Photo by Wil Stewart via Unsplash

Country-by-country reporting: first step in achieving transparency

Lucinda Pearson
10 July, 2015

On 8 July, the European Parliament voted in favour of measures to increase the transparency of the finances of multinational corporations, requiring EU-based multinational companies (MNCs) to reveal details of tax payments to governments around the world. The measures were voted through as part of the Shareholders’ Rights Directive (SRD), which amends two existing directives on long-term shareholder engagement and corporate governance.

Respectively 404 and 408 Members of the European Parliament (MEPs) endorsed the amendments to the directive, which would require MNCs to publicly report financial information on a country-by-country basis and to publicly disclose information regarding tax rulings.

Country-by-country reporting (CBCR) is an essential element of corporate transparency in order to ensure a stronger accountability of MNCs through an increased monitoring by stakeholders and citizens, which will also help to reduce tax avoidance. Currently, MNCs publish their accounts by combining data about tax compliance from multiple countries into one single aggregate report, making it difficult to distinguish between the contributions they make to all the individual countries they operate in. As the recent Luxleaks scandal brought to light, in most cases MNCs are not transparent regarding their structure and operations, and exploit loopholes in domestic and international tax law that allow for ‘profit shifting’ from country to country, with the intention of reducing the taxes paid on profits.

The CBCR provision adopted on Wednesday will now be discussed with the Commission and Council, and could become EU law. If this happens, MNCs would be required to disclose crucial information such as, among others, their turnover, number of employees, profit made, taxes paid and public subsidies received for all the countries in which they have an establishment.

As a matter of fact, current EU law already foresees these and similar measures for some sectors, namely the banking as well as the extractive and logging ones. However, the reporting requirements are different for these sectors, as in the former case the Capital Requirement Directive IV (CRD IV) obliges credit institutions and investment firms to disclose key financial information on a country-by-country basis, whereas in the latter one, according to the Accounting and Transparency Directive companies are only required to disclose information regarding payments to governments. A new and timely report published by Richard Murphy of Tax Justice Network addresses the issue of profit relocation by banks and shows the usefulness of CBCR by confirming the hypothesis that some or all of these banks may have been systematically over-reporting their profits in low tax jurisdictions or places identifiable as tax havens whilst under-reporting them in those places where they are either based or have major centres of operation.

Nonetheless, the European Commission is still reluctant to address this issue with mandatory legislation, despite its frequent rhetorical statements on its commitment to fight tax evasion and tax avoidance. Commissioner Jourova’s comments during the debate on the SRD in the European Parliament on the day before the vote seem to indicate that the Commission wishes to buy time on CBCR through its recently launched consultation, which will feed into an impact-assessment. Surprisingly, the Commission itself stated in its 2014 impact assessment of public CBCR for large financial institutions that fall under the CRD IV that it “is not expected to have significant negative economic impact, in particular on competitiveness, investment, credit availability or the stability of the financial system. On the contrary, it seems that there could be some limited positive impact”.

The European Parliament vote is an important step forward but only a first victory in a complicated process to be continued in autumn with the start of trilogue negotiations with Member States, ironically under the Luxembourgish Presidency. Hopefully the Council and the Commission will take into account the strong message coming from the European citizens’ elected representatives.

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Tax Transparency

What is the problem? In the current international financial system, multinational companies are under no legal obligation to disclose this information regarding their activities, profits and the taxes they pay in each country of operation. Key...