This week saw the re-launch of the European Union’s Common Corporate Consolidated Tax Base (CCCTB). The purpose of the CCCTB is to harmonise the rules around how multinational corporations are taxed across the European Union, and to switch from OECD tax rules to a unitary approach with formulary apportionment (more on that below).
The CCCTB was originally launched in 2011, after many years of discussion, but in the EU’s own words the proposals proved ‘too ambitious’ for member states. The immediate proposal now is but a baby step towards the bigger goal and we welcome the intention; but there is a long way to go before this will significantly impact on multinational profit-shifting, and there are important weaknesses that must be addressed even in the existing proposal.
What is the CCCTB?
The most ambitious part of the CCCTB is an attempt to create a single, harmonised tax base for multinational companies with operations in Europe. This means that large companies will report their profits across the whole European Union. Those profits will then be apportioned among countries, based on the real economic activity taking place in that country (e.g. people and sales), so that countries can then choose how much to tax those apportioned profits (i.e. there will be no harmonisation of rates).
This system is intended to lower compliance costs for multinationals operating across multiple EU jurisdictions, but also to prevent multinationals from apportioning their profits to low or no tax jurisdictions where they have few or any staff, starving countries where they are really operating, of tax revenues.
As our research into US multinationals has shown, there are a number of EU jurisdictions which offer near-zero effective tax rates in order to poach the taxable profit from their neighbours. The CCCTB would go a very long way towards addressing this anti-social behaviour, and many of the high-profile avoidance cases such as Google and Facebook.
All of this has the potential to make a huge difference to the fight against tax avoidance and evasion. Tax avoidance is facilitated by mismatches between legislation between different countries, and by companies shifting profits from high tax to low tax countries.
As Tove Maria Ryding, from our partners Tax Justice-Europe said:
“We all stand to benefit from this proposal. When multinational corporations are not paying their fair share of taxes it means that we have to pay more taxes and that there is less money in the public sector for hospitals and schools. This is a big step forward.”
The CCCTB has been in the works for a very long time. The European Parliament reported on the issue in 2005. The European Commission launched the proposals the first time in 2011. At that time the proposals were killed off by vocal opposition from member states, and as measures such as this require the agreement of all member states, the proposals were dead in the water.
Back in 2011 the most vocal opponent of the CCCTB was the United Kingdom, who saw it as a threat to their goal to create a “competitive” system of corporate taxation (aka a tax haven). With the UK now choosing to leave the EU, this proposal may now have more legs. Although in theory the UK could still block it, interfering with the rules of a club that they are seeking to leave would do very little to improve their negotiating position in the Brexit negotiations. However, it must be said, that the UK were not the only opponents at the time.
It is also clear that we are moving on from the world of the mid-2000s when these proposals were first made when too many people thought that tax avoidance by multinationals simply wasn’t an issue. It is clear that the EU is responding to the demand for more action following the many high profile stories of tax abuse, including most lately, the Panama Papers.
Will it work?
Of course the devil will be in the detail, and there is still long road to travel before the measures are implemented. The most ambitious parts of the CCCTB, the consolidation of the tax base and apportionment of profits between nations is still being negotiated and so could never happen.
But even without the ‘third C’, two CCs are an important step forward, particularly for developing countries which have often been the victim of companies using Europe as a tax haven. The proposals also contain a number of other measures for dealing with mismatches between tax rules in different countries. As Francis Weyzig of Oxfam Novib told us:
“This [the anti-avoidance package without consolidation] is the core of the package that really matters to developing countries. If agreed, it will be a big improvement. It will do away with all patent boxes in EU member states, eliminate the double Irish, eliminate Dutch hybrid structures (multi-billion dollar overseas cash boxes) widely used by US-based multinationals, and replace the harmful Belgian notional interest regime with something less harmful.”
Others have highlighted that the elimination of patent boxes is ‘compensated’ by the introduction of massive tax deductions for R&D. In combination with other elements, this risks the overall package seeing the EU take a further step down the foolish road of tax ‘competition’ – a race to the bottom which no state, nor its citizens, can win. This has the potential also to make the EU more of a problem for lower-income countries, as they seek to exert their own taxing rights.
Finally, Richard Murphy raises a fundamental problem with the current hopes for a CCCTB: that the data generated under International Financial Reporting Standards is simply not fit for tax purposes. Can accounting standard-setters finally rise to the challenge, or is there a need to develop separate tax reporting standards?
Unitary tax: the direction of travel?
How far the EU will manage to go with the CCCTB is an open question. There will be many, including the TJN, keeping a close eye on how these proposals advance. But we are heartened by the Commission’s appetite to move to a unitary basis for taxing multinationals. Other economic blocs around the world are likely to give increasingly serious consideration to such an idea – especially as the OECD’s BEPS reforms are increasingly seen to have failed to reduce the gross misalignment of taxable profits with real economic activity.
There has been much talk in Britain of new government proposals that tax advisors giving advice on tax avoidance could face large fines of up to 100% of the tax lost if their schemes are defeated in courts. We warmly welcome the principle of the thing: these players have been getting away with impunity when they market tax-cheat schemes to multinational corporations and wealthy individuals. In the case of the so-called Luxleaks scandal, where PwC was caught out marketing an astonishing array of socially abusive tax schemes to the world’s multinationals, the only two people to face any sanction were the whistleblowers who exposed the scheme. In 2013 UK Public Accounts Committee (PAC) heard that from one Big Four accounting firm officials that their company would flog schemes even if they thought there was only a 25 percent chance of surviving a court challenge.
In the words of Margaret Hodge, the PAC’s chair:
“What really depresses me is you could contribute so much to society and the public good and you all choose to focus on working in an area which reduces the available resources for us to build schools, hospitals, infrastructure.”
“Unless the United States, and other countries, lead by example in closing some of these loopholes and provisions, then in many cases you can trace what’s taking place but you can’t stop it… There’s always going to be illicit movement of funds around the world, but we shouldn’t make it easy.”
So said President Obama, responding to the #PanamaPapers. Leadership by example is certainly what’s needed – because the United States itself represents the biggest global threat to progress against financial secrecy.
Tax haven USA
In January 2015, we wrote a long piece about the increasing role of the US as a tax haven. Then in November, we published the latest edition of the Financial Secrecy Index – the global ranking of tax havens. This showed one major mover at the top: the United States, leapfrogging the Cayman Islands and Luxembourg to claim third place behind Switzerland and Hong Kong.
There followed a swathe of leading media pieces making the same point: including The Economist, Bloomberg and just this week The Washington Post – not to mention being promoted by the advisers at Rothschild Trust.
The USA is not the most financially secretive jurisdiction, overall – although some individual states are highly opaque; but the national combination of substantial secrecy, with very large scale, make it one of the biggest contributors to the global problem. Key components of US secrecy are the aggressive competition among states to offer anonymous company ownership services; and the rejection of automatic information exchange between jurisdictions.
Now, public registers of beneficial ownership and automatic information exchange are critical to any serious attempt to end the era of tax havens. [Not coincidentally, these are also two of the three policy measures TJN has long promoted – the other being country-by-country reporting by multinationals.]
A conflicted international watchdog
Sadly, the OECD – which is responsible for the multilateral agreement on information exchange, appears so in thrall to its largest member that it cannot manage the same clarity. The OECD’s latest list shows 55 jurisdictions committing to automatic exchange in 2017; a further 41 to join in 2018; and just four (Bahrain, Nauru, Vanuatu and – yes – Panama) so far unwilling to commit. On this basis, the OECD top brass have been across the #PanamaPapers media calling the country out as ‘the last financial centre that has refused to implement global standards of fiscal transparency’.
But wait: buried in a footnote of the OECD doc is the fact that the United States has not so much held off on committing, but has explicitly stated that it will not cooperate. Instead, it will continue to adopt bilateral intergovernmental agreements to ensure that it receives informational automatically, and in the great majority of cases does not reciprocate.
The case, in tweets:
— Alex Cobham (@alexcobham) April 5, 2016
— Alex Cobham (@alexcobham) April 5, 2016
In case of any doubt, here’s OECD’s own doc. https://t.co/r8ftbQBiz8
96 will exchange
4 won’t commit
…said No. pic.twitter.com/NfePwiL2c5
— Alex Cobham (@alexcobham) April 5, 2016
On the immediate horizon, there’s been a good deal of discussion of whether #PanamaPapers will provide major US revelations, which haven’t appeared yet. Some have suggested there’s a big story coming down the line; others, that the prevalence of secrecy on offer in the US means that demand for overseas alternatives such as Panama is limited, so there won’t be anything more to see. We couldn’t possibly comment.
In the somewhat longer term, these are the key questions:
- Will the US finally follow its own logic, and commit to develop a public register of beneficial ownership, and to provide tax information automatically to the rest of the world?The last throw of the dice for those committed to financial secrecy is that the US is unable to commit itself to transparent, globally responsible behaviour. That will leave a gaping hole in international arrangements, as well as legitimising exactly the approaches revealed in the Panama Papers.And the US will be unable to shake off the labels of both ‘tax haven’ and indeed ‘hypocrite’, if it continues to demand full tax information from other countries in respect of on any beneficial ownership by American citizens, without providing the same in return.
- If not, who will act? Since the OECD seems unlikely to overcome its current inability even to mention US secrecy, will the EU take a stand? To be effective, it seems likely that that would ultimately require making the same threat of withholding taxes, by which the US obtained global automatic information from the rest of the world, to pressure the US itself to cooperate. A 30% rate like the US take with FATCA, say? We made a detailed proposal on this in January.Will the UK be in a position to offer any leadership here? At present, the UK has its own issues to address. The UK’s network of Overseas Territories (such as the British Virgin Islands) and Crown Dependencies (such as Jersey) includes many major players in the Panama documents. If taken together, this network would sit clearly at the top of the Financial Secrecy Index, above even Switzerland. So Her Majesty’s Government will be unable to sustain a claim of leadership on transparency and accountability at its anti-corruption summit in May, if it fails to have its Overseas Territories and Crown Dependencies commit to public registers of beneficial ownership – as the UK, to its credit, has itself just introduced.
The full publication of multinational companies’ country-by-country reporting took a step closer today. A begrudging step, which as it stands would negate most of the benefits; but an important one nonetheless, because of the direction of travel.
A long road travelled
A little background. Public CBCR, as proposed by Richard Murphy and John Christensen for TJN way back in 2003, is a tool for accountability:
- First, by making public the distribution of companies’ activity, and that of their declared profits and tax paid, public CBCR makes multinationals accountable for the extent of their profit-shifting and tax manipulations.
- Second, public CBCR makes jurisdictions such as Luxembourg accountable for their role in siphoning off profits from elsewhere (without the underpinning economic activity).
- And third, public CBCR makes tax authorities accountable for their ability and willingness to ensure companies pay an appropriate rate of tax on their activities.
After ten years of building the case for public CBCR – including the crucial support of international development NGOs such as Christian Aid and ActionAid and our partners in the Financial Transparency Coalition, and the emergence of a global network of civil society organisations, the Global Alliance for Tax Justice – success! The G8 and G20 groups of countries mandated the OECD to produce a standard as part of the international tax rules.
Private CBCR: A measure for tax injustice
Then, a setback: aggressive lobbying led to the OECD taking its broadly robust standard and making it as unhelpful for accountability as possible. Specifically, the decision was taken to make the reporting private to tax authorities – at a stroke, eliminating all the accountability benefits with the exception of multinational accountability to tax authorities. (This, of course, is the accountability that was by far the strongest beforehand, since tax authorities could already demand very substantial additional information from corporate taxpayers; and hence the benefit arising is likely to be the smallest).
This move also reversed the development direction. Among tax authorities, public CBCR would disproportionately benefit those which are:
- politically least able to demand information, i.e. those from lower-income countries; and
- technically least able to resource long, technical battles over transfer pricing and other elements of the international rules where tax manipulation is common, i.e. those from lower-income countries.
As such, public CBCR is a measure that challenges the major inequality in the global distribution of taxing rights – an inequality that means the resulting tax losses may be several times larger as a proportion of existing revenues in non-OECD countries, on the basis of IMF research findings.
The OECD reversal was exacerbated by a decision that reporting would only be provided to headquarters country tax authorities, i.e. overwhelmingly to those in OECD countries and not elsewhere. This necessitated the development of resource-consuming, additional instruments to provide that information to other tax authorities; along with various criteria to exclude those that might have the temerity to make the data public, or to use it for non-OECD-approved tax approaches.
At this stage, then, the overall effect has been to worsen rather than to curtail the global inequality of taxing rights – exactly the opposite of what public CBCR would ensure.
Leaked European Commission proposals
Unsurprisingly, the policy discussion now centres on delivering TJN’s original proposal, and making CBCR public – with the expressed support of various European Commission officials and of UK Chancellor George Osborne. The compliance costs are now locked in for companies, and there would likely be an overall cost saving from switching to open data publishing, so that counter-argument has long gone.
Today, European Commission documents leaked to Politico and to the Financial Times show a step in this direction. The FT (£) summed up the main flaw:
In a significant disappointment for tax-justice campaigners, the scope of the disclosure rules will be limited to activities within Europe, leaving a lack of transparency on profit shifting to non-EU tax havens such as the Cayman Islands and Bermuda.
As Richard Murphy pointed out directly, this is not country-by-country reporting. It’s not only that we don’t see the likes of Bermuda; we also lose all developing countries too, and instead get a single number capturing both. Rolling together the jurisdictions where profit is likely to be shifted to, with those where profit stripping may be most egregious, is of course to negate the entire point of CBCR – which is to understand the disaggregated distributional picture.
As it stands, the proposal would support accountability of European tax authorities for LuxLeaks-type abuses – that is, it would make clear where EU members were receiving much higher shares of profit and/or tax than activity. To an extent, it would support accountability for authorities in terms of their obtaining a fair share of multinationals’ global tax base (albeit without explaining the full picture extra-EU). It would provide only limited accountability for multinationals, since the bulk of their inward and outward profit-shifting might well be hidden.
What the proposal would dramatically fail to deliver is any direct benefit for developing countries. Since their information would not be disaggregated, there would likely be little more value than from what is currently possible by comparing national tax returns with consolidated global accounts of the taxpayer’s group – except, perhaps, where the Commission proposal might reveal a particular jurisdiction risk relating to an EU member state (e.g. seeing the global scale of profit-shifting into the Netherlands might help the Ghanaian revenue authority to focus on particular transactions). Indirectly, the proposals might allow developing countries more space to pursue their own public CBCR approach; but at the risk of locking in the same weaknesses.
In addition, the proposal would fail to identify or support accountability for any non-EU profit havens – with the potential effect that their share of global shifted profits would actually increase. The Commission would be creating, deliberately, a playing field unbalanced against their own member states.
Rubbish proposals – rejoice!
Overall, then, the leaked proposals seem to fail when assessed against any realistic aims. They do not deliver full accountability within the EU; they disadvantage member states against others, to the extent that overall profit-shifting and tax losses may not be reduced; and they deliver nothing for developing countries.
The proposals are, in short, a clear step back from the European Parliament’s support for a fully global approach. The most obvious improvement would be to require public reporting by all multinationals operating in the EU, regardless of the location of their headquarters.
And yet the proposals remain a step in the right direction. The only discussion is about how to make CBCR public; not whether to. Given the heavy lobbying against the OECD standard – to say nothing of the ten years that it took us to bring the measure to the top of the global policy agenda – it was to be expected that there would be some bad proposals for public CBCR. And the leaked Commission document is certainly one!
More work is clearly needed to educate policymakers and their technical advisers on the specific benefits of public CBCR, in order to inform a more sensible set of proposals. (Not least in the US.) And it may be that some jurisdictions pursue bad proposals before others (and perhaps some forward-thinking multinationals) lead the way with good ones. But we are on the road, inexorably, to the global delivery of TJN’s first policy proposal: public CBCR and all the accountability benefits.
The Commission’s proposal is rubbish – let us rejoice.