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By Joe Kirwin
European Union member states soon will discuss a proposal under which European multinational companies would only have to publicly disclose their profits and taxes paid on a country-by-country basis if their net turnover exceeds 750 million euros ($817.5 million) for two consecutive years.
According to a new confidential compromise proposal drafted by European Union presidency holder Malta—seen by Bloomberg BNA—the “comply or explain” approach has also been scaled back for multinational companies if they didn’t provide public country-by-country reports on profits earned and taxes paid.
Slovakia, which previously held the rotating EU presidency, proposed the “comply or explain” approach in December 2016 to reach a compromise among the 28 EU member counties.
EU member states are due on May 17 to discuss the Malta compromise plan on public country-by-country reporting.
Unlike the original April 2016 European Commission proposal, the latest revision of the public country-by-country reporting legislation would give companies a reprieve from public country-by-country reporting if their net turnover dipped below 750 million euros for a year.
“Multinational groups, and where relevant, certain non-affiliated undertakings, should provide the public with a report on income tax information when they exceed a certain size over a period of the last two consecutive financial years, depending on consolidated revenue of the group or the revenue of the non-affiliated undertaking,” the Maltese compromise document states.
It adds that given the wide array of accounting frameworks with which financial statements may comply, “such revenue should be defined as the net turnover for undertakings.”
After opposition to the “comply or explain” approach from some EU member states led by the Netherlands, the Malta plan would exclude it except for subsidiaries to multinational companies with headquarters outside the EU.
The compromise proposal also inserts language that would mean only multinational companies “operating” in the EU would be covered by the public country-by-country reporting proposal. Critics, especially those from tax justice advocacy groups, say this change would allow letter box companies—which seek to minimize tax liability by establishing domicile in a tax-friendly country with only a mailing address while conducting their business elsewhere—to be exempt.
Overall the Malta compromise retains key features, which include allowing multinational companies with operations outside the EU to provide profit and tax reporting on an aggregate basis instead of on a country-by-country basis. The only exemption would be when an EU-based multinational has operations in any country or jurisdiction on an EU tax haven blacklist, due to be finalized by the end of 2017.
While the pending plan in the Council of Ministers is an effort to close gaps among EU member states, it is a long way from a pending plan on the same legislation before the European Parliament, which calls for all EU companies with a turnover of 40 million euros ($43.6 million) to be covered by mandatory public country-by-country reporting on profits and taxes, including all operations outside the EU.
In recent weeks, opposition to the European Parliament’s 40 million euro threshold plan has emerged. As a result, intensive efforts are ongoing to resolve differences before a vote due to take place by the end of May in the European Parliament’s Committee for Economic and Monetary Affairs.
The European Commission proposal for public country-by-country reporting has been controversial from the start since it goes beyond the Organization for Economic Cooperation and Development reforms to prevent multinational base erosion and profit shifting—the OECD’s plans would only require tax and profit reporting to national tax authorities.
In recent months the EU business community has lobbied intensely against public country-by-country reporting, especially vis-à-vis the terms pending in the European Parliament.
Informed of the Maltese presidency plan for a two-consecutive-year approach to the 750 million euro threshold instead of an annual basis, James Watson—an official with BusinessEurope lobby group that represents more than 10,000 EU companies—told Bloomberg BNA in a May 12 email that any change that makes the proposal less burdensome for business is welcome.
However, the BusinessEurope official insisted that “our feeling remains that with public CBCR Europe is taking an unnecessary risk with our companies’ competitiveness. As OECD members have agreed, the fight against tax fraud and evasion is best taken forward by sharing information between tax authorities, provision for which the EU has already put in place.”
The European Network on Debt and Development (Eurodad) advocacy group believes the Malta presidency’s plan further dilutes what it insists is an already weak plan drafted by the European Commission.
“Malta’s proposal is to make the directive even weaker,” Tove Maria Ryding, a Eurodad official, told Bloomberg BNA in a May 12 email.
“By suggesting that the directive should only include subsidiaries that are ‘operating’ in the EU, you risk that letterbox subsidiaries can dodge the transparency requirements. From the perspective of exposing multinational corporations that are dodging taxes, this would be highly problematic since the letterbox companies, while often not doing any real business activity, can play a key role in the tax set up of the corporation,” she said.
Ryding also criticized the two-year threshold approach proposed by Malta.
The legislation must get approval in both the Council of Ministers and the European Parliament before it can become EU law. Both institutions must reach a compromise agreement that resolves their differences.
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