Greater corporate tax transparency is also good for business

by Elena Gaita*

Far from making life harder for business, public country-by-country reporting will actually improve relations with investors, and benefit both companies and consumers, writes Elena Gaita.

In February, after years of deadlock, the EU Council of Ministers gave its backing to draft legislation designed to bring greater transparency to the secretive world of corporate taxation. It will now enter into negotiations with the European Parliament on the final shape of the legislation.

So-called public country-by-country reporting (CBCR) by multinationals, a practice already in place for big EU banks, will allow citizens to see for the first time how and where large companies pay their taxes (as visualised in our online tool, taxtracker.eu).

At a time when record sums of public money are being channeled to multinational companies to help keep them afloat during the pandemic, it’s an important breakthrough.

But not everyone is equally impressed.

In reality, large multinationals operating in the EU are already subject to country-by-country reporting. They share their country-by-country tax data with the tax administration of their country of headquarter, which in turn passes it on to the tax administrations of the other member states. The data is already there, it is just a case of making it accessible to the public.

The complaint that the legislation could hamper the competitiveness of EU businesses isn’t credible. Full public CBCR is already in force for the EU banking sector, under post-financial crisis legislation.

In November 2015, UK banks HSBC and Barclays gave evidence before the European Parliament Special Committee on Tax Rulings, and said that implementing public CBCR has not hampered their commercial interests. And it should also be noted that oil, gas and mining companies have been subjected to similar transparency requirements.

Rather than creating a risk of a reputational damage, public CBCR represents an opportunity for multinational companies to explain more clearly how their tax practices work by adding a narrative explanation to their reports.

And in fact, despite the political deadlock in the EU Council that for a long time prevented the adoption of EU public CBCR legislation, a growing number of companies, including Vodaphone, Shell and Phillips, have voluntarily started publishing CBCR information.

The purpose of public CBCR legislation is not to discredit or undermine tax authorities. While for tax administrations CBCR is a tax avoidance assessment tool, public CBCR is a risk assessment tool for national tax systems as a whole; informing public debate on taxation policy in Europe and beyond.

The proposal is also perfectly compatible with the confidentiality of OECD tax exchange systems, as the disclosure requirement is aimed at companies, not member states.

Opponents of the law continue to seek to reopen the long-debated issue of the legislation’s legal base, arguing that it is a tax proposal, and as such requires unanimity. But as we and many others have always argued, this is not a tax proposal, as it does not directly impact on Member States’ tax rates and does not involve tax administrations.

It is a corporate reporting measure, aimed at improving corporate transparency and accountability. A majority of member states agree and have rejected the call for a change of the legal base.

Far from making life harder for business, public CBCR will actually improve relations with investors, who have been calling for access to this information in order to be able to assess corporate risks.

For markets to be able to function properly, institutional investors and the public must be armed with sufficient information allowing them to meaningfully assess the business operations, management and risks public companies are facing.

Having access to CBCR information would allow investors to make better investments decisions, investing in firms that are enhancing shareholder value through sound investments, rather than those which rely on aggressive tax-reduction strategies.

*senior policy officer at Transparency International EU
**first published in: www.euractiv.com