EU wants companies to disclose where they pay taxes

The European Union’s executive wants thousands of multinationals to disclose in what member states they make money and pay taxes, an effort to close loopholes and crack down on the use of tax havens.

Reacting to public anger over tax avoidance by some of the globe’s best-known companies and by recent revelations of offshore accounts for the rich and famous, EU Taxation Commissioner Jonathan Hill said he wanted “to make sure that taxes are paid where profits are generated.”

He presented proposals Tuesday that would force companies that have over 750 million euros ($850 million) in global revenues and do business in the 28-country EU to publish how much income tax they pay in each member state and how much they pay on outside-EU business.

Hill said the rules would specifically target companies that do business in nations or territories that disregard good governance standards on taxation.

“So if large multinationals active in Europe are paying tax somewhere like Panama, to take one example, they would need to make that public,” Hill said, taking a swipe at the Central American nation already at the heart of the latest tax avoidance scandal.

The Commission says it would affect some 6,000 companies overall, with socialist legislators estimating it would affect less than 2,000 EU companies.

The EU estimates it loses up to $80 billion in revenue every year because of tax avoidance, and ever since the global financial crisis forced budget cuts in many EU nations the outcry against tax avoidance by the rich has become louder.

“Using complicated tax arrangements, some multinationals can pay nearly a third less tax” than local companies operate only inside national borders, Hill said.

Over the past years, it has also become clear that companies operating in the EU could shop around among the bloc’s member states for the most convenient tax arrangement. That has led to several huge companies paying almost no taxes on the profits they generate within a country.

Hill’s proposal will now be taken up by the European parliament and the member states for discussion and possible adoption.

Under the proposal, the companies would have to publish on their web sites on a country-by-country basis anything from the number of workers, to net turnover, pre-tax profit and the amount of tax annually paid.

Professor Crawford Spence of Warwick Business School said it was “a small, but important step towards ensuring that multinational companies pay their fair share of tax” and lauded the public part of the proposal.

“Without transparency it would be impossible to shame companies into paying more. Of course, these sort of initiatives have a bigger impact on consumer facing organizations whose brand everybody recognizes, such as Google and Starbucks,” Spence said.

The AmCham EU group speaking for U.S. businesses said that even though it backs tax transparency it is “concerned that the proposal could have a potentially negative impact on EU competitiveness and attractiveness as an investment destination.”

“The critical focus should be on confidential reporting to and between tax authorities,” it said.