The tax affairs of big corporations in Europe are to be opened up to greater public scrutiny after the European Union (EU) resolved this week to rush out a new law by this summer compelling firms to reveal corporate profits and taxes on a country-by-country basis.
The new EU law is being driven by the public and political furore over allegations of tax avoidance by large corporates such as Apple, Google and Starbucks. On the back of this controversy, the EU is extending transparency reforms for banks and resources groups, to all large public and private companies. The new law could come into force as early as summer 2013, after EU leaders abandoned any reservations about more intrusive reporting rules at a mid-week summit.
The proposed changes could have far-reaching implications for big multinational corporations (MNCs) in Europe because, at present, the vast majority do not offer a breakdown of their tax, profits, revenues and staff numbers on an individual country-by-country.
Basing treasury and processing centres in low corporation tax countries, such as Luxembourg, Ireland or the Netherlands, as Google and Starbucks have done in the latter two countries, would be much more difficult in future if the proposed EU laws are adopted because the weight of public opinion in Europe at the moment is strongly against such measures. Apple has also faced similar criticism in the US.
Tim Cook, Apple’s chief executive, had to defend his firm’s policies in front of a confrontational US senate hearing, maintaining that: “We pay all the taxes we owe, every single dollar. We not only comply with the laws, but we comply with the spirit of the laws,” he said, after being questioned about how the company avoided billions of dollars in taxes on its international profits.
EU To Legislate on Tax Avoidance
Michel Barnier, EU commissioner for the single market, is working on legislative options for the proposed new disclosure rules. According to the ‘FT’, he is also exploring the idea of speeding up its implementation by amending an existing proposal from April on corporate reporting of social and environmental issues. An alternative fast-track approach is for EU lawmakers to table amendments to new rules on accounting issues, which are almost agreed and are expected to be voted through by the European Parliament next month.
Mr Barnier told the ‘Financial Times’: “It is necessary that large companies such as Apple, Google, Amazon that we have recently spoken a lot about – but not only these – are obliged to report how much tax they pay to whom and where.”
Sharon Bowles, chair of the parliament’s economic affairs committee, said the change of heart from ministers to “force proper transparency” should be made law as soon as possible. The directives on the verge of being passed should be “reopened rather than waiting”, she told the newspaper.
Corporate tax avoidance has risen on the EU agenda in recent months after it emerged that a series of MNCs paid little or no tax at all, in many of the countries where they operate. Notoriously, Starbucks told a UK parliamentary hearing that it had made no profits in the UK for well over a decade, despite its shops opening across the land during this time, and Google has been maintaining that it technically sells nothing in the UK, with all its sales being processed through Ireland, despite whistle blower reports to the contrary from its sales staff in the UK.
“We weren’t expecting this to come up [at the summit],” said Carl Dolan, EU private sector policy officer at Transparency International, the anti-graft lobby group, when speaking to the ‘FT’. “There was no sense that this was going to be tackled now, especially as previous efforts to force extractive companies to report on a country-by-country level were opposed [by several member states].”
Treasury Impact of Furore: News Analysis
The proposed EU legislation is the first concrete impact of the recent furore over the tax affairs of MNCs and the tax efficient structures that corporate treasurers have put in place in recent years as globalisation has progressed. The online commercial arena has particularly outstripped the ability of national governments to enforce national taxes on domestic operations when firms can easily set up elsewhere using new technology to process payments and transactions via offshore or low-tax alternative countries.
This has been common practice at large MNCs for some time now, but whether the practice can continue in the face of such public and political pressure on both sides of the Atlantic is debatable. Already the UK Prime Minister, David Cameron, has pledged to make the issue of the centrepiece of the country’s next staging of the G8 summit, in Northern Ireland next month. A push towards agreed international rules for taxation can be expected.
The leader of the UK’s opposition Labour party, Ed Miliband, has already accused Google of going to “extraordinary lengths” to avoid paying its taxes this week at the firm’s Big Tent event in the UK, as the political pressure continues to be retched up.
Google’s chairman, Eric Schmidt, defended the company in the press however, insisting that: “With respect to the current sort of issues, I don’t think a company should decide what tax policies should be, I think governments should.”
It’s a fair point that many a treasurer would agree with and it will be interesting to see if the next G8 is the beginning of a movement towards establishing international tax laws.
Schmidt also responded to Ed Miliband’s attack in the UK by saying that, “Google feels very, very strongly that tax information and tax policies should be done completely transparently”. If the EU laws come into force it appears that he may be about to get his wish.
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