competent authority agreement on the exchange of country-by-country reports – which is itself an advanced stage of the process – signatory authorities could not expect to automatically collect “sensitive” information relative to the subsidiaries of foreign multinationals unless a specific bilateral agreement had been signed between their jurisdictions and that of the other party. A balanced, perfectly reasonable situation.
Because of the sensitive nature of the data published, governments, fully conscious of the need to protect their companies, exercised great caution in the choice of whom they signed with. For while the multinational groups of the northern world have a large number of subsidiaries operating in the South, the opposite is a great deal less true. Since the exchange (of information) necessarily involves some form of reciprocity, it is easy to understand that specific agreements of automatic exchanges of country-by-country reporting statements between Western nations and developing countries remain the exception rather than the rule.
To illustrate that point, one can underline that, with the notable exceptions of South Africa, Tanzania, Nigeria, and Mauritius, not one of the remaining 50 countries of the African continent can pride itself on automatically collecting country-by-country reports from any other country in the world so far.
This admittedly frustrating situation has led the shrewdest African lawmakers to circumvent the difficulty by supplementing the principle of automatic exchange with “secondary mechanisms” in domestic law. To put it simply, the state in which a subsidiary operates, realizing it does not have any means of legally collecting country-by-country reports, transfers the reporting obligation onto the local subsidiary, with sanctions being applied in case of failure to provide information.
The implementation of the new EU requirements will make such ploys unnecessary. Country-by-country reporting will be provided with a smile, as a gift from the European Parliament! As Shadow rapporteur Evelyn Regner put it, “For too long, corporations have played by their own rules. Thanks to the transparency provided by public country-by-country reporting, we will now be able to shed light on this opaque corporate jungle.” To which her colleague Iban Garcia Del Blanco added, “Citizens, investors, trade unions, researchers and journalists have the right to know this information, and corporations have to demonstrate they behave responsibly.”
In principle, enhancing transparency is an admirable objective, no doubt about it. But this decision nevertheless rests on two major misconceptions: that multinational groups routinely engage in tax evasion and that tax authorities unfailingly act in good faith.
The recent case of Nestle Morocco affords us a perfect counter-example. The tax inspector slapped a EUR 100 million (approximately USD 114 million) tax adjustment on the Swiss firm after rejecting its transfer pricing policy, without providing the slightest shred of economic justification.
There is no denying that large foreign groups represent a target of choice to fill the coffers of the state in developing countries, where the underground economy, which intrinsically remains untaxable, plays a major or at least a large part.
Promoting tax compliance is all good and well, but the blind belief that disclosing country-by-country reporting data of European firms is a constructive measure reflects the worst sort of ethnocentrism.
Pascal Saint-Amans, Director at the OECD Centre for Tax Policy and Administration, who is not exactly a staunch supporter of multinationals, had made that point as early as 2017. “Making certain data public at the European level alone, might well put European firms at a disadvantage compared with their American or Asian competitors”.
The US (whose economic and tax acumen is well-known) would never have taken an initiative of that sort. Bob Stack, former Deputy Assistant Secretary for International Tax Affairs at the US Treasury, went even further when he issued that unequivocal warning: “the US would not share the country-by-country report with foreign administrations that would choose to make it public.”
There are results with no ethics. There are ethics with no result too. But that EU directive is an innovation since it has introduced counterproductive ethics. If one were to compile a list of the most spectacular “own goals” of the decade, that one would definitely rank very close to the top.
I’m curious if there is a clear articulation of what the transfer pricing policy was in that Nestle Morocco and why it should have been seen as arm’s length. One area where tax transparency would be of clear importance is the transfer pricing between African mining affiliates and their Swiss marketing hubs.