Portugal vs Germany clash on EU corporate tax avoidance

Credit: Alexia Barakou

This article was originally published with our media partner, EUobserver.

When the German Economics Minister Peter Altmaier next meets with his colleagues from the other 26 EU states, it will be in the face of an embarrassing defeat. At the Council of Ministers meeting scheduled for 25 February, the majority of EU governments want to pass a law that Altmaier and his predecessors have been trying for years to prevent by all means: A reform of the company law that obliges transnational companies – as the title of the bill says – to “disclose income tax information”.

A meeting in January of civil servants in the Council’s Working Group on Company Law has revealed that there is now a secure majority in favour of the reform. As a result, the Portuguese government, which currently holds the presidency of the Council, has put what is known in EU jargon as “public country-by-country reporting” on the agenda for a vote. This was confirmed by diplomats and officials from several EU representations in Brussels to the Investigate Europe team of journalists.

This brings to an end almost five years of wrangling over an important step in the fight against tax avoidance by multinational companies. These are companies that shift large parts of their profits to letterbox companies in countries with lower tax rates; such as the Netherlands and Ireland, which attract businesses by with these lower rates, so facilitating tax avoidance.

The Google group alone recently avoided taxation of profits in the EU to the tune of almost 20 billion euros a year in this way. The EU Commission estimates the losses for the state coffers of the other EU countries at up to 70 billion euros annually.

However, tax avoidance is perfectly legal in most cases because states undercut each other as they compete for investments. The country-by-country reporting obligation through its transparency, is intended to generate public pressure, because it will reveal how profits are shifted to shell companies with little or no production, in low tax states. It will “help to investigate the tax behaviour of multinational companies” and “encourage them to pay taxes where they make profits”, is how the Commission justifies its proposal. It was no surprise that a reform such as this received a broad majority in the EU Parliament as early as June 2017.

But under pressure from the German corporate lobby, from the Federation of German Industries and the Family Business Foundation, the German government has been blocking the project for years. Public country-by-country reporting “would put German companies at a disadvantage in international competition”, claims Minister Altmaier.

In the Council of the EU, the second chamber for EU legislation, the German government forged an alliance with twelve other member states, which as a blocking minority prevented the necessary qualified majority of 55 percent of the states.

Which governments these were remained hidden for a long time due to the secrecy surrounding the proceedings in the Council. Only in the autumn of 2019 did it become known that these included (as expected) not only the lower-tax countries of Cyprus, Malta, Austria, Slovenia, Estonia, Luxembourg, Ireland and the Netherlands, but also (more surprisingly) the social democratic-led governments in Portugal and Sweden, which had promised their voters that they would take action against corporate tax avoidance.

After this was reported by Investigate Europe, Altmaier’s Portuguese colleague Siza Vieira came under such pressure from his party friends that he had to change position. The same happened in Austria. In December 2019, the Austrian parliament obliged the government to vote in favour of the EU Commission’s proposal in the Council of the EU in any future vote. This position was also adopted by the newly elected black-green government in Vienna. Since then, there has actually been a sufficient majority to approve the country by country reporting bill. And even within the German government, Vice-Chancellor and Finance Minister Olaf Scholz (SPD) explicitly spoke out in favour of the law when his party demanded it. But this didn’t make much of an impression on the coalition partner, the Christian Democrats (CDU)  and its economics minister Altmaier. They opposed it and took advantage of the fact that Germany held the presidency of Council meetings in the second half of 2020. With the acquiescence of their social democratic coalition partners, they refused to put the law on the agenda of the competent Council bodies and so avoiding the vote: “a disgrace”in the opinion of the German Green MP and finance expert Lisa Paus, after all, the Council presidency should be neutral.

And what Paus calls the Germans’ “foul play” becomes even more evident with the Portuguese initiative for the early vote. The Austrian Ministry of Economy representative, led by the conservative „Volkspartei” ÖVP, made one last attempt to sabotage the project at the 22 January meeting of the Council Working Group on Company Law. As the minutes of a diplomat involved, obtained by Investigate Europe show, after four years of negotiations the representative claimed legal reservations and “asked for an opinion of the legal service”.

But this quickly became known and was met with massive criticism, especially since Austria also provides the responsible rapporteur in the EU Parliament, the Social Democratic MEP Evelyn Regner. When she publicly demanded compliance with the parliamentary resolution, the government in Vienna assured the Portuguese Presidency in writing of its agreement. And so the Portuguese got serious and scheduled the vote. “The majority stands”, assures one of the EU ambassadors involved. The tax avoiders in the boardrooms will soon no longer be able to hide.

This article is part of the “Secrets of the Council” project by Investigate Europe, a team of journalists from ten European countries. In the Council of the EU, officials from national governments negotiate laws behind a veil of diplomatic secrecy and often act differently than has been publicly stated. That’s why IE is trying to shed light on which governments pursue which policies in the Council. See more here.