For years it’s been awaiting approval. Years during which multinational corporations have legally avoided paying taxes by shifting their profits to shell companies in low tax countries without any need for disclosure. The draft EU law — public country-by-country reporting or CbCR in EU jargon — aims to shed light on this activity by obliging companies to disclose their profits and paid taxes for every country in which they have economic activities.

US tech giant Amazon perfectly illustrates this practice of tax avoidance. The company has recently been grabbing headlines for the record-breaking sales it made as people became ever more reliant on its services during the pandemic. In Europe, the turnover in the online retail business was reported to have risen from €31 to €42 billion.

But when Amazon presented the 2020 balance sheet for its Luxembourg-based umbrella company covering its European business, it showed a loss of more than €1 billion. A result that not only left the EU tax authorities empty-handed, but also meant the company was entitled to €56 million in profit taxes from the Luxembourg tax office — to be used to offset future tax bills should it ever show a profit in Europe.

For years, Amazon’s European business has been bundled together under the Luxembourg-based “Amazon EU S.a.r.l”. Doing this has already secured more than €1 billion in tax credits for the company (to be offset on tax bills if there is ever a profit).

This makes Amazon sound like an ailing company whose business in Europe has brought only losses to the world’s largest retailer. Can this really be the case?

“Of course not,” says Christoph Trautvetter, financial expert at the German branch of the Tax Justice Network, which campaigns for fair taxation worldwide. “The profits are just shifted elsewhere, where less or no taxes are levied.”

He points to another line on the balance sheet — “Other external expenses”, with costs of €12.4 billion, paid for “services by affiliated companies”. But Amazon does not share any information about what these billions are for, nor where they go.

The company uses Europe’s state infrastructure to reduce its tax bill, “and the citizens don’t even find out where the profits are hidden that are made at their expense,” explains an outraged Trautvetter “This is where EU governments fail miserably.”

The case of Amazon EU S.a.r.l perfectly illustrates the EU’s tax dilemma. Like Amazon, hundreds of corporations that operate in Europe will register their profits in countries such as Luxembourg, Ireland or Cyprus (where tax rates are particularly low) even though these profits are, in large part, generated elsewhere.

This problem is global; researchers at the University of California, Berkeley and the University of Copenhagen have found that every year, a good 40 per cent of all worldwide multinational profits are shifted to low-tax countries. According to estimates by the EU Commission, what it means is a loss to EU member state coffers of up to €70 billion a year. This is equal to almost half of the EU’s annual budget.

While it is easy to blame corporations, they are obliged to maximise profits for themselves and their shareholders; they would be failing in their duties if they didn’t. And what they are doing is perfectly legal, as states are often in competition to undercut each other with lower taxes as a way of attracting companies to invest.

A common EU policy is not an option as EU governments cling to their exclusive right to decide on tax legislation as an expression of national sovereignty. Common tax laws can only be passed if agreed unanimously at the Council of the EU and this will always be blocked by countries that have used their low tax rate to attract multinationals.  

This is where public country by country reporting (CbCR) is supposed to come in. CbCR won’t prevent multinationals from minimising their tax bills, but it will expose the profit-shifting. It will show where companies generate their profits, and also where they are declared. The European Commission hopes that this greater transparency will “encourage them to pay taxes where they make profits”.

The law was first mooted in 2016 and found a broad majority within the European Parliament. A position was adopted on the draft law in July 2017.  But when it came to the Council, the German government opposed it from the beginning. The public reporting obligation on profits and tax payments “would put German companies at a disadvantage in international competition”, claimed Economic Affairs Minister Peter Altmaier, in unison with the Family Business Foundation and the Federation of German Industries.

In the Council, the German government forged an alliance with 12 other member states. This blocking minority prevented the required qualified majority of 55 per cent of states. The identity of those states was hidden for years in what is regarded as a prime example of the lack of transparency in the legislative process within the Council.

Years of wrangling by EU governments in the Council ensued until finally, in February 2021, enough countries were in favour of the Parliament’s proposal. Now, the Council could adopt their negotiation mandate. This gives the green light for the three main EU institutions — the Council, the Parliament and the Commission — to meet in so-called trilogues to negotiate a compromise on the fourth and final version of the tax transparency law.

Lobby influences the French position

But now, this piece of legislation has yet another hurdle to overcome, one which threatens to kill it altogether. Ahead of the second trilogue, a paper from the French government was circulated among members of the European Parliament and diplomats. The paper strongly argues in favour of the Council’s version of the law — meaning much less tax transparency than the Parliament’s recommendation.

The timing of the French note — at  a stage where both the Parliament and Council need to make concessions in order to broker a deal — has led lawmakers and diplomats to interpret it as the French government’s red lines, and that France would block any deal that didn’t take them into account.

“When you move to the EU level, business lobbies efficiently kidnap the national interest.”

MEP Sirpa Pietikäinen

A close inspection of the document by French magazine Contexte revealed that it was actually written by Mouvement des Entreprises de France (Medef), France’s largest employer federation. In the document’s metadata, they even found that Medef’s leading tax expert, Tania Saulnier had authored it.

When questioned by Investigate Europe, French diplomats involved quickly explained that this was irrelevant. It is “usual for the French administration to consult with stakeholders such as consumer and business associations”. The position paper on CbCR had been “substantially rewritten and revised”. But they did not provide any proof of this.

The EU diplomats that Investigate Europe spoke with describe the revelation of the lobby-drafted document as ‘sloppy’ and ‘embarrassing for the French government’, but ultimately nothing out of the ordinary, as all EU governments consult stakeholders before drafting their positions.

But French lawmaker Manon Aubry, who is a representative of the European Parliament’s Left party group in trilogues, is more critical. 

“Did we have Medef in front of us or the member states in the negotiation room last week?” she asks.  “It says a lot about the lobby influences over these discussions, that they actually set the red lines for the governments, and that they do everything to block any advance to tax transparency. It is worrying both from the point of view of the fight against fiscal evasion, and for democracy itself, she adds. Medef is influencing the French position because the government perceives the business position to be in the French national interest, concluded another European lawmaker, the Finnish conservative MEP, Sirpa Pietikäinen.

“If I were a minister or an MP in Finland and I lobbied for one company, I would be seen as a bad politician, there might even be an investigation. But when you move to the EU level, business lobbies efficiently kidnap the national interest. On the EU level, you score points in the media, in the public debate, if you defend the national interest, however perverse it may be.”

The government in Paris did not answer Investigate Europe’s question as to why France’s position on tax evasion had been written by lobbyists.

The Council and the Parliament: miles apart

The French position, which is the same as the Council’s maximum demand for the negotiations with Parliament, mirrors the position of the business lobby on two key points:

• Companies should be exempt from reporting requirements for six years, to avoid being forced to reveal sensitive information, the so-called ‘safeguard clause’.
• Companies should not have to report country-by-country tax information for activities outside the EU other than in aggregated numbers.

On these two issues, the Council and Parliament stand a long way apart.

Regarding the ‘safeguard clause’, Parliament wants to allow companies to temporarily omit some information, but this must be justified, and authorisation must be sought from national authorities every year. The European Commission should verify these national authorisations.

The position of the Council, however, gives a carte blanche to companies to omit information for six years.

The French position paper says that “[…]it is necessary to maintain the six-year duration. In particular, the temporary omission of the data should not be subject to prior annual authorisation of the national competent authority.”

And the EU business lobby, Business Europe, which counts Medef as a member organisation, wants businesses to be able to renew that six-year period.

On the second point, the Council’s position is that companies shouldn’t be to be forced to report country-by-country profits and taxes for their activities outside the EU.

For all non-EU states, with the exception of the likes of Panama or Seychelles (which are on the EU’s tax haven blacklist), the Council’s negotiating mandate is that “the report shall present the information […] on an aggregated basis [..]”

French lawmaker Manon Aubry believes this would empty the EU law of all meaning. Keeping country-by-country reporting for non-EU countries is an absolute priority, she says. “This is a red line that you cannot cross. Otherwise, we only do a political show with no efficient and useful measure. Even if it means having a safeguard clause and having the data later. It is not optimal, but it will allow us at one time or another to have the data.”

Before being elected as MEP, Aubry worked for Oxfam. The NGO made use of country-by-country data reporting for banks, which, thanks to a previous EU law, now has to be made public. “We could analyse the distortions of activity which make it possible to shed light over practices of tax evasion and artificial transfers of profits,” she explains.

Conservative MEP Sirpa Pietikäinen agrees that country-by-country reporting on tax from non-EU countries — many of them tax havens — is crucial.

But, in the actual negotiation, she says a whole bundle of articles — some big, some small — are treated together, and compromise will be found across different areas.  “It’s all about the scope and the content of the reporting. Who should report and what to report,” she says.

In the recent trilogue meeting, she says, there was a common understanding of a possible compromise. “We went through the different proposals and positions, so we know where we stand, what the room for manoeuvre is. It is very narrow, very thin, and it would require the Council to move. I would say that it will be one of those compromises where nobody is happy.”

Like Manon Aubry, she wouldn’t get behind a deal that is close to the Council’s position, which she believes means “neither reporting nor country-by-country”. 

“If you’re fighting for something and the result is worse than what you can get elsewhere, from national regulation, global standards or market practices, then don’t make a regulation that underachieves,” she says.

Is there still hope?

The next three-party negotiation is to be held at the beginning of June. The Council mandate adopted in February had the backing of a narrow majority. It would only take France and another EU country to withdraw support for the law to collapse. For this reason, perhaps more than the content of the position, the French note drew so much attention.

But other movements in the Council could counteract the French attempt to block the law. For the first time, Germany has openly stated that it supports the Council mandate on the tax transparency law. Some diplomats and MEPs interpret this as a change of heart and that Germany might now vote for a compromise deal.

There is also a slight shift in tone coming from the north, with the Swedish government indicating that it may give up attempts at blocking (its earlier objections were procedural, namely that the directive should be considered a tax directive and be adopted by unanimity, not majority-vote).

But if the Macron government succeeds in getting other EU states to agree to the hard position of the corporate lobby, the Parliamentarians will probably have no choice but to agree to a bad law with the hope of improving it later.

We won’t have to wait long to find out — the next meeting of the permanent representatives is scheduled for May 26.