EU Parliament May Lose Right to Veto Public Tax Reporting

The European Parliament risks losing the right to veto plans to make multinational companies publish tax and profit details for the countries in which they operate, according to the European Union’s legal advisers.

The Council of Ministers’ legal service insisted in its opinion, seen by Bloomberg BNA, that the European Commission’s decision to base the public country-by-country reporting proposal on EU single market law as accounting legislation is “flawed” and that this proposal should be a tax legislation issue decided on the basis of unanimous consent.

The opinion said the April proposal should have the same legal basis as legislation approved earlier in 2016, which requires large multinational companies to provide country-by-country reporting of tax and profit details to EU countries’ tax authorities.

“The primary objective of the proposed measures are to deter tax avoidance by exposing the multinational companies to public scrutiny and that the scope of the draft directive is similar to the DAC4,” the legal service said, referring to the 4th Directive on Administrative Cooperation, which includes amendments requiring automatic exchange among tax authorities of tax data on individuals.

The council’s legal service opinion, which took more than five months to draft, concluded further that the European Commission’s proposal “has been based on flawed reasoning mixing up aims and means.”

Lawyers for the council added that the legal basis should be Article 115 of the EU treaty, which requires all tax legislation to be approved unanimously.

Despite the Council of Ministers’ legal opinion, the European Commission stood by the legal basis of the April proposal.

“We take note of the council legal service opinion and are currently studying the arguments put forth,” commission spokeswoman Vanessa Mock told Bloomberg BNA Nov. 14. “We remain confident in our proposal” and with Article 50 of the Treaty on the Functioning of the European Union—the article on withdrawing from the European Union—”as the appropriate legal basis.”

The European Court of Justice is expected to be asked to rule on the issue.

Clear Opinion, ECJ Challenge

EU member countries are due to review the legal opinion by the Council of Ministers’ lawyers Nov. 17.

“The important point about this legal opinion is that it is very clear,” a Council of Ministers official told Bloomberg BNA Nov. 14 on the condition of anonymity.

“Quite often the legal opinions are rather cryptic and you can interpret them in various ways. Considering how adamant that the legal basis is wrong I am sure that ultimately this issue will end up before the European Court of Justice as a result of either a legal challenge by member states or other EU institutions.”

In order for the EU member states to force a change in the legal basis it would take the unanimous consent of all 28 countries to request that the proposal be sent back to the European Commission to be redrafted.

It will be up to Slovakia, which holds the rotating EU presidency, to decide whether to push forward with the legislative legislative negotiations in the Council of Ministers.

European Parliament Objections

The commission’s decision to consider the public country-by-country draft legislation as single market legislation provides co-decision voting rights to the European Parliament. Losing those rights triggered howls of protest by various parliamentarians who insisted that EU countries with low tax rates are the driving force behind efforts to change the legal basis.

“The attempt by the council to give veto power to each of the EU’s tax havens and also shut the European Parliament out effectively by amending the legal basis shows that they are still not serious when it comes to corporate transparency,” Fabio De Masi, a German member of the European Parliament who also serves on the special Panama Paper investigative committee, told Bloomberg BNA Nov. 14 in an e-mail.

In 2014 the parliament succeeded in forcing EU member countries to accept changes to the EU Capital Requirements Directive—adopted in the wake of the 2008 financial crisis—which compels public country-by-country reporting from large financial institutions operating in the EU. That data was published for the first time in 2016.

The commission’s pending proposal calls for all multinational companies operating in the EU with an annual turnover of 750 million euros ($806 million) to provide public country-by-country tax and profit details.

The proposal calls for multinational companies to provide aggregate details of operations outside the EU unless they conduct business in any country or jurisdiction that ends up on an EU tax haven blacklist due to be finalized by the end of 2017.

Accounting Versus Tax Data

Tommaso Faccio, a lecturer on company tax law at the U.K.’s University of Nottingham, told Bloomberg BNA Nov. 14 that he supports the view that the public country-by-country proposal involves accounting data and not data required for assessing taxation.

“Most of the data the multinational companies will need to prepare their country-by-country reporting will be accounting data and some of the data required is something the multinationals already prepare to comply with their disclosure requirements in their consolidated accounts,” Faccio said.

He said this this includes data on International Financial Reporting Standard 8 on segment data, which allows and encourages the publication of data on a geographic basis, broken down by territory.

An official with the council indicated that approximately 10 EU member countries oppose the legal basis proposed by the European Commission and requested the legal analysis.

These nations are understood to be concerned about ceding sovereignty on tax issues and also object to the proposal because it goes beyond the OECD’s recommendations for tackling tax base erosion and profit shifting, possibly leading to double taxation for EU-based multinational companies conducting business in India and China.