Public country-by-country reporting in the European Union — shaping corporate behaviour through stakeholder power

By Jussi Jaakkola, 12 March 2021

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Jussi Jaakkola, LLD, LLM, MA, is Postdoctoral Researcher, at the Faculty of Law, University of Turku

For decades, tax scholars have complained about how corporate tax systems have not kept pace with economic globalisation. In the global political economy, corporations' economic activities have dispersed across countries and their tax-avoidance opportunities have burgeoned. Firms' tax obligations have become ever more difficult to enforce, which has resulted in aggregate under-taxation across borders. For far too long, international organisations, such as the European Union, have addressed the problem rather modestly. These organisations have been somewhat hesitant to reconstitute governments' powers to tax. To make the contemporary system of taxation sustainable, progress in international tax governance has been called for. The call has essentially drawn on the idea of tax transparency.

Country-by-country reporting — overcoming tax authorities' information deficit

Since the early 2000s, tax transparency and especially country-by-country reporting obligations have been on the agenda of critical tax observers and non-governmental organisations, such as Tax Justice Network. Once the financial crisis of 2008-2009 erupted, the agenda began to gain added political momentum. Proper enforcement of tax obligations was perceived as pivotal for a fair and sustainable post-crisis recovery of national economies. The agenda was further invigorated by several leaks that revealed firms' and financial asset owners' tax-avoidance practices. These practices had previously been largely concealed from public consciousness, although facilitated by various governments. In 2015, European Commissioner for Economic and Financial Affairs, Taxation and Customs Pierre Moscovici celebrated tax transparency as the essence of the European Commission's future policies. He proclaimed transparency to determine 'everything' the Commission wished 'to accomplish on the tax policy front'. Around this time, 'the transparency revolution' became entrenched in the Commission's vocabulary.

In the EU, the plea for country-by-country reporting resulted in actual legal rules. The Council Directive that was adopted in 2016 notably obliges corporations to file their tax-relevant figures to tax authorities on a country-by-country basis. The authorities must, without waiting for a request, share this information with other countries' tax administrations. By the means of country-by-country reporting, tax officials obtain a better overall perception of corporate groups' dispersed economic activities. This enables the authorities, previously afflicted with epistemic incapacities, to impose taxes that better match the real volume and geography of firms' activities, whose territorial fragmentation has made their taxation a notoriously perplexing exercise. The clear background for the reporting obligations was the post-financial crisis credo that international tax rules should re-establish 'the link between taxation and where economic activity takes place' and 'ensure that Member States can correctly value corporate activity in their jurisdiction'.

Public country-by-country reporting — bringing the society in

In 2016, the European Commission proposed that enterprises also make their tax-relevant numbers publicly available. Rather than confined to the desks of tax administrations, the information should directly serve the needs of civil society and observant stakeholders, such as customers and investors. However, at the time, the Commission's proposal was not met with necessary support by the Member States, to the disappointment of its reform-minded proponents. Yet, the 25th of February 2021 saw a change of heart in the EU. Internal market and industry ministers discussed public country-by-country reporting, and the qualified majority expressed preparedness to push forward with public reporting, as recently reformulated.

Despite the majority's willingness to move forward, some countries have insisted that the mere qualified majority support will not suffice for introducing the public reporting rules. In their opinion, the proposed rules ought to be adopted under unanimous decision-making procedure in the Council of Ministers, which is a standard procedure in tax issues. Others, in agreement with the Commission, have submitted that public reporting standards do not qualify as genuine fiscal rules, and that a decision under the ordinary legislative procedure with a qualified majority does indeed suffice. While this may sound like a legal quarrel over technical procedures of the EU law-making, the dissent is revealing. It compels us to reflect on what sort of rules the EU is now dealing with and the functions they could serve.

Enhancing corporate accountability and responsibility — and perhaps something else?

Public country-by-country reporting standards stand in a sequence of efforts to enhance tax transparency, which has been a formative idea in recent discourses on corporate tax governance. Public information about enterprises' tax-relevant figures fosters firms' public accountability and social responsibility, which form the very cornerstones of the Commission's proposal. While non-public reporting improves authorities' capabilities to enforce tax obligations and to counteract under-taxation, public reporting facilitates sustainable consumer and investor choices, which can curb firms' tax avoidance. In their capacity as market citizens, customers and investors can access relevant information and exert behavioural pressures on corporate actors, whose real tax footprint now becomes disclosed. In essence, public reporting works by increasing stakeholder power. What this requires, of course, is that consumers have a real choice over services they endorse, which has become anything but obvious under the monopolistic market power of digital service providers.

Beyond direct stakeholder power, public reporting obligations have implications that may be considered more political. Public information about enterprises' real tax burden may fuel political debate about the amount to which the corporate sector ought to contribute to the public purse. It may inform the discourse on the fair distribution of tax burden between taxpayers and also between countries. Rather than having to rely on mere formal rules in tax statutes, whose overall effect on corporate taxpayers' fiscal obligations is hard to gauge, observant citizens' can better appreciate corporate actors' real contribution. In their capacity as political citizens, individuals can exert political pressure not merely on private society actors but also on elected decision-makers, who remain responsible for the political design of tax systems. Hence, while legislative efforts to enhance tax transparency may appear as the most feeble and liberal form of tax governance, as they do not prescribe how corporations ought to be taxed, transparency may animate the political discourse on tax systems and lead to their more profound and material change.

Tags: Sustainable finance, Social Justice and Sustainability, Business and global value chains
Published Mar. 15, 2021 10:18 AM - Last modified Aug. 28, 2022 1:39 AM