Advisers wary of EC push for multinational tax transparency

MULTINATIONAL CORPORATIONS will be forced to reveal where they make profits and pay their taxes as the European Commission takes a ‘small, but important step’ towards greater tax transparency.

According to reports, the executive of the European Union had always planned to introduce the legislation, but it’s been suggested that the Panama Papers leak has sped up the decision-making process, which will be confirmed by the EC today.

Last week over 11 million leaked documents belonging to Panamanian law firm Mossack Fonseca were revealed after being reviewed by a team of more than 370 journalists from 76 countries.

The files allegedly show how the legal services company has aided its clients in evading tax, dodging sanctions and laundering billions in cash over 40 years, from 1977 to 2015.

According to The Guardian, European Commission staff have “been working round the clock” to ensure that its proposals will also apply to tax havens, which could implicate corporations such as Facebook, Apple and Google, multinationals which have previously been criticised for avoiding corporation tax.

Clampdown on tax avoidance

Along with European multinationals, it’s expected that the EC will force large subsidiaries of non-European corporations to also publish its non-EU tax affairs.

This is not the first time that a tax scandal has prompted European officials to promote greater transparency.

In January the OECD announced that 31 countries agreed to sign an agreement on tax co-operation, enabling the sharing of country-by-country reports.

The Multilateral Competent Authority Agreement (MCAA) included signatures from the UK, France, Germany, Luxembourg and Ireland.

The agreement was signed just days after HMRC agreed a £130m settlement with Google over unpaid back taxes, a move which tax experts felt undermined the OECD’s BEPS initiative.

Under the OECD agreement, tax administrations of all 31 countries will receive aggregate information from multinationals annually, starting with their 2016 accounts. The countries involved will then be able to exchange information from 2017-18.

‘Small, but important step’

Crawford Spence, a professor of accounting at Warwick Business School and tax avoidance expert, has welcomed the notion of increased transparency from the European Commission.

“This latest initiative from the EU is a small, but important step towards ensuring that multinational companies pay their fair share of tax.

“Greater transparency, in the form of country-by-country reporting of revenue and tax payments, is on its own an insufficient condition for recouping greater amounts of tax from companies,” explained Spence, who added that the incoming announcement could have a bigger impact on ‘consumer facing organisations’ such as Google and Starbucks.

‘Major cause of concern for many multinationals’

Xaver Ditz, partner at multinational tax firm Taxand, fears that a number of multinationals may be confused by the reporting proposal and publish their tax affairs without being obliged to.

“Whilst the €750m (£603m) turnover threshold for disclosure is in line with the requirements of the BEPS project, the number of companies caught in its net is unverified, with no statistical or empirical evidence to support the reports that 85-90% of multinationals will not be required to report,” explained Ditz.

“The assessment of whether a company exceeds this threshold is also equally hard if the ultimate parent company resides outside the EU as the subsidiary may be unable to obtain, the required information to make this assessment.”

Announcement may hurt innocent businesses

Ray Smith, tax partner at Clyde & Co believes that the Panama Papers would have almost certainly sped up reform , but has warned that there may be potential consequences to innocent EU businesses, as well as having an impact over the UK’s European referendum.

“The concern is, as with any populist reforms that any new rules made in haste may overlook the fact that low tax jurisdictions often play an important and legitimate role in many investment and financing structures which EU businesses rely upon.

“If the rules are drawn too widely and applied indiscriminately they may increase, for little real gain, the tax and regulatory compliance costs on many EU based MNEs, which (as pro Brexit campaigners will tell us) are already creaking under the strain of ever increasing EU regulation,” said Smith.