EU tax transparency directive ‘insufficient first step’, activists say

An updated directive on the automatic exchange of information between national tax administrations received the green light from the EU’s 28 finance ministers on Tuesday (8 March).

So-called ‘country-by-country reporting’ between national tax authorities is opening a new era in tax transparency, backers say.

The 4th Directive on Administrative Cooperation (DAC4), adopted on Tuesday, will require multinationals to report, among other things, on their revenues, profits, taxes paid and number of employees in every country where they operate.

Pierre Moscovici, the EU Commissioner for Economic and Financial Affairs, Taxation and Customs, welcomed the agreement as “a major step forward towards enhancing transparency on tax matters,” saying the country-by-country reporting “will provide national authorities with the necessary insight to combat aggressive tax planning structures”.

The EU crackdown on tax avoidance came in the wake of the so-called ‘Luxleaks’ scandal, which exposed the world’s biggest companies, including PepsiCo and Ikea, for lowering their tax rates to as little as 1% in secret pacts with tax authorities in Luxembourg.

Every year, the EU loses between €50-70 billion from corporate tax avoidance as companies escape taxation by shifting assets, according to the European Commission, which tabled a proposal to update the directive in January.

“The text negotiated in the Council is very close to the one tabled by the Commission,” said an EU diplomat, who described the proposed directive as “pretty consensual”.

“We had a very precise template negotiated within the BEPS,” the diplomat explained in reference to the Base Erosion and Profit Shifting initiative at the OECD, which is now effectively being transposed in EU law.

A small first step

But transparency campaigners were quick to point out that the information will remain within the hands of tax authorities at this stage.

“The Council tends to qualify the exchange of information between tax administrations as transparency — it’s not,” said Aurore Chardonnet, a campaigner at the EU Office of global charity Oxfam.

“Transparency means the public can access it,” she told EURACTIV. “It can only be a first step otherwise this information will remain opaque.”

The Greens group in the European Parliament agreed, describing today’s deal on DAC4 as a “half measure” and “a small step forward” towards strengthening oversight over corporations’ tax dealings.

“The new measures fall far short of the full country-by-country reporting obligations demanded by the European Parliament for ensuring full transparency of corporations’ tax dealings,” the Greens said in a statement.

The Commission is expected to table a proposal on 12 April to make some of the reporting available to the wider public. “But what we hear is not very promising,” Chardonnet said.

One option currently gaining ground in the Commission would be to make the reporting public for EU countries but keep the rest of the world covered anonymously under “third countries”, she said. “This means data regarding activities in developing countries would be left out of the reporting,” Chardonnet said, describing this as a setback for transparency.

And the proposal does not enjoy unanimous support from EU countries. Luis de Guindos, the Spanish Economy Minister, said he did not consider public country-by-country reporting a necessity.

“The tax authorities are the ones that should be aware of the information and act”, he said after Tuesday’s meeting of finance ministers.

‘A little more than BEPS’

A silver lining for transparency campaigners is a so-called “secondary reporting requirement” for subsidiaries of foreign companies operating in the EU.

According to the principle, subsidiaries will have to report to the tax administration where their parent company is registered. Those in turn will have to report back to authorities in other EU member states, shining some light into an otherwise opaque tax system of “parents” and “subsidiaries”.

France claimed victory for the insertion of this provision, which was adopted despite opposition from Germany. Berlin finally bowed to pressure in exchange for a delay in implementation of one year, until 2017.

“There was a deferred application of one year but this is still a little more than BEPS,” said Michel Sapin, the French finance minister. “On this point, we extended after a discussion, the obligations a little more broadly.”

Oxfam welcomed the move, saying excluding subsidiaries from the reporting would have been “weird” as it would not have covered companies like Google.

However, Chardonnet believes this is “clearly not enough” to properly deter tax dodging. “For example, developing countries, suffering even more from corporate tax avoidance, would not access the info. In addition, this implies full cooperation on tax issues among member states.”

“I really wish this was the case but Luxleaks proved it is not always like that.”