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EU reaches landmark decision on multinational tax transparency

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Yesterday (1 June) the EU’s co-legislators reached a provisional political agreement on the public country-by-country reporting (CBCR) directive, which will allow the public and tax authorities to see what taxes are being paid and where, but there’s a but. The new system will be limited to the EU countries and certain countries that are considered to be non-compliant with tax norms. 

“Corporate tax avoidance and aggressive tax-planning by big multinational companies are believed to deprive EU countries of more than €50 billion of revenue per year. Such practices are facilitated by the absence of any obligation for big multinational companies to report on where they make their profits. It is our duty to ensure that all economic actors contribute their fair share to the economic recovery,” said Pedro Siza Vieira, Portuguese minister of state for the economy and digital transition.

Speaking at the launch of a new EU Tax Observatory, MEPs Paul Tang and Sven Giegold welcomed the development. While some have criticized the limited reach of the reporting, Giegold defended it, saying 80% of profit shifting in Europe was between EU member states.

Transparent reporting of where multinational companies book their profits will highlight and help to address the use of accounting tricks that are used to “profit shift” to lower tax jurisdictions, with the sole objective of avoiding tax. Increasingly, those countries which have been losing tax revenue have insisted that the tax burden should be a fair reflection of real economic activity. 

Lead negotiator Evelyn Regner MEP (S&D, AT) said: “The Parliament has been fighting for this directive to be implemented for more than five years and today we were finally able to reach a deal with the Council. We have laid the foundations for tax transparency in the EU with this deal, and this is just the beginning.”

What will it mean for multinationals?

Countries with a revenue of more than €750 million, whether headquartered in the EU or outside, will have to disclose taxes paid in each member state, as well as in any third country which the EU includes in its list of ‘non-co-operative jurisdictions for tax purposes’.

A common EU template will be used to report in a machine-readable electronic format and will be available online. The data provided will need to be broken down into specific items, including the nature of the company’s activities, the number of full-time employees, the amount of profit or loss before income tax, the amount of accumulated and paid income tax and accumulated earnings.

The reporting will take place within 12 months of each financial year. The directive should be transposed into national law by the end of 2023.

Corporate tax rules

Big countries' tax deal to reveal rift in Europe

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European Competition Commissioner Margrethe Vestager wearing a protective mask leaves the EU Commission headquarters in Brussels, Belgium July 15, 2020. REUTERS/Francois Lenoir/File Photo

A global deal on corporate tax looks set to bring to a climax a deep-seated European Union battle, pitting large members Germany, France and Italy against Ireland, Luxembourg and the Netherlands. Read more.

Although the smaller EU partners at the centre of a years-long struggle over their favourable tax regimes, welcomed the Group of Seven deal on June 5. for a minimum corporate rate of at least 15%, some critics predict trouble implementing it.

The European Commission, the EU's executive, has long struggled to get agreement within the bloc on a common approach to taxation, a freedom which has been jealously guarded by all its 27 members, both large and small.

"The traditional EU tax holdouts are trying to keep the framework as flexible as possible so that they can continue to do business more or less as usual," Rebecca Christie of Brussels-based think tank Bruegel said.

Paschal Donohoe, Ireland's finance minister and president of the Eurogroup of his euro zone peers, gave the G7 wealthy countries' deal, which needs to be approved by a much wider group, a lukewarm welcome.

"Any agreement will have to meet the needs of small and large countries," he said on Twitter, pointing to the "139 countries" needed for a wider international accord.

And Hans Vijlbrief, deputy finance minister in the Netherlands, said on Twitter that his country supported the G7 plans and had already taken steps to stop tax avoidance.

Although EU officials have privately criticised countries such as Ireland or Cyprus, tackling them in public is politically charged and the bloc's blacklist of 'uncooperative' tax centres, due to its criteria, makes no mention of EU havens.

These have flourished by offering companies lower rates through so-called letter-box centres, where they can book profits without having a significant presence.

"European tax havens have no interest in giving in," Sven Giegold, a Green-party member of the European Parliament lobbying for fairer rules, said of the prospects for change.

Nevertheless, Luxembourg's finance minister Pierre Gramegna welcomed the G7 accord, adding that he would contribute to a wider discussion for a detailed international agreement.

Although Ireland, Luxembourg and the Netherlands welcomed the long-fought for reform, Cyprus had a more guarded response.

"The small EU member states' should be acknowledged and taken into consideration," Cyprus's Finance Minister Constantinos Petrides told Reuters.

And even G7 member France may find it hard to completely adjust to the new international rules.

"Big countries like France and Italy also have tax strategies they are determined to keep," Christie said.

The Tax Justice Network ranks the Netherlands, Luxembourg, Ireland and Cyprus among the most prominent global havens, but also includes France, Spain and Germany on its list.

Europe's divisions flared up in 2015 after documents dubbed the 'LuxLeaks' showed how Luxembourg helped companies channel profits while paying little or no tax.

That prompted a clampdown by Margrethe Vestager, the EU's powerful antitrust chief, who employed rules that prevent illegal state support for companies, arguing that such tax deals amounted to unfair subsidies.

Vestager has opened investigations into Finnish paper packaging company Huhtamaki for back taxes to Luxembourg and investigating the Dutch tax treatment of InterIKEA and Nike.

The Netherlands and Luxembourg have denied the arrangements breach EU rules.

But she has had setbacks such as last year when the General Court threw out her order for iPhone maker Apple (AAPL.O) to pay €13 billion ($16bn) in Irish back taxes, a ruling which is now being appealed.

Vestager's order for Starbucks to pay millions in Dutch back taxes was also rejected.

Despite these defeats, judges have agreed with her approach.

"Fair taxation is a top priority for the EU," a spokesperson for the European Commission said: "We remain committed to ensuring that all businesses ... pay their fair share of tax."

The Netherlands in particular has underscored a willingness to change after criticism of its role as a conduit for multinationals to move profits from one subsidiary to another while paying no or low taxes.

It introduced a rule in January taxing royalties and interest payments sent by Dutch companies to jurisdictions where the corporate tax rate is less than 9%.

"The demand for fairness has grown," said Paul Tang, a Dutch member of the European Parliament. "And now it is combined with a need to finance investment."

($1 = €0.8214)

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Economy

Global Europe: €79.5 billion to support development

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The EU is set to invest €79.5 billion on development and international cooperation in neighbouring countries and further afield by 2027, Society.

As part of its 2021-2027 budget, the European Union is overhauling how it invests outside the bloc. Following a landmark deal with EU countries in December 2020, MEPs will vote during June's plenary session in Strasbourg on establishing the €79.5bn Global Europe fund, which merges several existing EU instruments, including the European Development Fund. This streamlining will allow the EU to more effectively uphold and promote its values and interests worldwide and respond more swiftly to emerging global challenges.

The instrument will finance the EU's foreign policy priorities in the coming seven years and support sustainable development in EU neighbourhood countries, as well as in sub-Saharan Africa, Asia, the Americas, the Pacific and the Caribbean. Global Europe will support projects that contribute to addressing issues such as poverty eradication and migration and promote EU values such as human rights and democracy.

The programme will also support global multilateral efforts and ensure the EU is able to live up to its commitments in the world, including the Sustainable Development Goals and the Paris climate accord. Thirty percent of the programme’s overall funding will contribute to achieving climate objectives.

At least €19.3bn is earmarked for EU neighbourhood countries with €29.2bn set to be invested in sub-Saharan Africa. Global Europe funding will also be set aside for rapid response action including crisis management and conflict prevention. The EU will boost its support to sustainable investment worldwide under the European Fund for Sustainable Development Plus, which will leverage private capital to complement direct development assistance.

In negotiations with the Council, Parliament ensured MEPs’ increased involvement in strategic decisions regarding the programme. Once approved, the regulation on Global Europe will retroactively apply from 1 January 2021.

Global Europe is one of 15 EU flagship programmes supported by the Parliament in the negotiations on the EU's budget for 2021-2027 and the EU recovery instrument, which collectively will allow the Union to provide more than €1.8 trillion in funding over the coming years.

Global Europe 

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Economy

Parliament calls for greater scrutiny over national recovery plans

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Iratxe García Pérez MEP, Leader of the S&D Group

MEPs held a debate on national recovery efforts today (8 June) demanding oversight of the implementation of the Recovery and Resilience Facility (RRF).

In a resolution adopted in May with 602 votes in favour, 35 against and 56 abstentions, MEPs restated that, in line with the contents of the RRF Regulation, the European Parliament is entitled to receive relevant information on the state of play on the implementation of national recovery and resilience plans (RRPs).

To ensure greater transparency and democratic accountability of national recovery and resilience plans, MEPs expect to receive from the Commission the necessary background information as well as a summary of the reforms and investments from the national plans it has received. They also expect this information to be provided to Parliament in an easily- understandable and comparable format.

On Tuesday, MEPs will discuss with the Commission and the Council the ongoing evaluation of the national recovery plans submitted so far by EU member states. The European Parliament wants to verify that the six agreed policy areas of the green transition, digital transformation, competitiveness, social cohesion, institutional crisis-reaction and preparedness, as well as the next generation including education and skills are covered in each plan. 

Leader of the S&D Group Iratxe García Pérez MEP said: “We have to make sure that those governing in Hungary, Poland, Slovenia and Bulgaria actually comply with rule of law and do not divert funds into the hands of their friends.”

Citizens' ownership

MEPs argue that full transparency and accountability involving Parliament would both ensure and enhance the democratic legitimacy and sense of citizens' ownership of the RRF. In order to ensure the involvement of civil society, and local and regional authorities in the implementation of the plans, MEPs call on the Commission to prompt member states to consult all national stakeholders and to monitor them to make sure consultation takes place for any future amendments or for new plans.

President of the European Commission Ursula von der Leyen also underlined the important role for MEPs in the process in  what she described as a European recovery saying: “We Europeans are in this crisis together, we will come out of it together, we will come out stronger than ever before. Next Generation EU has shown how much we can achieve when we all work together. So with more confidence than ever.”

All EU member states have now ratified the Own Resources Decision (ORD) this allows the Commission to start to borrow for the first time to finance the Next Generation EU. Countries have started submitting their plans for scrutiny by the European Commission, and approval by the Council of the EU. It is expected that pre-financing upfront payments could be made by as soon as September.

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