The European Commission’s proposals mark one more step towards the global adoption of a crucial measure for international tax transparency and accountability – but they are so highly flawed that as things stand they would most likely be bad for European tax revenues, and provide no help at all to developing countries.
Why should country-by-country reporting be public?
Since the Tax Justice Network developed the modern proposal for country-by-country reporting with Richard Murphy in 2003, there has been a long, hard road to its adoption as a global policy. Only in 2013 did the G8 and G20 groups of countries recognise the importance of understanding the misalignment between declared profits, tax paid and the location of real activity – and mandated the OECD to produce a standard that closely matches our proposals.
That OECD standard was initially restricted to private reporting by multinationals to tax authorities, which defeats the aim of greater public accountability for both multinationals and tax authorities. The Panama papers, and before them LuxLeaks, have shown clearly the importance of public information to prevent the hidden abuse of tax systems.
We therefore welcome the European Commission’s recognition that country-by-country reporting must be made public. But the flaws in the Commission’s proposal are so grave that the overall impact would be of limited value.
Flaws in the Commission proposal
The two main issues concern the data actually reported, and the countries covered.
In terms of data, the Commission has for no clear reason proposed not to publish the OECD standard reporting. This will have a range of costs, including additional compliance costs for multinationals that will be under the OECD standard already.
More importantly, however, the limited data proposed for each country will not provide anything like a full picture of where companies do business. For example, excluding the scale of companies’ investments makes no sense. The public will not be able to see the true pattern of activity, and companies will not be able to show, for example, that their operations in one country with high activity but low tax paid actually reflect a major new investment.
The failure to require a list of subsidiaries, meanwhile, means that it will remain impossible even to know what business a given multinational group is doing, and in which country – a strange type of transparency measure to bring forward, especially as the world is still digesting the Panama papers.
But the biggest flaw by far of the Commission proposals is in terms of country coverage. First, the decision not to report on non-EU jurisdictions is deeply wrong. While the manipulations using EU jurisdictions such as Luxembourg, Ireland and the Netherlands will become apparent, those using non-EU jurisdictions such as the United States or Bermuda will not. In effect, the proposal creates an incentive to use non-EU profit-shifting havens instead of EU ones – but not to reduce the level of profit-shifting.
In addition, Tax Justice Network analyst Andres Knobel said: “The lumping together of all non-EU countries into one aggregate will combine developing countries, which tend to suffer most from profit-shifting in relation to their overall revenues, with some of the most egregious non-EU profit-shifting centres such as Bermuda, Cayman and Singapore. The resulting information will be completely worthless, either in considering EU impacts or for developing countries.”
Finally, the Commission’s proposal to single out and add jurisdiction-level reporting for some ‘non-cooperative’ jurisdictions is equally flawed. Recent history show clearly that EU member states cannot agree on such a list, and special lobbying such as that of the UK on behalf of Bermuda means that any list is biased and cannot focus on the most important problem states. And few tax haven lists have ever dared to include the USA, even though it is now widely seen as the fastest growing financial secrecy jurisdiction.
An approach that relied on objectively measured and verifiable criteria, such as the secrecy score constructed in the Tax Justice Network’s Financial Secrecy Index, would provide a reasonable basis instead. But even this much stronger approach would be flawed, because there is simply no good reason to leave out any jurisdictions. Country-by-country reporting is, and should be, a global transparency and accountability measure.
Conclusion: Back to the drawing board
Tax Justice Network director of research Alex Cobham said: “Everyone understands that as soon as loopholes are created in tax, loopholes are exploited. It beggars belief that the European Commission could present a tax proposal that deliberately engineers so many loopholes to transparency.
“The Commission may think it has created a halfway house between the corporate lobbyists’ calls for continued secrecy, and public demands for transparency – but it has not. There is no middle ground here: either there is effective transparency, or there is not. And this is most certainly not.
“The Commissioners should think hard, and quickly, before coming back with a proposal for full, public, country-by-country reporting. Nothing less will meet the demands for transparency and accountability.”
Tax Justice Network Contacts:
Alex Cobham email@example.com tel. +44 7982 236863
Andres Knobel firstname.lastname@example.org tel. +54911 6008 3197
Nicholas Shaxson email@example.com tel. +49 172 772 9806
Markus Meinzer firstname.lastname@example.org tel. +49 178 3405673
Liz Nelson email@example.com tel. +44 7887 740798
Notes to editors:
About the Tax Justice Network
We are an independent international network focused on tax justice: the role of tax in society, and the role of tax havens in undermining democracy, boosting inequality and corrupting the global economy. We seek to create understanding and debate, and to promote reform, especially in poorer countries. We are not aligned to any political party.