The European Commission’s proposal for public country-by-country reporting of tax for large multinationals aims to discourage aggressive tax behavior and to get to grips with public unrest on tax avoidance. With this amendment to the Accounting Directive, it meets the public demand for more transparency on the tax strategies of large business and the fairness and efficiency of the tax system—against the backdrop of LuxLeaks and the Panama Papers. France, the United Kingdom, Greece, the Netherlands, and the European Parliament seem to be in favor of public country-by-country reporting.
The German Finance Minister, Mr. Schäuble, is not in favor. He is supported by Malta, Austria, and some tax advisor and business representatives. They claim that fiscal information is only meant for tax administrations. Tax administrations should fight tax irregularities and share information between them. Tax transparency would lead to a competitive disadvantage for Europe, increase costs of compliance, and disclose “company secrets.” It would also put pressure on tax administrations to levy more tax. “The public will decide the tax bill in the end,” so we hear. Furthermore, there is fear that, under the pressure of US multinationals, the US administration will respond with countermeasures.
The question is whether these arguments are of sufficient substance to counter the public and political pressure for more transparency. Here are 11 reasons to counter the arguments against tax transparency.
- For some industries, like extractive and banking, mandatory transparency regulations already exist. This has not resulted in market distortions—confirmed by companies subject to these transparency regulations. Why should these industries be transparent on tax and others not?
- Many companies are already voluntarily tax transparent or intend to become so in the near future.
- Non-transparency to avoid financial or reputational risks is foolhardy from a professional risk management perspective. It is gambling in the “tax-detection-risk lottery,” and it is not a sign of good corporate governance.
- The argument that ”company secrets” would be disclosed appears to be founded on the thought that, currently, data is safe within the company. Much (big) data is already publicly available. Furthermore, the information to be disclosed will not consist of secret formulas, but merely basic information on the difference between financial and tax accounting.
- Tax administrations already have more information than will need to be published. Dysfunctional tax administrations are not prevented by non-transparency in tax. In fact, tax transparency offers an opportunity to confront the public and politicians with the bad behavior of tax administrations.
- The argument that tax is too complicated to explain is not relevant. Try harder or implement less “unexplainable” structures.
- If transparency prevents tax optimization, and this is seen as a competitive disadvantage, then the question is, “how does this relate to a company’s (tax) governance and corporate social responsibility?”
- A company needs a functional tax control framework in order to be sure it can file timely, validated, and correct returns. Tax transparency in itself will not lead to serious additional administrative costs. The European Commission has looked into this.
- Countries are developing initiatives for more tax transparency on a state-by-state basis. Coordination and streamlining of international reporting standards via the European Union and the Organisation for Economic Co-operation and Development is needed to avoid a myriad of transparency regulations.
- After LuxLeaks and the Panama Papers, NGOs and journalists will keep publishing such information in a format over which taxpayers have no control. Voluntary transparency can result in more public and political understanding of the tax strategy of (transparent) companies.
- The United States itself has introduced regulations to improve transparency in risk management, reporting, exchange of information, and other areas.
In this era, in which tax has become a social media topic, multinationals are advised to develop a communication strategy on tax. The days when tax was the private playground of tax lawyers are over, whether mandatory tax transparency regulations are issued or not. To come to a consistent approach, the Commission’s proposal, therefore, deserves serious attention.