by
Hans Hack*
Within European legislative developments, tax policy is probably the last area that would keep a business leader awake at night. With unanimous voting (meaning every single Member State of the EU has to agree) and zero-sum game politics between the leaders, agreements on tax rules generally take a long time....
However, a recent agreement between the European Heads of State to step up the fight against tax avoidance and evasion has changed these dynamics. Fueled by large budget deficits, ministers hiding money in Swiss bank accounts and high profile “aggressive tax planning“ cases such as Amazon and Apple, European leaders have caught businesses and administrations by surprise. At a May summit they agreed to oblige large companies and groups to report country-by-country on their turnover and taxes paid.
It is time to sit up and take notice.
Upon receiving the request from the 27 leaders of the European governments, the European Commission has indicated it will look to swiftly introduce the legislation. The most likely scenario is that the concept of country-by-country reporting will be integrated in negotiations on non-financial reporting, which have started after the legislative proposal was produced by the Commission in April of this year. Considering the fact that the Heads of State and Government got the ball rolling in the first place – and that the European Parliament has already signaled support through UK MEP Sharon Bowles, Chair of the powerful Economic and Monetary affairs Committee– negotiations on legislation will not necessarily take a long time.
What is it and how will it impact your business
The official Conclusions of the European Council of 22 May state that: “the proposal amending the Directives on disclosure of non-financial and diversity information by large companies and groups will be examined notably with a view to ensuring country-by-country reporting by large companies and groups”.
This wording is far from specific but was repeated by European Commissioner for Internal Market and Services, Michel Barnier, in a speech on Thursday 23 May in Amsterdam at the Global Conference on Sustainability and Reporting:
“The largest banks will also have to disclose their profits, taxes and subsidies in each Member State and non-EU country where they operate. And in the line with yesterday's conclusion of the European Council we will expand these reporting obligations to large companies and groups”.
This seems to signify that the Commission intends to introduce a requirement for corporates to report the following:
a) Name(s), nature of activities and geographical location;
b) Turnover;
c) Number of full time employees;
d) Profit or loss before tax;
e) Tax on profit or loss;
f) Public subsidies received.
So where does this idea come from?
The background to this potentially game-changing proposal is that in times of austerity, the search for tax income has become more pertinent. In addition, the fairness of the social contract has come into question due to harsh measures being applied to all layers of society. To regain the trust of citizens, (who are also voters and tax payers), politicians need to demonstrate their efforts to ensure fairness. MEP Bowles succinctly described the political drive in a recent tweet: “country-by-country reporting for ALL sectors helps ALL countries get the tax they deserve”.
Country-by-country reporting is a concept that first featured in the revision of the Accounting Directive. This Directive specifies a requirement for large companies and public interest entities in the extractive industries to disclose payments to governments. This requirement, also introduced in the US, is intended to promote government accountability and good governance, basically reducing the likelihood of bribes. Following on this, a country-by-country reporting requirement regarding turnover and taxes paid was surprisingly introduced in the Banking Capital Requirements Directive (CRD IV), on the initiative of the European Parliament, however with a different aim. The recital to this proposal states: “Increased transparency regarding the activities of institutions, and in particular regarding profits made, taxes paid and subsidies received, is essential for regaining the trust of EU citizens in the financial sector. Mandatory reporting in this area can therefore be seen as an important element of the corporate responsibility of institutions to stakeholders and society”.
One can see how the next step of applying this requirement to all large businesses would be a logical one for politicians. Businesses need to be aware that this is coming their way.
* Hans Hack is Senior Director at FTI Consulting, Brussels
By: N. Peter Kramer
