Photo by Matsuoka Kohel via Flickr

Commission reaching for the Starbucks

Lucinda Pearson
21 October, 2015

Today, the European Commission announced that Starbucks and Fiat Chrysler received illegal state aid through tax rulings by the governments of the Netherlands and Luxembourg and unduly reduced their tax burden by 20 – 30 million EUR. These companies, secured special arrangements or “sweetheart deals” with Dutch and Luxembourgish public authorities, aimed at reducing their tax payments. The decision, announced this morning by Competition Commissioner Margrethe Vestager, follows a 15-month investigation.

Large multinationals have been able to reduce their taxes on profits through the secrecy surrounding their structures and operations, and by publishing their financial data, including tax-related information, in one single global report. Despite the fact that they are supposed to pay taxes in all the individual countries they operate in.

To avoid doing this, they have found semi-legal techniques to shift their profits around different countries, moving them to jurisdictions with lower or zero tax with the sole purpose of minimising their global tax bill. In many cases – as today’s ruling has shown – they are able to reduce their taxes on profits with the collusion of governments which grant them special treatment. All of these practices are currently without public scrutiny.

We at Transparency International EU have been calling for public country-by-country reporting (CBCR) for a long time. CBCR is an essential element of corporate transparency in order to ensure a stronger accountability of multinational companies through an increased monitoring by society at large, which will have a strong deterrent effect and ultimately also help to reduce tax avoidance.

CBCR would make it mandatory for multinational companies to report key financial information in every country where they make profit. That information would include, among other things, companies’ turnovers, pre-tax profits, taxes paid as well as a list of their subsidiaries around the world.

Had we already had legislation on public CBCR in the EU, multinationals’ reports would have flagged up anomalies in the data a long time ago. This would have revealed their deals with the governments of Luxembourg and the Netherlands, consequently avoiding a breach of EU state aid rules.

Next week, the Council, together with the European Parliament and Commission, will start negotiating a measure foreseeing the extension of CBCR to all large EU-based companies, as part of the review of the Shareholders’ Rights Directive.

Having mandatory and public disclosure of multinationals’ financial data would mean that the public debate on tax policy will finally be based on transparent reporting of facts rather than leaks and investigations.

The questionable element of today’s announcement is the fact that the Member States, which signed these deals with Starbucks and Fiat and effectively allowed the multinationals to avoid tax, will get money back. While the countries that have been deprived of resources by these tax rulings will receive nothing. We see parallels with the fines imposed in anti-corruption or bribery cases, where the refunds go to public authorities instead of those negatively affected.

As Commissioner Vestager put it: “More transparency is crucial. Tax avoidance won’t be tackled with the enforcement of state aid rules alone, but also through legislative responses”. If Member States are actually serious about improving corporate tax transparency, they will have the perfect chance to prove it next week.

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