Financial Transparency Coalition

Last week, the European ministers made a call to establish a country-by-country reporting standard for multinational companies in the extractive sector – a much needed first step to curb tax evasion and avoidance in poor countries. This decision follows groundbreaking reports by the European Parliament to enhance global tax policies which would allow mobilising further development finance to meet internationally agreed development goals.

This is a partial victory for civil society organisations in Europe who have been strongly advocating for specific policy reforms to make global tax policies work for the poor.

European ministers take first steps to curb tax dodging from poor countries

On 10 March the European Competitiveness Council called upon “the Commission to come forward with initiatives on the disclosure of financial information by companies working in the extractive industry, including the possible adoption of a country-by-country reporting requirement, International Financial Reporting Standards (IFRS) for the extractive industry, and the monitoring of third-country legislation.”

This decision follows strong calls by the European Parliament for greater tax justice at home and abroad. Although the Council calls for a country-by-country reporting requirement for the extractive industry only, this is an important first step towards implementing such standard to all companies in all sectors – a decision which could make a breakthrough in the fight against tax evasion and avoidance by multinational companies.

Ministers follow groundbreaking Parliament’s recommendations

On 8 March 2011, the European Parliament (EP) passed two different and complementary non-legislative resolutions which set out the Parliament’s proposals for greater tax justice. Eurodad welcomes both resolutions which confirm the Parliament’s political leadership in raising the benchmarks of financial honesty at the global level.

These resolutions, on tax and development – “Cooperating with developing countries on promoting good governance in tax matters” (rapporteur: Eva Joly), and on innovative financing at global and European level (rapporteur: Anni Podimata), put forward proposals to mobilise further resources to finance development, including by curbing USD 800 billion (€575 billion) of tax-related illicit flows which escape poor countries every year without being taxed by country authorities.

Both resolutions call for the implementation of a financial transaction tax (FTT) which, according to the reports’ estimates, could raise “some €200 billion per year at EU level which could constitute a substantial contribution by the financial sector to the cost of the crisis and to public finance sustainability.” The Podimata report makes a bold call to implement the FTT at the EU level as a first step towards a global financial transaction tax.

Raising further resources for development is not only a matter of generating new global taxes, but also curbing existing tax evasion and avoidance which bleed developing countries’ finances at the rate of USD 160 billion a year. To this effect, the resolution on tax and development puts forward a number of specific measures to ensure that multinational companies comply with the highest standards of financial honesty and pay their tax dues in countries where they operate.

Making European companies pay their tax dues at home and abroad

The report on tax and development states that improving financial reporting by multinational companies is crucial to effectively combat tax evasion and avoidance from poor countries. Increased transparency in financial reporting is a necessary condition to ensure that the profits made and taxes paid by MNCs in poor countries are in the public domain. To make sure this information is useful and used by developing country authorities, it needs to be detailed enough, and tax authorities in poor countries need to build the capacities to be able to use it. More and better financial information, however, is a much-needed first step.

The report makes a set of specific and bold proposals to curb tax evasion including by calling:

• The European Commission to integrate a country-by-country reporting standard for multinational companies in forthcoming revisions of EU accounting laws which spell out what type of financial information European companies must report in their annual consolidated accounts;
  • The European Union to “work upon concrete proposals to ensure that the G20, the OECD, the UN and the WTO consider a broader set of indicators and methods for tackling trade mispricing,” which is “one of the most prominent drivers of illicit financial outflows” from developing countries;
  • The G20 and the OECD to set up mechanisms of automatic exchange of information on tax matters following the model of the EU savings tax directive, as a way of curbing illicit financial flows in secrecy jurisdictions;
  • The International Accounting Standards Board (IASB) to set up a country-by-country reporting standard that would require all multinational companies to report on the profits made and taxes paid in each of the countries in which they operate to ensure financial transparency;

• The international community to improve the international architecture to combat tax havens beyond the OECD framework, namely by revising tax treaties in order to include the possibility of granting the primary right to tax in the source country where real economic activity takes place.

Last week’s decisions are a partial victory for European civil society, which has been strongly advocating specific measures that could make tax policies work for the world’s poor. Civil society will continue putting pressure to the European decision-makers to make sure that greater financial honesty is required to all companies in all economic sectors.

Correction: Originally, this article mistakenly stated that tax evasion and avoidance “bleed developing countries’ finances at the rate of USD 160 million a year.” Tax evasion and avoidance actually cost developing countries’ USD 160 billion per year. The article has been updated to reflect this correction.