The recent press investigations widely known as the Panama Papers have highlighted the importance of the EU's ongoing effort to clamp down on corporate tax avoidance. As part of this effort, the European Commission on 12 April proposed changes to EU accounting rules that would increase the transparency in the EU of the tax behaviour of multinational companies. Specifically, the proposal would introduce public reporting requirements for the largest companies operating in the EU. The move is part of broader anti-tax avoidance efforts, which the Commission has been pursuing since 2015.        

Exploiting loopholes

Unlike small and medium-sized companies (SMEs) or individual taxpayers, large multinational groups are able to exploit loopholes and mismatches in domestic and international tax laws in order to move profits from one country to the next to reduce their tax payments. A combination of complex tax rules and fiscal secrecy has made it easier for these multinationals to do this. Estimates show that countries in the EU lose between € 50 and € 70 billion every year in tax avoidance by companies.

With this initiative, the Commission wants to respond to legislative and market shortcomings and encourage more responsible tax strategies by large multinationals. "By using complicated tax arrangements, some multinationals can pay nearly a third less tax than companies that only operate in one country,'' said Jonathan Hill, Commissioner for Financial Services, Financial Stability and Capital Markets Union. ''It has long been a priority for the Commission to make sure that taxes are paid where profits are generated. The Panama papers have sharpened this focus.''

The requirements would only apply to very large multinationals – with total turnover in excess of € 750 million – that are either EU-headquartered or with a medium or large subsidiary/branch in the EU. No new requirements are being imposed on small companies in the EU.

Providing information

So how will it work in practice? EU multinational groups will have to disclose publicly on their websites the income tax they pay within the European Union, on a country-by-country basis. In addition, they will be asked to disclose how much tax they pay on the business they conduct outside the European Union. For activities in tax jurisdictions that do not abide by tax good governance standards (so-called tax havens), a specific process is being introduced to provide full, country-by-country, disclosure – in other words the same as for within the EU – to ensure a higher level of transparency. This information must include the nature of the group's activities, number of employees, total net turnover, profit before tax, income tax both paid and accrued and accumulated earnings.

As regards any non-EU multinational companies, the obligation will apply to all the group's subsidiaries in the EU – or branches, if it does not have any EU subsidiaries. However, the parent group has the option to instead make the report publicly accessible itself.

This initiative builds on the OECD Base Erosion and Profit Shifting (BEPS) Action implemented in the EU through the Anti-Tax Avoidance Package, which was proposed in January 2016 and agreed by the Member States in March. The information to be disclosed is a subset of the report that companies will have to provide to tax authorities by 2017.

European banks already have to publish a country-by-country report following the provision of the Capital Requirements Directive. Consequently, they will not be affected by the current initiative so long as their reporting encompasses all of the group’s operations – for instance including operations that may not be subject to prudential reporting.

Read more on corporate tax transparency