EU Transparency Rules: Needed in All Sectors

November 9th, 2011

flickr / ines saraiva

The European Commission released a proposal for country-by-country reporting on 25 October, this will help to address corruption surrounding extractive industries and logging. However this will not address the larger problem of tax dodging which is prevalent in these industries and widespread in all other sectors. European parliamentarians and member states could improve the proposal so that tax issues in all sectors are covered.

This is a very valuable reform which will help people in resource rich countries get a better deal for their resources from companies and their own governments. This would not have been possible, without the landmark Dodd Frank act in the USA. Positively this proposal goes beyond Dodd Frank, most notably large private companies will be covered (both listed and non listed) and the forestry sector, where corruption, human rights and environmental abuse are prevalent is included. Revenue Watch argued that this proposal will hopefully make US regulators see that Dodd Frank should be viewed as just a starting point, in the drive for transparency, which should apply to corporations as well as governments. The EU standards are weaker than Dodd Frank in some areas, for example they allows exemptions where host country laws prohibit disclosure of the information, such laws might proliferate if the bill is introduced.

The EU rules made as part of the proposed revisions to the Transparency and Accounting directives require that extractive industry and forestry companies declare the payments they make to governments in every country that they operate in. This applies to listed and large non-listed companies. The proposal contains a review clause to assess the changes within the first five years after implementation, to consider extending the proposal to other sectors. However it makes little sense to wait to take measures needed now. Eurodad has produced a hard hitting report detailing why country-by-country reporting is needed in all sectors, this will be launched in the European Parliament on 21 November. It argues that under-resourced revenue authorities in developing countries would benefit especially much from full country-by-country reporting. Evidence presented in the report finds that extractive commodities are only a small part of the problem and accounted for just 5% of the trade mispricing activity taking place between the EU and third countries in 2007. This clearly suggests country-by-country reporting is needed in all sectors.

There was acknowledgement of this in Internal Market Commissioner Michel Barnier’s statement “we need to ensure all companies, not just social businesses, take their impact on wider society seriously: that’s why I also want big multinationals – in particular those in the forest and mining industries – to be more open about what they are paying to governments across the world.”

However, while disclosing information on payments will certainly help combat corruption and improve governance, it will fail to tackle corporate tax dodging, because further information is needed in order to asses if payments made are consistent with the economic performance of companies. Eurodad and Publish What You Pay have detailed for the sort of country-by-country reporting that is needed to tackle tax dodging in the extractive sector. Companies should disclose other financial information beyond payments to governments. This should include:

  • Production figures
  • Name of all subsidiaries,
  • Profits
  • Intra-company loans
  • Staffing levels

The European Parliament and Member States now have the opportunity to amend and improve these proposals, so they tackle both corruption and tax dodging.

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Written by Alex Marriage

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