Financial Transparency Coalition

EU Commission headquarters in Brussels | Photo: TPCOM, Flickr

The European Commission has recently opened a consultation process until 23 August 2010 calling for views to modify a regulation that sets out minimum transparency requirements for listed companies.

The Transparency Directive was adopted in 2004 with the aim of improving the information available to investors on companies’ performances to help them make investment decisions. Now, the so-called TOD Directive is under revision.

Where the directive currently falls down

As it currently stands, while the Directive covers a large range of firms, namely, those whose securities are admitted to trading on a regulated market, it only offers EU Member States the possibility of adopting country by country reporting for the extractive industries and only on a voluntary basis. The modernisation of the Transparency Directive should uniformly require companies that fall under the scope of the Directive to report their financial accounts in every country in which they operate.

The European Commission should introduce mandatory country by country reporting for EU listed companies

A requirement for country by country reporting by extractive industries has recently been set by United States legislation, (US Financial Reform Bill), thus creating an important precedent. The Provision1504, (Disclosure of Payments by Resource Extraction Issuers), requires oil, gas and mining companies registered with the Securities and Exchange Commission (SEC) to publicly report how much they pay each government for access to their oil, gas and minerals.

Following the US example but going beyond it and beyond the current Transparency Directive, the Commission should make country by country financial reporting a binding requisite for all companies listed in the Directive, and not just those in the extractive industries.

The International Accounting Standards Board (IASB) is also considering the introduction of a country by country reporting requirement during the review of the International financial reporting standard for the extractive industries (IFRS6). The European Commission should adopt a leading and proactive role by including such a requirement in the revised Transparency Directive. This would put pressure on the IASB to act similarly during the IFRS6 review process, since a significant number of countries that apply the IASB standards are also EU Member States.

Within the EU, the European Parliament has called for mandatory country-specific reporting requirements for the extractives sector in particular, and for listed companies in general, on several occasions[1].  The June Council of the EU’s conclusions on tax and development acknowledged that country by country reporting would contribute to improve domestic resource mobilisation in developing countries.[2]

The requirement for country by country financial reporting would benefit investors by giving them access to information that would help them to judge country-specific risks and, therefore, make investment decisions. In addition, governments would be able to ensure that firms pay a fair share of taxes and it would be easier to prevent transfer mispricing, tax evasion and avoidance. Finally, citizens would have a better chance of holding companies and governments to account.

The Transparency Directive, if modified to include a binding requirement for country by country reporting, would help solve these problems, to boost investors’ confidence and governments’ accountability. Many multinational corporations are listed within the EU. The information from these firms’ financial reports, if disaggregated on a country by country basis, would be a basic tool in building such transparency and accountability.

Details about the consultation.

Read Eurodad’s submission to the consultation process on the modernisation of the Transparency Directive, which explains how your organisation can also make a submission, using Eurodad’s letter template.

Footnotes

[1] Resolution P6_TA(2007)0526, passed 14^th of November 2007.

See also the following EP reports: European Parliament resolution of 25 March 2010 on the effects of the global financial and economic crisis on developing countries and on development cooperation (2009/2150(INI)); European Parliament resolution of 10 February 2010 on promoting good governance in tax matters (2009/2174(INI)) and European Parliament resolution of 20 January 2010 on the second revision of the ACP-EC Partnership Agreement (the “Cotonou Agreement”) (2009/2165(INI))

[2] Council conclusions on tax and development – cooperating with developing countries in promoting good governance in tax matters. 3023rd EU Foreign Affairs Council meeting, Luxembourg, 14 June 2010.