Major changes to the way multinationals report their activities in the European Union have been proposed by the European Commission this afternoon in a bid to clamp down on the practice of aggressive tax planning.
Companies with revenues of more than €750 million with operations in the European Union will be forced to disclose publicly information related to taxation for the first time.
Under the proposal, companies will be obliged to provide certain tax-related information each year for each jurisdiction in which they do business. This will include information on revenue, pre-tax profits and losses, the amount of tax due to the tax authorities in each country together with how much tax has been paid, and the number of employees.
The new legislation, which must be approved by the European Parliament and European Council, represents the latest move by the European Union to legislate on corporate tax avoidance and comes a week after the Panama Papers scandal revealed practices of widespread tax avoidance.
Unlike new rules that were agreed at OECD level last year, companies will have to disclose information publicly, rather than simply sharing it with tax authorities. Companies will be obliged to publish the information on their websites for at least five consecutive years.
In a significant change from the original proposal, the Commission has proposed that the disclosure rules will apply, not just to activities in the European Union, but also to certain non-EU activity.
While the initial proposal conceived allowing companies to aggregate information related to non-EU activities in a lump sum, the document published Tuesday in Strasbourg states that information on tax arrangements in non-EU jurisdictions regarded as tax havens, will need to be disclosed on a disaggregated basis.
Unlike most EU tax legislation, the new country-by-country directive will technically be an accounting regulation, so is not subject to the unanimity rule that usually governs EU tax legislation and which effectively gives member states the possibility of vetoing a tax proposal.
The move to introduce country-by-country reporting for multinationals follows the introduction of similar European legislation for banks and extraction companies in 2013.
Outlining the rationale for the new rules in today's Irish Times, EU commissioners Valdis Dombrovskis and Jonathan Hill said it was important to ensure fairness in the tax system.
“If some companies pay less tax, it means others have to pay more. It means that smaller companies, which cannot afford clever tax advice to minimise their bills, are basically paying for some of the multinationals. That can’t be right either from the point of view of equity or of fair competition.”
The new directive will need approval from both the European Parliament and European Council which represents member states, and could be agreed within the next year. The legislation is then likely to be transposed by member states in 2018.
While the proposal is likely to face strong resistance in the Council from some member states who oppose full disclosure of multinationals’ activities, MEPs are likely to call for the legislation to go even further than envisioned by the European Commission.
Responding to the proposal, the centre-left Socialist and Democratic group in the European Parliament said it was “unacceptable” that the Commission has limited the scope of its proposal to companies with an annual turnover of €750 million, arguing that just a fraction of companies operating in the EU will be covered by the directive.
But Irish MEP Brian Hayes said that, while multinationals will need to work with the new proposals coming from the European Commission, it would not be right for small or medium sized companies to be subject to stringent public reporting obligations. He noted that Ireland had already implemented legislation on country-by-county reporting under recent OECD guidelines.
Tax justice campaigners also criticised the proposal, with Christian Aid describing the proposals as “woefully inadequate”.
Sorley McCaughey, head of advocacy and policy for Christian Aid Ireland, said the proposals may have the effect of encouraging companies to redirect their profits away from blacklisted jurisdictions and into tax havens that don’t appear on the EU list.
Similarly, the European Network on Debt and Development (Eurodad) said the proposal means that multinational corporations will be able to move their profits from small tax havens to big tax havens which are powerful enough to avoid being included in the EU’s tax haven list.
"Since the proposal doesn't take effect before 2018, multinational corporations would have plenty of time to move their profits to new hiding places," Eurodad's tax justice co-ordnator Tove Maria Ryding said.