With a view to reducing tax avoidance among multinational companies, the European Commission, on the 12th of April 2016, submitted a proposal to ensure that multinational companies are adhering to their tax obligations. According to a study carried out by the European Parliamentary Research Service, the EU is estimated to be losing 50-70 Billion in revenue each year as a result of corporate tax avoidance. In light of this, the Juncker Commission has officially declared fair tax to be a political priority. Following recent developments, there has been an increasing public demand for more transparency in the tax system.
Multinational companies will now be required to publicize their paid income tax within the European Union, including how much tax they pay outside of the European Union. Multinational companies with an aggregate turnover of over €750 million will need to comply with these additional transparency requirements. Information which will need to be disclosed includes:
- The nature of the activities;
- The number of employees;
- The total net turnover;
- Profit made before tax;
- The amount of income tax due in each country;
- The amount of tax actually paid in that year;
- The accumulated earnings.
This information will be included in a report which will be accessible to the public for a minimum of 5 years from the multinational company’s website. If multinationals are active within jurisdictions which do not comply with international tax good governance standards, they will need to adhere to special transparency requirements.
It is estimated that around 6,000 multinationals active in the EU will need to publicize their tax-related details. SMEs do not fall within the ambit of the proposal, as the focus will be on multinational entities which can afford to engage in tax planning activities.
EU and non-EU companies will now be on a level playing field, as they will have to comply with the same reporting standards. The process will be enforced by implementing the penalties which are provided in the Accounting Directive. Competent national authorities will have the power to impose fines on companies. Such fines must be effective, proportionate and dissuasive.
The proposal has been submitted to the European Council and Parliament for discussion. Once the proposal has been adopted, the Directive will need to be transposed into national Member State Legislation within one year from its entry into force.