New EU Directive To Tackle Multinationals’ Tax Dodging

New EU Directive To Tackle Multinationals' Tax Avoidance

The European Parliament just made a significant first step in the fight against tax dodging by large multinationals, by passing a directive which would require them to report tax and financial data separately in all countries where they operate. Currently they disclose their operations in one consolidated report, which makes it impossible to track where profits were made, so this would be a major step forward.

The controversy which resulted from revelations like the Panama Papers and Luxembourg Leaks has initiated a wider overhaul of current tax regulations, which this EU directive is a part of, in order to tackle widespread tax avoidance by multinationals and wealthy individuals. As with all directives made by the EU however, it will still need to be approved by the individual member states and consequently be enacted into national law within a year. So there is still a ways to go before a celebration is in order.

Another reason not to get too excited just yet is because conservative and liberal groups in the EU legislature successfully pushed for companies to be allowed to apply for limited-period exemptions from disclosing information that is commercially sensitive, in order to protect Europe’s competitiveness. By not specifying what is considered sensitive this exemption has created a massive loophole that could effectively undermine this entire bill. By adding this exemption lawmakers are once again “bowing to big business”, according to Oxfam.

The annual loss in revenue for EU countries as a result of tax avoidance is estimated between 50 and 70 billion euros, Valdis Dombrovskis, the vice president of the EC, told lawmakers. For most of these tax dodging schemes it is essential to shift the taxable profits from the high-tax states where they were made to countries with lower tax or even none at all. So requiring these companies to make these revenue flows more transparent could potentially generate a huge influx in tax. This could in turn be spent on improving public services, reducing poverty, financing green energy initiatives and many other matters that would benefit society as a whole.

As a result of the public becoming more and more aware of these facts there has been increasing pressure for EU-wide rules to close these loopholes and prevent companies like Apple, Amazon, Google and Starbucks from using them to dodge taxes. This EU directive is an important first step, but in order to ensure fair taxation everywhere not only do the exemptions need to go, but comparable steps to ensure tax transparency will have to be taken not just across Europe, but across the world. Even though international pressure is mounting, the OECD doesn’t seem to get the message yet. Which is why it is more important than ever to persist in our demands for international tax reforms and to let them know that the world is watching and will not accept their failure to take action any longer.