How well will the EU tax transparency measures go down in Washington?

12 April 2016

George Bull

Today, the EU Commission announced that multinationals operating in the EU with annual turnover of more than €750m will be required to publish country-by-country information including a breakdown of profits, tax, employees and net turnover on a yearly basis. 

It follows the publication last June of the EU Commission’s Action Plan for reforming corporate taxation in the EU, one of the key pillars of which was a drive for increased transparency. It is hoped that the initiative will help reduce corporate tax avoidance and aggressive tax planning in Europe which is estimated to cost EU countries €50-70bn a year in lost tax revenues.

Country-by-country reporting already applies to banks, mining and forestry companies but the new proposals mean that this would be expanded to cover companies accounting for about 90 per cent of corporate revenues made by multinationals. It will apply to an estimated 6,000 large firms operating in the EU, without affecting small and medium-sized companies. The rules would also apply to non-European multinationals doing business in Europe. 

Very simply, the EU is hoping that mandatory public country-by-country reporting will enable people to scrutinise the tax behaviour of large multinationals which will, in turn, encourage companies to pay tax where they make their profits.

The plans will, of course, need approval from national governments and the European Parliament but before that happens, many questions will have to be addressed. It seems to me that four are of fundamental importance:

a) Will these proposals force companies to abandon tax havens?

This depends on why the companies are using tax havens and whether the public disclosure of information causes reputational problems for them. If so, some may restructure in a way which reduces their reliance on tax havens.

b) What power does the EC have over 'British' tax havens?

A difficult question, but developments in the last 24 hours suggest that UK Prime Minister David Cameron is keen to bring the UK tax havens into line and to encourage them to take the initiative. With the prospect that some tax havens will routinely be sharing information on company ownership with the UK within 24 hours of being notified, this is unlikely to be a problem in practice.

c) Will more tax become payable as a result?

While some companies may end up paying more taxes if they restructure away from tax havens, a broader look at the EC proposals suggest that they hope to increase the size of the tax 'cake' by shaming multinationals into restructuring away from tax havens. The proposals are also likely to change the size of the slices of tax 'cake' collected by different tax authorities. We can expect to see more competition between tax authorities to maximise their own tax yield arising both from the EC proposals and also from the wider OECD BEPS initiative.

d) How will the US view this proposal?

Bearing in mind that many of the multinationals that have had their tax arrangements highlighted in the media have been US-headquartered, this proposal is likely to create waves across the Atlantic. US business leaders and politicians have previously voiced concerns about the publication of country-by-country data and this announcement is unlikely to please those who consider that US businesses are being singled out unfairly by the EU. The reaction of US policymakers will be important in determining whether this remains an EU initiative or evolves on a global scale.

If you would like any more information on this issue please contact George Bull or your usual RSM contact.