Last week, members of the European Parliament approved a directive aimed at curtailing tax avoidance and profit shifting by large multinational companies operating in Europe.
This latest directive will require multinational companies to provide more information on where they specifically pay taxes.
As explained by Kim Darrah for European CEO, “the proposed rules would force large firms – with a worldwide turnover of €750m or more – to publicly disclose how much tax they pay on a country-specific basis,” ultimately “[making] it harder for firms to shop around for the lowest tax rates.”
Furthermore, this new regulation will force companies “to publish data on employment numbers, so as to reveal those companies that are running shell operations.”
This information must be made publicly available with companies having to post all of these details on their websites.
Talking about this historic decision, Austrian MEP Evelyn Regner said, “If we don’t [enforce] country-by-country reporting, we will never bring to light the system of letterbox companies that is abused to shift profits and avoid taxes worldwide. We are ready now for negotiations with the Council to find a common reporting regime; the EU must lead the fight against tax avoidance.”
Finnish MEP Pirkko Ruohonen Lerner agreed, saying, “While not perfect, the proposals are a clear step forward from our current rules towards a greater accountability and transparency of multinationals. We need this to ensure that taxes are paid where the business is made and to detect possible abuses.”
Is New Country-by-Country Reporting Directive Too Malleable?
Critics, however, argue that certain stipulations built into this directive will provide multinational companies with a way to avoid taxes.
For example, the “safeguard clause” exempts companies from revealing information when it is deemed to be of a commercially sensitive nature. Adding to the complexity of the situation, the directive fails to offer a working definition of what it refers to as “commercially sensitive.”
Italian MEP Elly Schlein, for instance, said the exemption “will allow companies to avoid their transparency obligations on the vague pretext of protecting sensitive commercial information. But the principle is not even really defined.”
Both anti-corruption organizations like Transparency International and Oxfam criticized this directive for establishing these exemptions.
Transparency International called it a “massive loophole,” while Oxfam remarked that the new regulation “is a big crack in the directive, which will be exploited by companies to continue hiding their tax strategies.”
ActionAid’s Head of Advocacy Charlie Matthews expressed her organization’s disappointment too, asserting “that a loophole in the proposals could allow companies to get away without publishing their taxes if they claim to have concerns about commercial sensitivities. It is vital that these exemptions are not allowed to be exploited by companies looking to keep profits hidden in tax havens.”
According to Cécile Barbière for EURACTIV.fr, “the get-out clause was defended by the right-wing and centrist political groupings, who warned that in some cases, strict transparency rules could undermine European companies’ competitiveness.”
Will the Developing World Benefit from New Tax Avoidance Directive?
Proponents of this new directive believe the developing world is to benefit significantly from this regulation and lauded its efforts to extend beyond Europe and ask for multinational companies to report on their operations in all countries.
Schlein said, “Developing countries pay an enormous price for tax evasion…Failing to demand detailed reporting outside European countries would have been completely useless for developing countries. They often lack the political clout to demand greater transparency from multinational companies.”
The directive was approved with 534 votes against 98 plus 62 abstentions and now each country must approve it locally prior to implementation.