Wednesday

19th Feb 2020

Opinion

Fed up with tax dodgers? New disclosure rules can trigger change

Time and again when an election rolls around, the injustices ingrained in our tax policies become a central part of the debate. UK voters are set to go to the polls today, after weeks of campaigning on the questionable tax affairs of MPs, the use of ‘non-domiciled status’ by rich UK residents to avoid tax, and tax dodging multinationals.

The LuxLeaks scandal that broke last November showcased the extent of the problem: more than 340 multinational corporations (MNCs) were shown to have concocted secret deals with the government of Luxembourg to secure extremely low tax rates. In some cases, MNCs were paying less than 1 percent.

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  • 340 multinational corporations concocted secret tax deals with Luxembourg (Photo: Christoph Diewald)

At a time when citizens are asked to accept cuts in public spending, salaries, and pensions, large multinational enterprises seem to get away with paying next to nothing in tax on their profits. It shouldn’t be surprising then to learn that 59 percent of respondents in a British survey agree that legal forms of tax avoidance are morally wrong.

But the lack of transparency makes this kind of aggressive tax planning difficult to quantify. Enhanced transparency in the way multinationals report and publish their accounts would be a low-cost way to tackle the problem.

A major share of global cross-border trade happens between related parties within the same multinational corporation. This type of trade opens the door to exploitation of loopholes in domestic and international tax law, allowing an MNC to arbitrarily shift profits from one country to another with the sole intention of reducing their tax bill.

Though MNCs publish their accounts as a single unified entity, they aren’t taxed that way. Each business entity within the corporation is taxed individually, but they don’t have to report on this information on a country by country basis.

So, without the help of whistleblowers that bring things like LuxLeaks to light, even governments only see a small window into the inner workings of transnational businesses.

A vote in Brussels could help address the transparency problem EU wide. The European Parliament’s legal affairs committee will vote on a proposal to make country by country reporting—something already required for large financial institutions—a requirement for MNCs in all sectors.

The measure would require companies to publicly report things like profits, revenue, taxes paid, and number of employees in each country where they operate. This would give tax authorities, investors, journalists, and concerned citizens the whole picture of a company’s tax payments, trade flows, corporate governance, and stop potential corruption in its tracks.

Many in the business community already support this type of common sense reform.

A 2014 poll by PricewaterhouseCoopers, the accountancy firm, found that 59 percent of business leaders favoured public country by country reporting.

Investors who are integral to keeping the economy moving forward want to know whether potential business partners are operating in unstable areas, using tax havens, or engaging in the type of aggressive tax planning that will put them in the middle of the next LuxLeaks.

The lack of substantial country-specific reporting has handed multinational enterprises an advantage that their small and medium sized counterparts don’t possess. But this isn’t a competitive advantage; it’s an artificial one.

Many small and medium sized enterprises are already reporting the very type of information required for CBCR, as they only operate in one jurisdiction. Why should their larger counterparts be exempt?

Koen Roovers is an EU Advocate for the Financial Transparency Coalition

Disclaimer

The views expressed in this opinion piece are the author's, not those of EUobserver.

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