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June 14, 2017

Public country by country reporting tumultuous journey in EU legislation

By Vincent Huck

Earlier this week a vote at European Union (EU) on amending Directive 2013/34/EU which would introduce amongst other changes public country-by-country reporting (PCBCR) was inconclusive.

The vote took place at a joint Committee on Economic and Monetary Affairs (ECON) and Committee on Legal Affairs (JURI) meeting, and this magazine understand that the draft report received 38 votes in favour, 9 against, and 36 abstentions (predominantly from the Social and Democrats (S&D) and the Green MEPs). Which is sufficient support at committee level but not sufficient enough to allow for the parliament to start trialogue negotiations.

As a result the report was sent back to the EU Parliament for debate in a plenary session, although the date was not fixed.

Contacted by this magazine, a spokesperson for the S&D said: “Our S&D members in ECON and JURI committees abstain at the end because an amendment tabled by the EPP and the Liberal went through watering down the ambition of the legislation.  Basically, this amendment will give a large exemption to companies to the obligation of disclosing information. Then it was decided to go to plenary in order to have a chance to re-table our own proposals.”

The vote comes after a few weeks of intense lobbying from various groups in favour and against the proposals. Amongst those was a joint letter by associations representing European businesses which argued that PCBCR will undermine the EU industry’s competitiveness and international tax co-operation as well as lead to erroneous interpretation and unjustified reputational damage.

“Businesses support transparency and the objective to fight tax fraud and evasion. Tax authorities, under BEPS Action 13, will receive all information needed to determine whether companies meet their tax obligations in all the jurisdictions where they operate. Tax authorities are best equipped to do so as they master complex tax laws and understand the various situations of companies,” the letter read. “We are seriously concerned that the Commission’s proposal would put EU companies at a competitive disadvantage towards their competitors and business customers and damage the attractiveness of the EU as an investment destination, ultimately undermining the European economy.”

Unfair competition
One of the signatories’ main concerns is that disclosure to the public of such information would allow competitors and clients to work out profit margins and other business information which would unveil a company’s strategy and lead to unfair competition.

However Richard Murphy, professor of practice in international political economy at City (University of London) talking to this magazine said: “Free markets can only operate if there is open and transparent data. That is what economic theory tells us. It is what practice tells us. Opacity creates market abuse and monopolies. Country-by-country reporting creates more transparency. It is about delivering the data to create effective, open and competitive markets. The existing opacity does the opposite and those who say otherwise are defending market abuse.”

Effect on international tax co-operation
In their joint letter the associations representing European also expressed their concern that PCBCR would undermine international tax co-operation. “Public CBCR would undermine the agreement reached at the international level (OECD BEPS Action 13) on the automatic exchange of CBCR information among tax authorities,” the letter read.  

While to date, 57 countries (including 25 Member States), have agreed to exchange data between tax administrations, signatories worry that certain third countries may refuse to exchange tax information if CBCR information were to be made public, as they argued this international agreement was reached under the condition that the confidentiality of information exchanged is safeguarded. “For instance, the USA has already made it clear that they would not exchange CBCR reports with tax administrations of countries that have implemented public CBCR.”

Murphy also disagreed on this point saying: “It is ludicrous to say that public country-by-country reporting will undermine tax cooperation. CBCR is accounting data. It is not tax data. Arguing that sharing it harms tax cooperation is like saying accounts on public record are threat to tax collection. The argument makes no sense at any logical level and is instead a threat by countries that are defending tax abuse against those who are trying to defeat it.”

Erroneous interpretation and reputational damage
The third and final concern raised in the joint letter had to do with the risk that PCBCR might lead to erroneaous interpretation and unjustified reputational damage.

“A proper assessment of companies’ tax positions requires deep expertise and knowledge not only of domestic and international tax laws and accounting standards, but also of the legal structure of the company group, of the nature and structure of the transactions between the group’s different entities and the history of its tax assets and liabilities,” the letter read. “The information disclosed under Public CBCR would be insufficiently comprehensive to provide a full understanding of companies’ activities, the inevitable result would be inaccurate comparisons, erroneous interpretations, and wrongful accusations against European companies.”

As a consequence, the letter continued, there would be a correlative impact on time and energy to contain the reputational damage instead of focusing on the real business and long-term value creation.

Murphy also rebuffed that argument saying that if PCBCR leads to erroneous interpretation it is wholly the fault of the company that is reporting. “If they can't prevent true and fair accounts they should expect to be misinterpreted. Nothing in CBCR prevents a company issuing narrative notes to aid their interpretation.”

The letter's signatories are:

  • The European Confederation of Directors Associations
  • Eurochambres
  • European Issuers
  • Association francaise des entreprises privees
  • Association Nationale des Societes par Actions
  • Associazione Fra Le Societa Italiane Per Azioni
  • Bundesverband der Deutschen Industrie eV
  • Deutsches Aktieninstitut
  • Confindustria
  • Mouvement des entreprises de France (MEDEF)
  • Federation of Belgium Companies (VBO/FEB)
  • The Federation of Austrian Industries

The letter is available online here

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