In issue 47 of the Cayman Financial Review I have illustrated how the misuse of country-by-country (CbC)-type data facilitates the publication of misleading tax gap estimates. To counter the tax grabbing agenda that is promoted based on such inflated estimates, I have urged and pleaded with those tax practitioners wishing to preserve tax competition to challenge these questionable estimates and to put BEPS in a more somber perspective. Considering the rather worrisome recent developments within the EU, notably the further steps towards the introduction of compulsory public CbC-Reporting and the adoption of the Common Consolidated Corporate Tax Base (CCCTB), I feel compelled to renew my plea. Underestimating the long-term effects of these ostensibly technical and preliminary legislative proposals on the degree of tax harmonization and indeed, in more general terms, the further centralization of political power in the EU could be a costly blunder indeed.
The legislative train towards further tax harmonization gained momentum when the European Parliament approved the draft report for compulsory public CbC-Reporting on July 4 by 534 votes to 98 votes (62 abstentions). In other words, it wasn’t even close. While the draft will now need to progress through the legislative treadmill of the EU, eventual ratification seems to be a foregone conclusion. In light of the broad consensus within the EU and the unwavering public support for enhancing tax transparency, it is not conceivable that the legislative train will grind to a halt, even when, as it is often the case in the EU, progress might be slow. Once implemented, MNEs with a global turnover of more than 750 million euro must publicly disclose how much tax they pay to each jurisdiction they operate in, as well as country-specific data on their turnover, employees, assets and other supplementary data on their business activities. The public CbC-Reporting is touted by EU officials as a vital step towards increased tax transparency which will help to prevent abusive tax structures.
While the reliability of identifying abusive tax structures based on CbC-Reporting data is at least questionable, analogous to the tax gap estimates, it is completely unclear why publication of the CbC-Reporting is considered to be an additional benefit, i.e. how exactly is public availability of the data thought to contribute to preventing abusive tax structures? Indeed, the limitations (“The information will certainly not be sufficient for the public to determine whether a company paid the right amount of tax due under the law. Indeed, this is not the proposal’s objective”) as well as the dangers (“disclosed figures can be sensationalized or misunderstood, thus increasing the heat and lowering the quality of the public and political debate”) of publicizing such data have been explicitly pointed out to the European Parliament TAXE Special Committee. While the debate on the ‘pros’ and ‘cons’ of public CbC-Reporting is often dominated by technical considerations, including valid concerns in respect to additional compliance burdens for taxpayer, these are likely to pale compared to the political implications, i.e., the additional political pressure for stricter tax and transfer pricing legislation that is the only logical outcome (and arguably the primary purpose) of making CbC-Reporting data readily available to pressure groups which will not hesitate to (ab)use the date to push their tax grabbing agenda.
It would, however, be naïve to look at the public CbC-Reporting in isolation. The proposal for the adoption of the CCCTB is frequently referred to within the same parliamentary reports and is explicitly conceived as an integral part of the comprehensive anti-tax-avoidance package. While it may be true that the adoption and implementation of the CCCTB is further away than the public CbC-Reporting and (luckily) not an entirely forgone conclusion, the paradigm shift (i.e. abolition of the arm’s length principle) would be a game changer. The proponents of policies such as the public CbC-Reporting and the CCCTB share, to put it mildly, a deeply imbued and “mistrust” of all multinational enterprises. Their arguments in favor of the CCCTB are political rather than technical and may, as reflected in the parliamentary vote cited above, ultimately be more effective in influencing the legislative process.
The success of the tax grabbing agenda should not come as a surprise, as taxes are ultimately a political choice. Unfortunately, most tax experts, especially those hailing from Europe, prefer to steer clear of politics and limit their participation in the debate to commenting on technical aspects. One conceivable explanation might be the fear of being perceived as accomplices in aggressive tax planning and tarnishing their professional reputation by wading into the murky waters of politics. Considering the increasing influence of pressure groups such as the so-called BEPS Monitoring Group (BMG), a global network of researchers on international taxation sponsored by “tax justice” organizations (Tax Justice Network, Oxfam etc.), the professional detachment and aloofness of tax experts is not going to suffice for preventing large scale tax harmonization. Far from following a strategy of stealth, the BMG is rather blunt in castigating multinational companies as being prone to criminal activity and stating their demands for granting additional powers to tax authorities, as illustrated by these recent statements:
“People’s life chances are shaped by corporate control of food, water, medicines, air, energy, savings, jobs, news, investment, pensions and much more. … Corporations also profit from their involvement in tax avoidance, bribery, corruption, money laundering and exploitation of employees, consumers and the environment.”
“[OECD] draft clearly acknowledges, but fails to adequately address, the endemic and serious problem of information asymmetry between a tax authority and a company … issue could be addressed through a reversal of the burden of proof, with a presumption that any intra-firm transfer of HTVIs should be subject to pricing based on subsequent consideration of the actual income produced, unless the taxpayer can show that specified criteria were satisfied … proof that the transfer did not result in a significantly lower effective tax rate.”
Such statements are by no means to be discarded as irrelevant ramblings of obscure academics. The proponents of the BMG are highly influential in shaping legislative proposals for tax policies in Europe. Not only are they frequently referenced by the EU as landmark papers on tax avoidance (notably Richard Murphy), they also prominently participate in public hearings on tax policies. It should be a clear signal to European tax experts in respect to who is relevant in shaping tax policies, that Murphy was invited as one of only five participants in the public hearing on the CCCTB on May 3, 2017 in Brussels. The most worrisome aspect of this public hearing, however, is to be seen in the fact that Murphy encountered virtually no opposition. To the contrary, the other four participants more or less applauded the CCCTB initiative and some even happily proposed a variety of additional “perks” for high taxing governments such as introducing a minimal corporate tax rate of 25 percent and “full global transparency” and the detailed publication of CbC-Reports.
Among the five participants, two organizations exhibit profiles suggesting general support for the business community and entrepreneurs: Accountancy Europe and Business Europe. Alas, neither showed any inclination to question, let alone challenge, the adoption of the CCCTB. While Accountancy Europe pointed out that the CCCTB should not be expected to be much of an anti-tax avoidance measure, they had no qualms whatsoever to signal their support and making irksome notions about “arbitrating between short term individual pain and long term collective benefit.” The position paper of Business Europe was especially saddening. Despite pointing out several fundamental shortcomings of the CCCTB, importantly implementing more stringent measures than those contained in the BEPS Action Plan that put the EU at a competitive disadvantage as well as risking that the consensus (presumably regarding the arm’s length principle) at OECD level will eventually break, Business Europe managed to conclude that, based on the condition that a variety of technical concerns (accounting, depreciation rules, R&D allowances, etc.) are adequately addressed, the benefits of a CCCTB may outweigh the negatives. It is hard to understand how a reputable organization whose mission statement prominently features “standing up for companies across the continent and campaigning on the issues that most influence their performance” can be coaxed into cahoots with the likes of the BMG. Possibly they are lulled to sleep by technical details. Sure enough, keeping depreciation rules simple and competitive is important and a super deduction for R&D is enticing. Bickering about such details at the cost of losing sight of the bigger picture, however, hardly reflects political maturity.
With the European tax experts being too coy to address political implications of the CCCTB and business representatives being asleep at the wheel, the legislative train towards further tax harmonization will continue chugging happily towards the elimination of tax competition, maximizing global transparency and eventually minimal corporate tax rates of 25 percent (to start with). It is time to wake up and make a stand.