EU to crack down on multinational tax avoidance with new reporting rules

European Commission proposes 'country-by-country' reporting rules to address public anger over multinational tax avoidance

European Commissioner Lord Hill says the new plan will "make companies more accountable” (AFP/Getty)

Greater transparency could be imposed on multinational companies operating in the European Union after the European Commission unveiled plans to require all large firms to disclose their profits earned and taxes paid in each of the bloc’s countries, as well as in overseas tax havens.

But campaigners immediately condemned the proposals as “highly flawed” and said the information it produced would be “completely worthless” due to the deficiencies in the design of the plan.

The proposals were already being drawn up in Brussels when the contents of the Panama Papers were made public last week, but the reinforced mood of popular anger over aggressive tax avoidance could smooth the passage of the Commission’s plans through the European Parliament and the Council of EU leaders.

Public concern has exploded about the practice of multinational firms, including internet giants such as Amazon, Facebook and Google, aggressively “shifting” their profits out of the large countries in which they operate with complex accounting manoeuvres and into tax havens – and thereby paying almost nothing in corporation tax anywhere.

Critics say this practice, though legal, gives multinationals a grossly unfair advantage over smaller domestic firms, which lack the resources to divert profits in the same way to avoid corporation tax.

The objective of the EU plans would be to enable national tax authorities and the general public to observe where a multinational’s revenues are being made and where profits are being declared with a view to exposing the most egregious cases of avoidance and bringing public pressure on the firms involved to stop.

The Commission said the imposition of so-called “country by country” reporting was a “simple, proportionate way to increase the accountability of multinationals (defined as those with annual revenues of more than €750m) on tax matters without damaging their competitiveness”. It stressed that small and medium-sized companies would be exempt.

“Our proposal to increase transparency will help make companies more accountable” said the EU Commissioner for financial stability Jonathan Hill. ” It will promote fairer competition between companies regardless of their size”.

The Commission said the publication of information on a firm’s turnover, the number of its employees and the nature of activities will enable an “informed analysis” to be made of its behaviour on tax. The plan would cover not only European domiciled multinationals but any large firm doing business in Europe, which would include the Silicon Valley tech giants.

The Commission estimates that multinational tax avoidance costs governments in the bloc between €50- 70 billion a year in lost revenues.

“Our proposal to increase transparency will help make companies more accountable” said the EU Commissioner for financial stability Jonathan Hill. ” It will promote fairer competition between companies regardless of their size”.

The Commission said the publication of information on a firm’s turnover, the number of its employees and the nature of activities will enable an “informed analysis” to be made of its behaviour on tax. The plan would cover not only European domiciled multinationals but any large firm doing business in Europe, which would include the Silicon Valley tech giants.

The Commission estimates that multinational tax avoidance costs governments in the bloc between €50- 70 billion a year in lost revenues.

But campaign groups said the EU proposals did not go far enough because it was not clear how many countries – and which tax havens would be covered by the disclosure rules. “Unless these proposals are extended to cover all countries there’s a risk they could be close to pointless, as businesses will still be able to dodge taxes by diverting money to territories not included on the list” said Mark Goldring of Oxfam.

Toby Quantrill of Chrisian Aid said: “The Commission plans will allow multinationals to hide large parts of their global affairs from public scrutiny, which is a recipe for dodgy business as usual.”

Andres Knobel of the Tax Justice Network 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”.