The European Parliament on Tuesday (4 July) voted to oblige multinationals to publish details of their activities on a country-by-country basis, even outside the EU. The measure is designed to help the poorest countries fight tax evasion. EURACTIV France reports.
The adoption of the directive at the Parliament’s plenary session in Strasbourg is a big victory for transparency campaigners and the governments of some of the world’s poorest countries. The new rules are part of a wider overhaul of tax regulation spurred by the so-called Panama Papers and other revelations of widespread tax avoidance by companies and wealthy individuals.
The banking sector is already subject to binding transparency rules, but MEPs voted to extend the same obligations to all multinationals that operate in Europe.
Under the transparency rules, backed by civil society and a number of EU governments, companies will be obliged to publish details of their profits in each country, along with their real activity in those countries.
Comparing companies’ declared profits or losses in certain tax jurisdictions against their levels of real activity allows tax authorities to see whether profits are being shifted from one jurisdiction to another to minimise companies’ tax liabilities.
“Today the European Parliament has taken a step forward in the fight against tax evasion by multinationals,” said Manon Aubry from Oxfam France. Under the rules adopted on Tuesday, any company with a turnover of more than €750m and at least one subsidiary in the EU will have to publish details of its worldwide activities.
But one loophole does exist: a safeguard clause that could allow companies to side-step their responsibilities, claiming the need to protect trade secrets.
“This will allow companies to avoid their transparency obligations on the vague pretext of protecting sensitive commercial information. But the principle is not even really defined,” said Italian MEP Elly Schlein (S&D group).
The get-out clause was defended by the right-wing and centrist political groupings, who warned that in some cases, strict transparency rules could undermine European companies’ competitiveness.
“But when we hear this kind of argument, it is very clear that ‘competitiveness’ is just code for ‘reputation’,” said Philippe Lamberts, a Belgian MEP and leader of the Parliament’s Greens group.
Despite this loophole, the final transparency rules are still stronger than those originally proposed by the Commission in April 2016. But for Oxfam, it is still not good enough: “This exemption is a big crack in the directive, which will be exploited by companies to continue hiding their tax strategies,” said Aubry.
Impact on developing countries
While country-by-country reporting is designed to shed light on the tax practices of multinational companies operating in Europe, it will also strengthen developing countries’ ability to protect their tax bases.
The requirement for companies to reveal their activities even beyond the EU’s borders, added to the directive by MEPs, will benefit those countries that suffer the most harm from tax evasion.
“Developing countries lose the most, proportionally speaking, to tax evasion,” said Aubry. According to a report by the African Union, the continent of Africa has lost more than $1,000bn over the last 50 years due to illicit financial flows, including tax evasion.
“Developing countries pay an enormous price for tax evasion,” said Schlein, who led the adoption of the directive in the Parliament’s development committee.
“Failing to demand detailed reporting outside European countries would have been completely useless for developing countries. They often lack the political clout to demand greater transparency from multinational companies,” she added.
But the exemption clause could also undermine the quality of reporting in developing countries. Each EU member state would be free to decide which exemptions to grant, which according to Schlein, could mean that “a European authority could decide to exempt a certain multinational from its reporting obligations in Niger or Senegal”.
Weak tax administrations
The adoption of public reporting opens a new front in the fight against tax evasion in developing countries, many of which have previously been left on the sidelines of international exchanges of fiscal information.
Under the OECD’s Base Erosion and Profit Shifting (BEPS) strategy, which foresees the automatic exchange of information between tax regimes, countries have to adopt common reporting standards, which they can then adapt with certain restrictions.
“In practice, this means countries can choose which states they exchange information with,” said Aubry. “At this stage, for example, we are not sure that Switzerland will agree to exchange information with any developing countries because their tax administrations still lack the ability to ensure the confidentiality of information.”
Tuesday’s decision by MEPs could go some way to providing the governments of developing countries with unrestricted access to multinationals’ tax information. For this to happen, the directive must be adopted by the Council of Ministers, where it is sure to meet with resistance from some EU member states that would prefer to weaken its transparency requirements.