EU deal on tax transparency for multinationals fails to convince critics

It was late on Tuesday evening that the negotiators representing the EU’s two legislators — the EU governments and the European Parliament — finally agreed on a compromise law that would require multinational companies to disclose where — or if — they pay corporate taxes: the so-called public country-by-country reporting (pCBCR).

Companies with a turnover of more than €750 million operating in Europe will have to disclose their net sales and profits, the number of employees and paid income taxes, on a yearly basis and by country. The financial reporting will use a common EU template and be in machine-readable electronic formats — a veritable Ali Baba’s cave for future economics researchers, NGOs and journalists.

“From now on, the spotlight is brightly and clearly on those companies who systematically avoid taxes,” said Sirpa Pietikäinen, conservative Finnish MEP, who had negotiated the deal for the centre-right party group EPP. 

Multinational companies’ profit-shifting from high tax to low tax jurisdictions is estimated to deprive EU countries of around €70 billion a year, according to estimates by the EU Commission. With public country-by-country reporting, this profit shifting becomes visible and the pressure on the companies will increase.

“This agreement is a defining moment for tax justice in Europe,” said Green MEP Sven Giegold, a long-time advocate for the tax transparency law. 

But transparency activists are not as happy. Transparency International calls on MEPs and EU governments to vote down the compromise, as the European Parliament gave in to the Council on the main issue of conflict: the geographical scope of the EU law.

The European Parliament, which had adopted its position on the draft law five years ago, wanted all countries covered by public tax reporting. Basically that it should be mandatory for, say, IKEA to report on its sales and corporate taxes even in the UK and the US. 

The EU governments, who only adopted their position this February, wanted a much narrower scope. Leading up to the last round of negotiations, the French government had advocated that companies should only be obliged to disclose aggregated tax information for countries outside the EU.  Its position paper was later revealed to have been drafted by the French employer association, Medef.

The European Parliament all but accepted the Council’s demands. The compromise deal means that reporting is mandatory only in the EU countries, in countries that are on the EU’s “black list” of tax havens, and in countries that have been on the “grey list” of tax havens for at least two years in a row. 

The tax haven blacklist — officially titled “the EU list of non-cooperative tax jurisdictions” — was established in 2017 and is regularly revised — most recently in February 2021. Today, 12 countries, small and peripheral, are blacklisted: American Samoa, Anguilla, Dominica, Fiji, Guam, Palau, Panama, Samoa, Trinidad and Tobago, US Virgin Islands, Vanuatu and Seychelles. Nine countries are currently on the “grey list”: Australia, Barbados, Botswana, Eswatini (former Swaziland), Jamaica, Jordan, Maldives, Thailand and Turkey.

“Perverse incentive”

The actual impact of Tuesday’s deal is that multinationals’ tax information will only be made public for 46 countries: the 27 EU countries, the 12 on the blacklist, and 7 countries that have been on the grey list for two years, including Turkey. 

“This agreement allows for more than 80% of the states in the world, including notable tax havens such as the Bahamas, Switzerland or the Cayman Islands, where companies won’t have to publish any information,” says Manon Aubry, French MEP and negotiator for the Left group. 

But, Green MEP Sven Giegold argues that since most European tax money that is lost actually goes to tax havens within the EU, the agreement will have a real impact. 

Researchers at Berkeley University and the University of Copenhagen have estimated that around 80% of the profits shifted out from EU countries go to EU tax havens such as Ireland, Luxembourg and the Netherlands. 

Meanwhile, Transparency International fears that public country-by-country reporting mainly for the EU could lead to European companies moving parts of their tax planning outside the EU. 

“The [limited] approach provides a perverse incentive for large multinationals to restructure some activities outside the EU to avoid reporting obligations,” said numerous NGOs, including Oxfam and the European Trade Union Confederation in an open letter to the legislators. 

“In Europe, it is wiser to make a start with a good compromise rather than to wait forever for a supposedly ideal solution.”

MEP Sven Giegold

Another point of contention between the European Parliament and the Council was the “safeguard clause” which allows companies to not report information judged “commercially sensitive” for a period. Instead, they have the chance to publish it retroactively. In the final deal, the clause was limited to five years, while the Council had wanted six years. 

The compromise needs to be formally adopted by both legislators. And it most likely will. Although tax justice and foreign aid NGOs are unhappy, the deal has broad support in the European Parliament. 

After adoption, the EU countries have 18 months to put the EU framework law in to national legislation. 

Fours years after its application, the European Commission will have to go back to the directive and analyze its effects. MEPs who preferred to settle for a weaker deal rather than risking getting nothing see this revision in the near future as another opportunity to strengthen tax transparency. 

“In Europe, it is wiser to make a start with a good compromise rather than to wait forever for a supposedly ideal solution,” says Green MEP Sven Giegold.

It almost looks like an afterthought that on Tuesday, just hours before the deal was struck on public country-by-country reporting, the European Tax Observatory was launched. 

The brand new EU-funded research hub will assist the European Commission and the other EU institutions in their fight against tax evasion. Leading the observatory is Gabriel Zucman, the globally-known French researcher and activist against tax evasion, and the author of the Berkely/Copenhagen study on EU profit shifting.