A new EU law requiring multinationals to report profits and taxes on a country by country basis may be introduced within a few months, reports have suggested after the European Council agreed to strengthen measures to tackle tax evasion and avoidance. But the published conclusions of last week’s meeting in Brussels did not set out a specific proposal on tax reporting.
As Tax Journal reported in March, the UK government appeared to have softened its line on country by country reporting for all multinationals when the Treasury’s spokesperson in the House of Lords told peers that it was “currently looking” at the proposal, but last month David Cameron called on EU leaders to consider how country by country reporting could be “further encouraged on a voluntary basis”.
EU finance ministers broadly endorsed new measures on transparency for banks in March, including a requirement for banks to disclose profits made and taxes paid on a country by country basis from 2015, subject to an economic impact assessment to be conducted by the European Commission next year. Agreement was reached in April on a new EU accounting directive requiring European companies in the extractive and forestry industries to disclose payments to governments on a country and project basis.
‘Shake-up’
On 22 May EU leaders broadly backed a “shake-up” that could see a law passed as soon as this summer, the Financial Times reported, extending those reforms to all large public and private companies.
A published note of the European Council’s conclusions gave rise to some uncertainty. “The proposal amending the directives on disclosure of non-financial and diversity information by large companies and groups will be examined notably with a view to ensuring country by country reporting by large companies and groups,” it said in a section on taxation.
Tax Journal invited HM Treasury to comment. Its reply was silent on the possibility of mandatory country by country reporting for tax. A spokesperson said: “The government is committed to greater transparency and supports the European Council’s proposal to amend the directives, with a view to ensuring large companies and groups disclose non-financial and diversity information on a country-by-country basis.”
However, during a speech on 23 May Michel Barnier, the EU internal market commissioner, said: “[The] largest banks [will have to] disclose their profits, taxes and subsidies in each member state and non-EU country where they operate. And in line with yesterday's conclusion of the European Council we will expand these reporting obligations to large companies and groups.”
The FT reported that Barnier was working on options including the amendment of a recent proposal on reporting of social and environmental issues, and a spokeswoman for Barnier told Bloomberg that the commissioner would seek to put the transparency rules in place “as quickly as possible”. The FT noted that the move would “pile public pressure on groups using low-tax bases such as Ireland or Luxembourg as a revenue hub for their European operations”.
Mary Monfries, head of tax policy at PwC, pointed out that country by country reporting can take many forms. “The key for any proposal is focusing on transparency to whom and for what purpose. The emphasis must be on information that's understandable and capable of being used by the intended recipient, rather than data for data's sake … It will also be important to consider the impact that any reporting requirements introduced in the EU alone could have on competition, given the extra red tape,” she said in a press release.
But Christian Aid’s senior economic justice adviser, Joseph Stead, said a new EU law would be “hugely welcome”. It would go a long way towards helping to curb “the shifting of profits to tax havens to reduce tax liabilities in the country where the money was made”. Stead said next month’s G8 summit would be “a major opportunity for David Cameron to influence other countries beyond the EU to look at similar requirements”.
ICAEW chief executive Michael Izza said greater transparency and disclosure should enable a “more informed” debate on the different approaches sovereign nations take to taxing multinationals. However, any proposals should be proportionate. “Measures should be focused on information and data that companies already hold [to avoid] imposing too great an additional regulatory burden,” he said.
Earlier this month the CBI’s director-general John Cridland warned that mandatory country by country reporting could leave readers with “more questions than answers”, and Ernst & Young urged companies to steer the debate towards a “more workable and effective long-term solution”.
Conclusions
The European Council agreed to accelerate work in the “fight against tax fraud, tax evasion and aggressive tax planning”. In particular, priority will be given to promoting and broadening the scope of the automatic exchange of information at all levels.
On aggressive tax planning and profit shifting, it noted that the European Commission intends to present a proposal before the end of the year for revision of the parent/subsidiary directive and is reviewing anti-abuse provisions in EU legislation.
The European Council “looks forward” to the OECD’s forthcoming report on base erosion and profit shifting. Those issues need to be pursued globally, to ensure a level playing field, it said. Further work is necessary to ensure that third countries, including developing countries, meet appropriate standards of good governance in tax matters.
It is important to work within the EU on the elimination of harmful tax measures, it added. “To that end, work should be carried out on the strengthening of the code of conduct on business taxation on the basis of its existing mandate.” The identification of beneficial ownership “including as regards companies, trusts and foundations” is essential in dealing with evasion, fraud and money laundering. The revision of the third anti-money laundering directive “should be adopted by the end of the year”.
The European Commission will address the challenges of taxation in the digital economy, to be discussed at the October 2013 European Council. Efforts to respond to these challenges will take “full account of ongoing work in the OECD”, the European Council said.
A ‘new committee’
The Independent reported that Margaret Hodge, chairman of the Commons public accounts committee, suggested that companies could be forced to make full disclosures of their tax affairs to MPs hearing evidence in private. “This would allow close, but crucially confidential, scrutiny of their tax arrangements,” the paper reported. A new committee could be set up, Hodge suggested, on the lines of the Intelligence and Security Committee.
Hodge, whose committee has been criticised by some tax professionals for the way in which it has conducted its inquiry into tax avoidance, will be questioned by the House Of Lords economic affairs committee’s inquiry into corporate taxation on 4 June. Peers will also hear evidence from Gary Richards, corporate tax partner at BLP, Ashley Greenbank, partner at Macfarlanes, and Steve Edge, partner at Slaughter and May.
Andrew Goodall is a freelance tax writer and journalist
A new EU law requiring multinationals to report profits and taxes on a country by country basis may be introduced within a few months, reports have suggested after the European Council agreed to strengthen measures to tackle tax evasion and avoidance. But the published conclusions of last week’s meeting in Brussels did not set out a specific proposal on tax reporting.
As Tax Journal reported in March, the UK government appeared to have softened its line on country by country reporting for all multinationals when the Treasury’s spokesperson in the House of Lords told peers that it was “currently looking” at the proposal, but last month David Cameron called on EU leaders to consider how country by country reporting could be “further encouraged on a voluntary basis”.
EU finance ministers broadly endorsed new measures on transparency for banks in March, including a requirement for banks to disclose profits made and taxes paid on a country by country basis from 2015, subject to an economic impact assessment to be conducted by the European Commission next year. Agreement was reached in April on a new EU accounting directive requiring European companies in the extractive and forestry industries to disclose payments to governments on a country and project basis.
‘Shake-up’
On 22 May EU leaders broadly backed a “shake-up” that could see a law passed as soon as this summer, the Financial Times reported, extending those reforms to all large public and private companies.
A published note of the European Council’s conclusions gave rise to some uncertainty. “The proposal amending the directives on disclosure of non-financial and diversity information by large companies and groups will be examined notably with a view to ensuring country by country reporting by large companies and groups,” it said in a section on taxation.
Tax Journal invited HM Treasury to comment. Its reply was silent on the possibility of mandatory country by country reporting for tax. A spokesperson said: “The government is committed to greater transparency and supports the European Council’s proposal to amend the directives, with a view to ensuring large companies and groups disclose non-financial and diversity information on a country-by-country basis.”
However, during a speech on 23 May Michel Barnier, the EU internal market commissioner, said: “[The] largest banks [will have to] disclose their profits, taxes and subsidies in each member state and non-EU country where they operate. And in line with yesterday's conclusion of the European Council we will expand these reporting obligations to large companies and groups.”
The FT reported that Barnier was working on options including the amendment of a recent proposal on reporting of social and environmental issues, and a spokeswoman for Barnier told Bloomberg that the commissioner would seek to put the transparency rules in place “as quickly as possible”. The FT noted that the move would “pile public pressure on groups using low-tax bases such as Ireland or Luxembourg as a revenue hub for their European operations”.
Mary Monfries, head of tax policy at PwC, pointed out that country by country reporting can take many forms. “The key for any proposal is focusing on transparency to whom and for what purpose. The emphasis must be on information that's understandable and capable of being used by the intended recipient, rather than data for data's sake … It will also be important to consider the impact that any reporting requirements introduced in the EU alone could have on competition, given the extra red tape,” she said in a press release.
But Christian Aid’s senior economic justice adviser, Joseph Stead, said a new EU law would be “hugely welcome”. It would go a long way towards helping to curb “the shifting of profits to tax havens to reduce tax liabilities in the country where the money was made”. Stead said next month’s G8 summit would be “a major opportunity for David Cameron to influence other countries beyond the EU to look at similar requirements”.
ICAEW chief executive Michael Izza said greater transparency and disclosure should enable a “more informed” debate on the different approaches sovereign nations take to taxing multinationals. However, any proposals should be proportionate. “Measures should be focused on information and data that companies already hold [to avoid] imposing too great an additional regulatory burden,” he said.
Earlier this month the CBI’s director-general John Cridland warned that mandatory country by country reporting could leave readers with “more questions than answers”, and Ernst & Young urged companies to steer the debate towards a “more workable and effective long-term solution”.
Conclusions
The European Council agreed to accelerate work in the “fight against tax fraud, tax evasion and aggressive tax planning”. In particular, priority will be given to promoting and broadening the scope of the automatic exchange of information at all levels.
On aggressive tax planning and profit shifting, it noted that the European Commission intends to present a proposal before the end of the year for revision of the parent/subsidiary directive and is reviewing anti-abuse provisions in EU legislation.
The European Council “looks forward” to the OECD’s forthcoming report on base erosion and profit shifting. Those issues need to be pursued globally, to ensure a level playing field, it said. Further work is necessary to ensure that third countries, including developing countries, meet appropriate standards of good governance in tax matters.
It is important to work within the EU on the elimination of harmful tax measures, it added. “To that end, work should be carried out on the strengthening of the code of conduct on business taxation on the basis of its existing mandate.” The identification of beneficial ownership “including as regards companies, trusts and foundations” is essential in dealing with evasion, fraud and money laundering. The revision of the third anti-money laundering directive “should be adopted by the end of the year”.
The European Commission will address the challenges of taxation in the digital economy, to be discussed at the October 2013 European Council. Efforts to respond to these challenges will take “full account of ongoing work in the OECD”, the European Council said.
A ‘new committee’
The Independent reported that Margaret Hodge, chairman of the Commons public accounts committee, suggested that companies could be forced to make full disclosures of their tax affairs to MPs hearing evidence in private. “This would allow close, but crucially confidential, scrutiny of their tax arrangements,” the paper reported. A new committee could be set up, Hodge suggested, on the lines of the Intelligence and Security Committee.
Hodge, whose committee has been criticised by some tax professionals for the way in which it has conducted its inquiry into tax avoidance, will be questioned by the House Of Lords economic affairs committee’s inquiry into corporate taxation on 4 June. Peers will also hear evidence from Gary Richards, corporate tax partner at BLP, Ashley Greenbank, partner at Macfarlanes, and Steve Edge, partner at Slaughter and May.
Andrew Goodall is a freelance tax writer and journalist
