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Public CbCR fails to move forward in EU Council

EU ministers failed to agree on an approach to public country-by-country reporting (CbCR) because it puts European business at a disadvantage in the global market against China and the US.

After two years of deadlock on the transparency measure to disclose company profits and income tax liabilities in each EU member state, EU Council ministers failed to reach agreement in a majority vote on public CbCR at the EU Competitiveness Council (COMPET) meeting on November 28. Ministers continue to discuss the details on the EU Commission’s proposal for public CbCR, but want to advance the discussion in the Economic and Financial Affairs Council (ECOFIN).

A majority of 16 countries need to vote in favour of the proposal for it to advance. While the UK failed to vote and Germany abstained, 14 states, including the Netherlands, France and Spain, voted in favour of the proposal and 12 were against, including Ireland, Sweden and Luxembourg.

“Today it is sadly not possible to reach a general approach on CbCR,” said Timo Harakka, minister of employment in Finland, who chaired the COMPET meeting.

Although companies will welcome the lack of unanimity on the issue, tax justice campaigners are disappointed.

“"This is a bitter day for tax justice. A blocking minority of member states prevented more tax justice in Europe and sided with the tax havens,” said Sven Giegold, spokesperson for the Alliance 90/Greens party in the European Parliament.

However, the EU’s market growth is challenged by the expansion of China’s economy, which is comparable with the EU economy in terms of size, according to COMPET. Ministers said that the pace of growth in the Chinese and US markets is expected to outperform the EU in coming years, and there is greater need to protect the EU’s business environment while balancing the need for tax transparency.

Taxpayers would be relieved given that many are hesitant about whether public CbCR can offer insight into their wider business structures that hold sensitive information for EU companies to maintain a competitive edge.

“It’s not just reputational risk, but wider business competitiveness. Public CbCR offers tax information on EU-based companies, including insights into [tax] structures, but US companies don’t share this information under any such standard,” said one head of tax at a multinational manufacturing company ahead of the vote on November 28.

The legislative proposal requires multinational enterprises or standalone undertakings with a total consolidated revenue of more than €750 million ($830 million) in each of the past two consecutive financial years to disclose the income tax they paid in each member state along with other relevant tax-related information.

While there is significant political agreement on the content of the legislative proposal, the negotiations on the proposal have slowed in past years because of repeated disagreement over its legal basis. The legal challenge, which came up in the COMPET meeting, was whether the proposal should pass under a qualified majority vote or a unanimous vote.

Ministers from Luxembourg, Sweden, and Ireland brought up challenges to accepting such a proposal in the EU without finding similar measures in other jurisdictions such as Japan and the US.

“This country-by-country proposal is a consequence of BEPS Action 13 and it should include the OECD and G20 countries to come to a conclusion on what they want to achieve,” said Pierre Gramegna, Luxembourg minister of finance, who voted against the proposal and emphasised tax transparency under a fairer global tax system.

“The ultimate goal should be a level playing field at home as well as globally,” agreed Harakka. “We have to make sure that we don’t put multinationals in Europe in an uncompetitive situation as compared with global peers.”

Tax directors at large multinational companies have been looking ahead to adapt to challenges under public CbCR and other disclosures in 2019 by hiring risk analysts and other tax specialists to help develop in-house automation capabilities for analysing and distributing tax reports.

“This has taken a lot of my time in 2019,” said one indirect tax director at a multinational company that provides automotive parts. “We are still working on our automation and it’s challenging, but this has already started to make reporting easier,” he added.

Public CbCR will continue to stall under discussions of its legal basis and disadvantages in international business competition, but tax departments have already started preparing for more stringent disclosure measures as tax transparency pressures grow.

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