Transparency Crackdown E.U. Law to Target Corporate Tax Avoidance

As part of its drive to increase corporate transparency, the European Commission plans to introduce a law that would force companies to declare their tax liabilities on a country-by-country basis.
European Commissioner Pierre Moscovici is due to unveil the E.U.'s initial tax transparency plans this week.

The European Commission is planning to put forward a draft law that could force companies to publicly release their earnings and tax liability for each country in which they operate.

The European Union's executive arm, which wants greater transparency from large corporations, aims to present its proposals in the early summer, high-ranking E.U. sources told Handelsblatt.

With this duty of disclosure, the Commission hopes to pressure multinational corporations into paying tax in the same countries where they make their profits.

The move is part of a wider crackdown by the European Union and other countries on multinationals that have long avoided paying much of their corporate tax bill by exploiting international loopholes.

On Thursday, E.U. Commissioner Pierre Moscovici will present the first outline of a new E.U. law on curbing tax avoidance. The legislation will implement part of an “action plan” for wealthy countries that was drawn up by the Organization for Economic Cooperation and Development, the OECD.

The E.U. package against tax avoidance poses risks for the German economy. Markus Kerber, Managing Director, Federation of German Industries

Mr. Moscovici's legislative proposal this week will not include all of the OECD's recommendations, although his measures include reporting profits and tax on a country by country basis.

Companies are being asked to confidentially declare their profits to the finance ministries of the countries in which they have their headquarters, but Mr. Moscovici is not suggesting an obligation to report publicly. At least not yet. He has said he supports making the data public but that such a move would depend on a guarantee of reciprocity from U.S. companies.

But it is likely that an obligation to publicly disclose will follow in a matter of months, sources in Brussels say. The Commission aims to adopt a part of the OECD action plan against tax-base erosion and profit-shifting, known as BEPS, by the end of the Dutch E.U. presidency in June. Presumably there will be a targeted revision of the E.U. guidelines for consolidated reporting.

A total of six new rules are contained in the draft E.U. legislation. Two of the proposed regulations go above and beyond BEPS. The plan is to make it more difficult to relocate businesses – or even entire companies – to tax havens, by imposing an “exit tax.”  Sweeping tax exemption for overseas profits will also no longer be possible. According to the draft, interest payments to subsidiaries in low-tax countries will also be taxed.

Predictably, big business is not enthused. The Federation of German Industries (BDI) protested the changes last year. They say the information is sensitive corporate data, which must be kept confidential. Even Germany's finance minister Wolfgang Schäuble argued that tax secrecy had priority and that this type of transparency goes too far.

“The EU package against tax avoidance poses risks for the German economy,” the managing director of the BDI, Markus Kerber, said.

“It could lead to double-taxation of companies, or even to disputes between countries about where a company should be paying its tax,” he added.

Brussels argues that even the U.S. Securities and Exchange Commission is demanding that large corporations provide a public country-by-country report. And in Europe, banks already seem to be able to live reasonably happily with similar requirements. The E.U. Capital Requirements Directive IV requires European finance houses to openly declare profits, tax debt, number of employees and other information relevant to each state.

 

Ruth Berschens heads Handelsblatt's Brussels office, leading coverage of European policy. To contact the author: [email protected]