The EU is going to fail on country-by-country reporting

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The Financial Times has reported that it has a leaked copy of the EU’s proposed standard for country-by-country reporting, and that it falls well short of anything remotely deserving of that title. As it has said:

In a significant disappointment for tax-justice campaigners, the scope of the disclosure rules will be limited to activities within Europe, leaving a lack of transparency on profit shifting to non-EU tax havens such as the Cayman Islands and Bermuda.

Crucially, data on activities outside the EU would not have to be broken down country by country. Instead, firms could aggregate data on, for example, profits made in all non-EU countries into one lump sum. The same applies for taxes and other information to be disclosed.

This is not, of course, country-by-country reporting. It is EU zone reporting at best. It fails the demand made by the Parliament of the Commission, which was in effect for the publication of the full OECD template for country-by-country reporting for all countries in which the multinational group trades, without exception. That publication would begin to approximate to what country-by-country reporting should be; narrative explanation of the results on this basis and their full reconciliation with the published consolidated information being a necessary condition to come close to anything really fully deserving of that title. 

So why has this planned failure arisen? According to the FT:

Commission officials defended their approach, saying that pushing the plans any further would have led the EU into a legal minefield. A specific concern was to prevent discrimination against EU companies vis-à-vis their global competitors.

Very politely, this is nonsense and no one should fall for it. We know there is no problem whatsoever in the EU demanding that information relating to the trading of multinational companies outside its territory be published for four reasons. The first is that this is required by  the EU law that requires a company to prepare consolidated accounts for all its operations, wherever they might be.

The second is that under the EU endorsed International Financial Reporting Standard 8 on segment data it is permissible and encouraged that a company publish a geographic summary of its trading wherever it might be, and if such information is regularly presented to its board of directors them it us obliged to do so. As I argued to the IFRS Foundation when IFRS 8 was last revised, country-by-country reporting is just an elaboration of this in a specific form. To argue that it is not legally possible to publish this data is, then, just wrong.

Third, under the EU’s own new rules relating to disclosure by banks under the Capital Reporting Directive IV a subset of country-by-county reporting data is required to be published. No one has legally challenged the validity of this legal requirement and banks are actually publishing it.

Finally, the EU does, in another variation on this theme require that companies operating in the extractive industries publish significant amounts of data on their taxes paid in countries outside the EU.

For all these reasons to pretend that there is any legal reason that prevents the publication of country-by-country data should candidly be bluntly dismissed as straightforwardly untrue. Instead what my sources tell me is that the suggestion has been made in this form to appease the USA.

In the USA the inclusion of country-by-country reporting data in tax returns is seen as a European imposition on US companies even though it is actually an OECD issue. It is massively resented by the Republicans and is only being implemented because it has been argued that it is a mere administrative reform to tax returns not requiring legislation for approval, which would be blocked if it was proposed, like most things of any value are in the US these days. But, in a compromise the IRS thinks it has to make to get the data I understand that they have told the EU that they believe that the OECD stipulation that the data be unpublished is binding and that if any country or countries publish data for jurisdictions other than their own then they will not share data the US receives on CBCR with them. Apparently they accept the EU as one administration for this purpose.

So, the threat of legal action is from the U.S. here and the issue arises because the OECD rules do not require that a group of companies submit its country-by-country report to all the countries in which it trades but only to the tax authority of its parent company, which is then legally bound to share it, which is what it looks like the US is refusing to do. The consequence is that the US can hold the EU to ransom as a result.

Three issues arise. First is why the EU has ignored the line Australia and China are following, which is to say that if the US will not share they will demand the data from subsidiary companies, come what may. This would end this US stranglehold.

Second, the question arises as to why the EU does not use the leverage of its funding of the IFRS Foundation to simply make this an accounting standard. This accounting profession controlled body has long refused to engage with county-by-country and I think the time for its effective objection, when it is supposed to act in the public interest, has to come to an end or it must lose its EU mandate.

Third, the OECD has to change its rules.

The absurd situation where markets are denied data to fuel the paranoia of the supposed free market loving American right cannot be tolerated. There is a bumpy ride ahead on this issue, and I predict real problems for the European Commission with this current, wholly inadequate, proposal.