Tax transparency: Keeping the public in the dark?

In the middle of the eighteenth century, its golden age a distant memory, Amsterdam was in fact a nest of political corruption. Public offices were openly bought and sold and nepotism was rife. One of the city’s regents – the oligarchs of their day – awarded the title of postmaster-general, and the generous annuity that came with it, to his five-year old son.

The officials loathed most intensely by the general populace for their corruption were the tax-collectors. They had paid the city’s regents handsomely for their positions and were zealous about recouping their investments from the public.

In 1748, the public’s barely-contained resentment reached boiling point. A routine fracas between citizens and tax collectors escalated and the local militia stepped in. When one of the demonstrators hitched up her skirts and proffered her flanks to the trigger-happy militia men, she was shot in the buttock for her pains and subsequently died of her injuries.

Four days of frenzied rioting ensued, which saw the wholesale looting of the private houses of Amsterdam’s wealthy merchant elite. The contents of one wine merchant’s cellars – some 32,000 bottles – were completely destroyed, although not before many of the rioters collapsed amid the alcohol fumes.

All of which is to say that the subject of tax and corruption arouses strong passions.

We now live in more enlightened times, of course. Tax authorities are loathed for many reasons, but not for the petty corruption that preys on individual citizens.

These days, we are more likely to be concerned about the deals struck by tax officials with multinational companies that assure them that the baroque and opaque structures they have created to minimise their tax bill are perfectly legal.

Luxleaks revealed an assembly line of ‘sweetheart deals’ in the form of ‘comfort letters’ provided to companies with Luxembourg subsidiaries, but this is common practice all over the EU.

'Transparency' reform hidden from public

This week, finance ministers struck a deal to exchange information on these tax rulings between member states but, curiously, given that it is trumpeted by the Commission as a “transparency” reform, none of this information will be in the public domain.

The same spirit guides the OECD’s much vaunted initiative to curb profit-shifting by multinationals that was agreed on Monday – financial information is to be shared between tax authorities in rich countries and no further.

There seems to be a broad consensus emerging that, when it comes to the tax affairs of multinationals, it is best to “keep the general public out”.

Indeed, that was the plea I heard from an eminent professor of tax law at a recent event. If information about tax payments was more widely known, his reasoning went, there would be huge pressure on politicians and administrators to rescind some of these agreements, and there would be little discretion for negotiations with other countries on technical matters such as transfer pricing rules.

Mob rule would replace the rule of law. The mansions of Luxembourg oligarchs would be pillaged.

This is a familiar refrain from those who believe that there are some matters that are simply too technical and complicated for public scrutiny and best left to the experts.

That is until the experts are revealed to be systematically wrong – think of banking supervision before the financial crisis.

Usually the response to these expert failures is to demand more transparency, and tax policy should be no different. Public disclosure would reduce the risks of ‘group think’ and regulatory capture.

Given the horrendously complicated nature of tax arrangements that span companies and continents, there is a need for more pairs of eyes, not less. Tax authorities have not been immune to swingeing public sector cuts, and despite all the new information available to them, there is a risk they will not see the wood for the trees.

Companies know that officials will only prosecute a small number of cases they are sure to win, so the deterrent effect will be minimal.

In many cases we are not talking about impartial and efficient administration, but painstaking negotiations between opposing legal teams poring over the accumulated loopholes, anomalies and case law that make the application of tax rules such an attractive intellectual sport for some.

In these circumstances, we do not have the rule of law, but the rule of lawyers.

The antidote

Fortunately, there is an antidote to this notion that taxation of multinational companies must of necessity be a black box.

Country-by-country reporting legislation, which requires public disclosure of financial information for each country of operation, is in place for EU banks since last year.

In July, the European Parliament voted for an extension of this measure to all large EU-based companies as part of the review of the Shareholders Rights Directive.

Now the Parliament needs to face down sceptical member states in negotiations that will start later this month, but if successful we would have a basic measure of transparency that would flag up the kinds of special arrangements that companies had with the Luxembourg authorities in other parts of the world.

It would allow an informed public debate on tax policy, rather than a debate that is currently informed by scandal and hearsay.

Resolution of the negotiations between Parliament and Council may fall to Dutch officials as part of their country’s presidency of the EU in 2016.

One rather hopes that they will remember the example of their eighteenth century forbears, for whom the corruption of the tax administration was a potent symbol of a wider malaise.

On such a vital topic, one that goes right to the heart of our conceptions of citizenship and representation, there really is no alternative to transparency and public engagement.

Carl Dolan is director of the Transparency International Liaison Office to the European Union (TI EU)