Financial Transparency Coalition

Photograph by JLogan

On Monday 14^th, the European Council adopted conclusions on tax and development, giving its support to last April’s Commission Communication “Cooperating with Developing Countries on Promoting Good Governance in Tax Matters”. Eurodad welcomes these conclusions, which put capital flight, including tax avoidance and tax evasion high on the EU and Member States’ agenda. The Council acknowledges that tax avoidance and tax evasion are “a major obstacle to domestic resource mobilization” for developing countries and that capital flight “requires efforts from both developed and developing countries”. The Council conclusions include the following:

Support for a Country by Country (CBC) reporting requirement for Multi National Companies (MNCs):

We regret that the Council has not been more assertive and explicit in this point and limits itself to exploring CBC reporting as a standard for MNCs. Yet, it is very positive that the Council calls on EU Member States to “support ongoing consultation by the IASB on a country-by-country reporting requirement in IFRS 6 for the extractive sector” and beyond. The fact that the Council encourages IASB to go beyond the extractive sector is a significant step forwards and will be particularly relevant during the forthcoming IFRS 8 review, to be conducted by the European Commission in 2011.

Promote an international framework for exchanging information on tax matters:

Such a framework would include a multilateral and automatic information exchange instrument and the availability of the beneficial ownership of all legal structures. This is a very welcome step. Nonetheless, while the conclusions consider the three options: automatic information exchange, spontaneous and on request models, we regret that the Council does not differentiate between these models, and importantly, that it does not make explicit how the automatic model is the most effective to combat cross border tax evasion.

Reduce incorrect transfer pricing practices:

While this is a very welcome objective, the proposals to do so are excessively vague and weak. The Council supports research on innovative approaches to tackle this problem, which is welcome, but at the same time it supports the implementation of the OECD guidelines on transfer pricing, which CSOs consider very inadequate to effectively address the problem and excessively complex to be implemented by poor countries.

Address IFI use of tax havens:

The Council states that International Financial Institutions (IFIs) should avoid “that EU funds are being used directly or through Offshore Financial Centers (…) for the purpose of evading tax payment”. This is a very welcome step that should be closely monitored. The Council also calls on the IMF to look, within the Reports on Observance of Standard and Codes, at whether a country is committed to the exchange of tax information and whether it treats “fraud” as a criminal offence that should be treated as money laundering. While this is very welcome, we regret that it only considers the term “fraud” and did not include “evasion”, in accordance with the spirit of the conclusions.

Support of greater participation of developing countries in international fora dealing with tax issues:

This is a positive step, but the conclusions here lack a more detailed explanation on how the EU and its Member States will proceed on this at the international level. Moreover, we deplore that while the Council encourages the Commission and Member States to financially support initiatives such as CIAT and ATAF, it does not at all financially support the UN Tax Committee, as CSOs have long been calling for.

Overall, the Council conclusions are an important step forward in addressing key issues related to tax evasion and development. These recommendations should now be endorsed by EU heads of State in their forthcoming European summit on June 17. But overall, they should be followed by a swift and practical translation into concrete measures. This will be the acid test of the commitment and leadership of the EU and its Member States in the fight against tax evasion, and in its commitment to stronger international cooperation with developing countries on tax matters.

Find here the full Eurodad response to the Council conclusions on tax.