Pay your taxes where your profit is

The long-simmering demand that multinationals provide country-by-country reporting of their tax payments is coming to a dénouement.

Numerous tax scandals, such as the Panama Papers, Lux Leaks and latterly Open Lux, have demonstrated how easy it is for large corporations to circumvent national tax laws. To avoid their tax obligations or reporting requirements, multinational enterprises (MNEs) create shell companies or corporate structures with which they operate in several European Union member states or even worldwide. MNEs appear simply to choose the country with the most favourable tax system, social-security arrangements or worker-protection standards in which to conduct their business.

To curb these practices, several years ago the Socialists and Democrats in the European Parliament (successfully) put a proposal on public country-by-country reporting (pCBCR) on the table of the parliament’s Legal Affairs Committee. The European Commission responded in 2016 with a proposed directive on pCBCR.

Country-by-country reporting is a transparency tool, which seeks to collect sufficient data from MNEs to enhance corporate accountability. The aim is to counter non-transparent practices, such as avoidance of corporate taxation and aggressive tax ‘planning’.

The proposed directive would require all corporations with an annual net turnover of more than €750 million to report publicly the tax paid on their corporate income, on their website as well as in a database managed by the commission. The directive would specify that corporations provide, among other things:

• the name of the ultimate parent company and, if applicable, a list of all its subsidiaries;
• a brief description of the nature of their activities and respective geographic locations;
• the number of full-time-equivalent employees;
• fixed assets other than cash and cash equivalents;
• profit or loss before corporate income taxes, and
• the amount of such income tax paid.

Opportune time

After almost five years of deadlock and blockade in the Council of the EU, the directive for pCBCR was finally adopted by competitiveness ministers in February. As a result, ‘trilogue’ negotiations, among the council, commission and parliament, were opened in March. My colleague Ibán García del Blanco from the Legal Affairs Committee and I remain very keen to move this directive forward. And we are starting negotiations at an opportune moment.

Particularly at a time when many companies are in receipt of public money, we all have an even greater right to know where—even if—they are paying their taxes. It is the responsibility of companies to make their contribution to society and it is only fair that if economic aid is disbursed taxes are paid in return.

In Austria, for example, Starbucks paid just €2,848 in taxes in all of 2019. Yet last November alone, the corporation was due €800,000 in revenue replacement from taxpayers. This is not a unique case but it shows the importance of the directive: making tax data public will mean European citizens, and investors, can track whether corporations are actually paying their fair share.

Or take Amazon. While the public were in lockdown and retail stores remained closed, demand for online purchases soared—Amazon has been among the biggest beneficiaries of the pandemic. Although it remains unclear how much the company pays in taxes in Europe, we do know that, due to various tax constructions, in some countries it does not pay any tax at all. Again Austria is a case in point: Amazon’s subsidiary there pays high royalties to Ireland—where the company’s headquarters is located—but does not pay any tax in Austria itself. 

While workers and employees in Europe have to pay their taxes month after month, an American corporation can avoid them with legal tricks. The pCBCR directive would shed much-needed light on these synthetic tax arrangements.

Transparency and trust

Opponents of pCBCR often argue that disclosure of sensitive data would jeopardise the competitiveness of European companies by revealing their business strategies. Yet transparency can never be the enemy of competition: public reporting promotes dialogue and enhances trust within companies and among their stakeholders—investors, minority shareholders and employees—while strengthening the position of workers and making companies more sustainable.

Following the Basel IV standards agreed in 2017—as part of the effort in the wake of the 2008 crisis to ensure financial institutions maintained adequate capital to avoid excessive risk-taking—banks and credit companies have been subject to public country-by-country reporting. So have extractive industries. Representatives of banking have repeatedly assured that the associated disclosures do not pose any problems—indeed, that they rather foster sustainability in the sector.

Hence, why this should principle not apply to other entities as well? The voices for greater transparency are growing louder in our society. The United States has now joined the debate, with pCBCR bills tabled in the House of Representatives and the Senate as well as discussion in the Securities and Exchange Commission.

This illustrates the pioneering role of the EU—but with companies operating on a global scale it is crucial to move towards global reporting.