European Affairs

Public Disclosure Regime Latest EU Effort to Crackdown on Corporate Tax Avoidance     Print Email

Transparency proposal would shame tax-dodging multinationals

spellmanRigorous disclosure requirements are the latest in the European Union’s accelerating efforts to tax revenue that may be escaping levies through multinationals’ maneuvers, which range from offshore vehicles to company-specific deals with host countries in Europe and elsewhere. EU officials announced the effort (April 12) against a backdrop of outrage worldwide after a Panamanian firm’s 11.5-million papers were leaked, revealing how lawyers helped heads of state and wealthy individuals escape tax liabilities.

“By adopting this proposal, Europe is demonstrating its leadership in the fight against tax avoidance,” said Valdis Dombrovskis, vice president of the European Commission in charge of euro and social dialogue. That avoidance costs the bloc’s member-states between €50 billion ($56.4 billion) and €70 billion ($78.9 billion) a year in lost tax revenues, according to the EU. Worldwide, the Organization for Economic Cooperation and Development estimates that between 4 percent and 10 percent of corporate income tax revenues are being lost to tax avoidance.[1]

“The Panama Papers hasn’t changed our agenda, but it has strengthened our determination to make sure that taxes are paid where profit is generated,” said Jonathan Hill, the EU commissioner for financial stability, financial services, and capital markets union. [2]“By using complicated tax arrangements, some multinationals can pay nearly a third less tax than companies that only operate in one country. It’s not right that smaller companies should be at a competitive disadvantage to multinationals,” Lord Hill said. The EU’s tax policy czar, Pierre Moscovici, similarly noted the importance of the Panama Papers, that as a consequence “there must not be a single hesitation from anybody…. [W]e need country-by-country reporting.”

The new proposal would require companies whose annual global revenues exceed €750 million ($856 million) to publicly release information in seven key areas on a country-by-country basis within and outside the EU: business profile; staff size; net turnover; pre-tax profits; taxes due based on yearly profits; taxes paid; and, accumulated earnings. Companies must provide each year’s information for five years on its website.[3]About 6,500 companies (4,000 of those are subsidiaries of global corporations with headquarters outside the EU) would be affected. Brussels is targeting 2018 as the start for disclosing tax payments made a year later. Since the initiative would be crafted as accounting legislation, a supermajority vote is needed to enact the provisions. No EU country will be able to veto it singlehandedly (as would be the case for tax legislation).

spellman201604chart1


The proposal builds on the “Base Erosion and Profit Sharing Guidelines” drafted by the Organization for Economic Cooperation and Development, recommending that tax authorities share data among themselves but stop short of demanding public disclosure.[4]

To avoid or reduce taxes, multinational companies may shift profits from high-tax jurisdictions to low-tax ones and move loans, costs, and other profit-reducing deductions to high-tax jurisdictions. For example, a company could structure how subsidiaries and headquarters purchase and sell goods and services from one another to reduce tax liabilities (so-called transfer pricing). Holding off on the repatriation of earnings, meaning the earnings are retained in overseas entities and not moved back to headquarters to be subjected to that jurisdiction’s tax laws, is another strategy. A further approach is “inversion.” A company acquires a legal address in a low-tax jurisdiction by merging with a company domiciled there. The largest deal ever for pharmaceutical companies, the $160-billion merger between Pfizer Inc. and Allergan Plc, was recently terminated after the U.S. government proposed regulations to crack down on these tax-driven inversions.[5]

spellman201604chart2

spellman201604chart3

Source: Jane G. Gravell, “Tax Havens: International Tax Avoidance and Evasion.” Congressional Research Service, January 15, 2015. https://www.fas.org/sgp/crs/misc/R40623.pdf

That announcement was followed by an agreement (April 14) among five of the EU’s largest economies – the United Kingdom, Germany, France, Italy, and Spain – to share information on “secret owners of businesses and trusts” and previously "secret tax information between countries such as America, Saudi Arabia and China," according to a BBC report.[6] At the spring meetings of the International Monetary Fund and the World Bank in Washington, the five urged the other G20 countries to participate in this information swap.

Over the past 18 months, Brussels has become more aggressive in probing tax arrangements between member-countries and companies. The “Lux Leaks” investigation by the International Center for Journalists showed that hundreds of companies were reducing their taxes through “secret agreements” with the host country Luxembourg. [7] Last October, EU Competition Commissioner Margrethe Vestager ordered Luxembourg to claim back as much as €30 million ($46 million) in unpaid taxes from a Fiat Chrysler financing unit, and the Netherlands to collect a similar amount from Starbucks Corp.[8] After an 11-month investigation, the EU ordered Belgium in January to reclaim €700 million ($765) million from 35 multinationals that benefit from an illegal tax break. [9] A ruling by the Commission is expected later this spring on whether Ireland granted Apple terms on taxes that other companies would not benefit from, which would constitute an illegal subsidy from a member-state.[10]

Asserting a disproportionate number of U.S.-based firms have been the focus of Vestager’s actions, U.S. Treasury Secretary Jacob Lew in February complained to European Commission President Jean-Claude Juncker that American firms are unfair targets of investigations of “state aid.” Under EU law, the Commission must review state aid granted by member-states, including preferential corporate tax arrangements. If such aid is incompatible with EU law, namely that it distorts competition, the member-state must abolish or alter such aid within a prescribed time period.

Lew wrote Juncker that EU inquiries are creating “disturbing international tax precedents” and seem to target U.S.-based firms without sufficient justification. The commission “appears to be adopting an entirely new legal theory and applying it retroactively in a broad and sweeping manner,” Lew said in the letter. “We respectfully urge you to reconsider pursuing these unilateral actions and instead focus on our collective work.”[11] U.S. senators made veiled threats of employing a never-used 1934 tax law giving President Barack Obama authority to impose retaliatory double taxes on EU citizens and companies.[12]

In response, “EU law applies indiscriminately to all companies operating in Europe -- there is absolutely no bias against U.S. companies,” the EU’s executive arm said. “We may disagree, but that shouldn’t be on the basis of things not being clear or differences not being in the spotlight,” Vestager said. “It is in this situation quite obvious that there are differences as to how we do this in the European Union and how this is looked at here in the States.”[13]

Immediately after the announcement by Brussels of its transparency initiative, sharp lines of division formed, signaling a lengthy political fight ahead. “We believe that these proposals, by making the EU a lone front-runner in terms of public disclosure, risk undermining our attractiveness as a location for investment, particularly from overseas,” said Markus Beyrer, head of BusinessEurope, an advocacy group that represents companies including Alphabet Inc.’s Google and Comcast Corp.’s NBCUniversal.[14] The group argues that the scale of tax avoidance, as estimated by the OECD, pales in comparison, for example, to the gap between value-added tax revenue that should be collected and the actual proceeds, a gap that exceeds 15 percent across the EU.[15] In the tax debate, too, the amount of taxes businesses already pay, nearly €2 trillion ($2.25 trillion) in 2012, should not be dismissed blithely, BusinessEurope says.

While supporting tax transparency, the AmCham EU group said it is “concerned that the proposal could have a potentially negative impact on EU competitiveness and attractiveness as an investment destination.”[16] A similar theme was stressed by the head of a German industry association BDI (Bundesverband der Deutschen Industrie). “Competitors will acquire sensible information on the structure and margins of a company due to the obligation of reporting," Ulrich Grillo feared.

In contrast, some interest groups attacked the proposal’s weaknesses in breadth and scope. "The Commission is only proposing reporting obligations for firms' activities in a restricted list of countries, mainly within Europe, with crucial countries like the US and Switzerland excluded," EU Green lawmaker Molly Scott Cato said. "Unless the reporting obligations cover all countries, it will be impossible to find out if and how firms are channeling funds to tax havens," she said.[17] Tuesday’s legislative proposal “cannot be called public country-by-country reporting, if it does not include most of the world,” Elena Gaita, a policy officer at Transparency International in Brussels, said in a statement.[18]

Addressing the tax abuses means confronting deeper issues of democracy and multinational coordination among countries beyond the EU’s borders, says University of Michigan Law Professor Reuven S. Avi-Yonah. “I think it is important as a transparency and democracy issue that countries and their voters know how much each multinational earns within them and how much tax they pay. Under the current system huge disparities are possible between these two numbers with no accountability because the low tax is based on either sweetheart deals under the table or on aggressive use of corporate tax avoidance tactics like placing [subsidiaries] in low tax jurisdictions with no real meaning. The solution is either a coordinated move by the G20 to tax multinationals headquartered in them (90% of large multinationals) currently on all income with a credit for foreign taxes or (longer term) global formulary apportionment of MNE profits based on sales and payroll.”[19]

Crawford Spence, a professor of accounting and tax avoidance expert at Warwick Business School, sees the transparency measures as just a first step. “This latest initiative from the EU is a small, but important step towards ensuring multinational companies pay their fair share of tax,” he said. “Greater transparency is on its own an insufficient condition for recouping greater amounts of tax from companies. Companies could be transparent about paying very little tax yet continue not to pay it. There are a lot of other companies who are not consumer-facing and so will be less concerned about public opinion. For those organizations, transparency will have a small impact on how they conduct their tax affairs.”[20]

Corporate tax rates worldwide have been falling over the past decade, with the effective rates in Europe dropping to 18.6 percent, an average, last year from 27.2 percent in 2004.[21] Within the Eurozone, the rate averaged 28.92 percent from 1995 until 2015, with the record high rate of 36.80 percent in 1995 and the record low rate of 24.30 percent in 2012, according to Trading Economics.[22] Researchers attribute that shift to competition among countries worldwide to attract companies.

 


Effective Tax Rates

 

 

spellman201604chart4

 

Source: Frank Streif, “Tax Competition in Europe — Europe in Competition with Other World Regions?” ZEW - Centre for European Economic Research Discussion Paper No. 15-082 (November 2015). http://ssrn.com/abstract=2710677 .

 

Euro Area Corporate Tax Rate, 2006 to 2016

 

spellman201604chart5

 

Source: Trading Economics. http://www.tradingeconomics.com/euro-area/corporate-tax-rate .

 

spellman201604chart6

 


Source: Kyle Pomerleau, “Corporate Income Tax Rates around the World, 2014.” Tax Foundation, August 20, 2014. http://taxfoundation.org/article/corporate-income-tax-rates-around-world-2014 .


[1]

OECD, Mandatory Disclosure Rules, Action 12 - 2015 Final Report. October 5, 2015 version. http://www.oecd.org/publications/mandatory-disclosure-rules-action-12-2015-final-report-9789264241442-en.htm. The release of the Panama Papers culminated a year-long investigation concluded by more than 360 journalists in 24 countries.

[2]

Full remarks at: http://europa.eu/rapid/press-release_SPEECH-16-1365_en.htm .

[3]

Fact Sheet, “Introducing public country-by-country reporting for multinational enterprises - Questions & Answers,” summarizes the proposal. http://europa.eu/rapid/press-release_MEMO-16-1351_de.htm .

[4]

More information about BEPS: http://www.oecd.org/ctp/beps.htm . The initiative seeks to shape the standard-setting and monitoring processes.

[5]

Kristen Hallam, Cynthia Koons, and Zachary Tracer, “Pfizer Confirms Termination of Proposed $160 Billion Allergan Merger.” Bloomberg, April 6, 2016. http://www.bloomberg.com/news/articles/2016-04-06/pfizer-allergan-end-160-billion-merger-amid-new-tax-rules .

[6]

Kamel Ahmed, “Five EU nations launch tax crackdown.” BBC, April 14, 2016. http://www.bbc.com/news/business-36049817 .

[7]

For more information on “LuxLeaks,” go to: https://www.icij.org/project/luxembourg-leaks .

[8]

James G. Neuger, “EU Seeks to Shame Tax Free-Riders With Business Disclosures.” Bloomberg, April 12, 2016. http://www.bloomberg.com/news/articles/2016-04-12/eu-seeks-to-shame-tax-free-riders-with-business-disclosure-rule . Also, Jones Day, “EU rules Starbucks, Fiat received tax advantages from the Netherlands and Luxembourg constituting illegal State aid, must pay back taxes.” October 21, 2015. http://www.lexology.com/library/detail.aspx?g=f7166519-e5cb-4f85-a664-45292b60a588 .

[9]

Tom Fairless, “EU Orders Belgium to Recover Unpaid Taxes From 35 Firms.” Wall Street Journal, January 11, 2016. www.wsj.com . “The tax scheme, in place since 2005, allowed certain corporations to reduce their tax base by between 50% and 90% to discount for so-called excess profits that allegedly result from being part of a multinational group, the commission said.”

[10]

Christian Oliver, Tim Bradshaw, and Barney Jopson, “Apple’s offshore tax arrangements spark a transatlantic face-off.” Financial Times, April 6, 2016. http://www.cnbc.com/2016/04/06/apples-offshore-tax-arrangements-spark-a-transatlantic-face-off.html

[11]

Vicki Needham, “Lew Blasts EU Tax Probes of US Companies” The Hill, February 11, 2016. http://thehill.com/policy/finance/269154-lew-calls-on-eu-to-stop-tax-probes-of-us-firms .

[12]

Richard Rubin, “Senators Ask White House to Consider Retaliatory Tax Measure on EU.” Wall Street Journal, January 15, 2016. www.wsj.com. Also, see testimony of Robert Stack, deputy assistant secretary for International Tax Affairs for the U.S. Treasury, before the Senate Finance Committee on December 1 and December 18, 2015. www.finance. senate.gov/imo/media/doc/01dec2015Stack.pdf . www.finance. senate.gov/imo/media/doc/01dec2015Stack.pdf

[13]

Richard Rubin, “U.S., EU Continue Feud Over Corporate Tax Breaks.” Wall Street Journal, April 8, 2016. www.wsj.com .

[14]

Statement at: https://www.businesseurope.eu/publications/country-country-reporting-risks-damaging-eu-investment .

[15]

See position paper “BUSINESSEUROPE position on the anti-tax avoidance package.” https://www.businesseurope.eu/publications/businesseurope-position-anti-tax-avoidance-package .

[16]

Raf Casert, “EU wants companies to disclose where they pay taxes.” Associated Press, April 12, 2016. https://www.washingtonpost.com/business/eu-seeks-tougher-tax-rules-after-offshore-accounts-scandal/2016/04/12/a27b8df8-00af-11e6-8bb1-f124a43f84dc_story.html .

[17]

Ibid

[18]

Simon Marks, “Will the Commission's Attempt to Curb Corporate Tax Avoidance Go Far Enough?” EuroInsight, April 13, 2016.https://euroinsight.mni-news.com/posts/will-the-commission-s-attempt-to-curb-corporate-tax-avoidance-go-far-enough-2303 . Also, see: “New EU Transparency Proposal is Only Transparency in Name,” Transparency International. http://www.transparencyinternational.eu/2016/04/new-eu-proposal-on-corporate-tax-is-transparency-only-in-name/ .

[19]

Interview, April 13, 2016.

[20]

Emma Rumney, “EU plans law to push tax transparency on multinationals.” Public Finance International, April 12, 2016. http://www.publicfinanceinternational.org/news/2016/04/eu-plans-law-push-tax-transparency-multinationals .

[21]

Editorial, “The EU Gets It Wrong on Corporate Taxes.” Bloomberg, October 23, 2015. “Tax shopping is popular within Europe, too. Effective corporate tax rates in Europe have come down to about 18.6 percent from 27.2 percent in 2004; the rate varies from country to country and even within countries. France's corporate income tax rate, for example, is 34.4 percent, among the highest in the world. But the effective tax rate for the largest companies in the CAC40 (a French stock market index) is actually only 8 percent, while it is 22 percent for small and medium-sized enterprises. Such a byzantine system favors firms that can afford the time and expense required to navigate it.” http://www.bloombergview.com/articles/2015-10-23/to-promote-fairness-simplify-corporate-taxation .

[22]

“Euro area Corporate Tax Rate 1995-2016.” Trading Economics. http://www.tradingeconomics.com/euro-area/corporate-tax-rate .