European Union: EU tax transparency is here to stay
Tax transparency and governance has moved up in the hierarchy of key topics and risks for the C-suite to monitor and manage. Tax has changed from simply just being in the exclusive realm of the tax director and being a compliance concern for multinationals, to becoming the more consequential strategic matter it is today. How you communicate on where and how you pay your taxes, and what your narrative is in terms of tax strategy and corporate social responsibility, has become increasingly important. This is due to the large increase in tax transparency requirements that have been mandated at international, EU and national levels. This trend started in 2012 and has intensified since revelations such as 'LuxLeaks', as well as the Panama and Paradise Papers. However, there are still quite a few CEOs, CFOs and tax directors – as well as tax advisors and others – who expect that the current transparency drive will soon blow over post-BEPS. So which one is it for tax transparency? Are we at the beginning of the end, or at the end of the beginning?
'LuxLeaks' in November 2014 was a game-changer. Under intense pressure from the European Parliament, NGOs and social media, the EU Commission kick-started a self-proclaimed "tax transparency revolution" in March 2015. Tax transparency then became the main catalyst for getting new BEPS-related tax legislation adopted at the EU faster than ever. Significant strides have been made since then. Still pending are two proposals for 'fair taxation of the digital economy'. The common consolidated corporate tax base (CCCTB) remains the 'end game' for the EU. The Commission opened a 'second front' through tougher enforcement of EU fiscal state aid rules. The Code of Conduct Group (Business Taxation) was revamped and the common EU blacklist has already forced 65 non-EU, 'non-cooperative' tax jurisdictions into becoming more transparent under the threat of EU sanctions.
The elephant in the room remains the Commission's April 2016 proposal for public country-by-country reporting (PCbCR). This amendment to the EU's Accounting Directive addresses the public demand for more transparency on the tax strategies of 'large undertakings', as well as seeking more fairness and efficiency of the tax system post-'LuxLeaks'. PCbCR has divided EU member states since the start. The European Parliament is overwhelmingly in support of PCbCR. A number of member states including France, Greece, the Netherlands, Spain and the UK also seem in favour. However, in April 2018, an EU Council representative told the European Parliament that there were 'unresolved political issues' preventing agreement in the Council.
Nevertheless, a May 2018 study conducted by Deloitte – which queried multinational companies in almost 40 countries – found that 80% of them expect PCbCR to be adopted in the next few years. So, in the perception of many corporate leaders around the world, the genie is out of the bottle, and it's just a matter of time before PCbCR will be implemented. Given the continued public interest in corporate tax, as well as a steady stream of new corporate tax abuse revelations, it appears PCbCR and issues of enhanced tax transparency and governance will remain firmly on the EU's agenda in the years to come. This poses challenges as well as opportunities to internationally operating businesses and their tax functions. Multinationals would do well to be prepared and develop a clear communication strategy on tax.