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The New Paradigm for Fairer Taxation of Multinational Enterprises in the European Union: Corporate Tax Avoidance and the Need for Greater Transparency

John Gillespie, 4th Year LLB, discusses the need for greater transparency regarding corporate tax avoidance and the new paradigm for fairer taxation of multinational enterprises in the European Union.

Fairer Taxation of Multinational Enterprises

‘In an ideal world, the profits derived from the investment of a multinational company in a specific country would be clearly attributable to real activity in that country’.[1] Ours, though, is not an ideal world. June 2015 saw the European Commission produce an Action Plan for ‘A Fair and Efficient Corporate Tax System in the European Union’ [the Action Plan], specifying ‘5 Key Areas for Action’ in the EU corporate tax system. The pith of the Plan is to ‘re-establish the link between taxation and where economic activity takes place’[2], a proposal that echoes the belief of the tax chief of the Organisation for Economic Co-operation and Development (OECD), a global body that pioneers tax reform, that the time has come for a ‘change of paradigm’ in corporate tax law.[3]


‘Taxation where profit is generated’ may seem like a rudimentary suggestion that is essential to prevent inequality between large multinational enterprises (MNEs) and local companies but it is not one that is easily enforced in the EU, with a regulatory framework that adopts an archaic profit-distribution mechanism that pre-dates the EU and is insensitive to Digital Age value-creation that utilises intangible assets.[4] Unabashed exploitation of this weakness through cross-border profit-shifting by MNEs and the furtive harbouring of these profits by Member States has brought the issue of tax avoidance to the fore in the public and political sphere. The problem is a fruit of the sustained EU ideology that inter-Member State tax competition is good, with the Commission perceiving a de minimis approach to harmonisation on corporate tax measures necessary to remain competitive on a global level.[5]


Therefore, MNEs operating in the EU have a plethora of tax regimes at their hypothetical disposal.

This is believed to have been a major cause of the downward push on corporate tax rates that has occurred across the bloc from an average of 32% at the turn of the new millennium to an average of 22.8% in 2015.[6] However, the sheer complexity of the legal environment is also believed to be one of the major drivers behind artificial profit shifting across the borders of the member states.[7] The importance of mitigating profit-shifting to the extent that it causes tax avoiding activity is explicitly recognised at the EU level.[8]


Corporate Tax Avoidance: A Sum of Two Parts

Despite this, research into tax avoidance is prone to irreconcilable debate. A complex problem, estimates of the corporate tax avoided annually across the EU each year yield polarities such as €50 billion[9] and €150 billion[10], making the problem seem to many evasive or even partly illusory.


At the company level, the contemporary corporate lexicon veils manipulative practices. The difference between tax evasion and tax avoidance may be the width of a prison wall as Denis Healey once surmised, but this distinction is a blunt object when it comes to ‘tax optimisation’ or ‘neutral taxation’. Corporate tax planning is not a violation of the law but risks being designated as tax avoidance and so liable to regulation and if it is regarded as ‘aggressive’, meaning to ‘take advantages of the technicalities of a legal system’ without containing outright illegal substance.[11] At the state level, there is a contention about the limits of the EU rules on illegal state subsidies offered to MNEs.


It thus becomes apparent that the issue of tax avoidance consists of two organs. On the one hand, there are MNEs engaging in profit-shifting to accord their tax liabilities in a fashion most favourable to them. The predominant method of concern at EU level is ‘transfer-pricing’. If divergent tax bases are the vehicle for tax avoidance, transfer-pricing is the engine that drives it. Perpetuated by a respect for the arm’s length principle - the concept that legally separate entities, even if part of the same MNE, are independent and so capable of transacting according to fair market prices - transfer-pricing refers to the legitimate price manipulation of cross-border transactions between related companies. MNEs, structurally focused on cost-minimisation, are prone to such practices with the aim of tax liability reduction.[12]


On the other hand, there are the EU Member States that facilitate this tax avoidance with corporate tax rulings offered to individual companies. A tax ruling is a guarantee communicated, usually in advance, regarding the application of tax laws for a certain enterprise’s activities.[13] If transfer-pricing is the engine for tax avoidance, tax rulings is the M.O.T.; the ‘box-tick’ that rules the practice road-safe and able to continue. A tax ruling may include confirmation from the relevant tax authority that the MNE is permitted to use transfer-pricing tactics to import profits into that Member State.[14] Nevertheless, a tax ruling, like corporate tax planning, is not in and of itself illegal[15] but may breach EU state aid rules - a branch of competition law - if it provides ‘a selective advantage’ to an individual company.[16]


Any reform to combat the double-sided issue would require a sophisticated multidisciplinary approach across politics, economics as well as EU competition and tax law. Pertinently, a long-debated proposal for a mandatory ‘Common Consolidated Corporate Tax Base’ (CCCTB) across the EU have been re-introduced in the Action Plan.[17] It is envisaged that if implemented the CCCTB would eliminate the incentive for manipulative transfer-pricing procedures.[18] However, a CCCTB proposal has been in discussion for a great amount of time already and it is unclear as to whether it will be introduced in the near future, with many of the strongest economies in the EU firmly opposed to it.[19]


The Need for Dual-Type Transparency

A secondary solution is for better clarity on the problem itself, in order that profit-shifting by companies is made more difficult to hide and profit-harbouring by Member States made more difficult to justify. Greater transparency could facilitate the introduction of effective legislative reform in the future to help move EU corporate tax law towards the ‘new paradigm’. In this regard the Commission has prioritised greater EU corporate tax transparency, recognising how this would help quantify tax avoidance[20] and assist in providing the substructure necessary to allow better enforcement of the current tax rules.[21]


With complete comprehension of the tax rulings proffered by member states to MNEs, as well as unimpeded access to internal company activity of all MNEs operating in the EU, the Commission and national tax authorities would have the means to conduct functional investigation of when the state aid and/or transfer-pricing rules have been breached. The former could be termed ‘inward’ transparency, and it would allow preferential tax regimes that offer selective advantages to be spotted. The latter could be termed ‘outward’ transparency, and it would help pinpoint the MNEs most aggressive in their tax organisation. With tax avoidance an enigma of two parts, then, so too is a unified aim at two-way transparency necessary to enable effective future reform.


Outward Transparency: A Matter for Development

A general, state-by-state reporting obligation of data detailing the profit made, taxes paid and subsidies received by all large MNEs for every Member State they operate in would help provide a solution to the subversive reality that powerful companies, without any legal obligation to do so, are unlikely to reveal full details of their corporate tax strategies for risk of also revealing the tax liability they have successfully mitigated.[22] Such an obligation to share information amongst national tax authorities for regulatory purposes on a state-by-state basis already exists for financial institutions under the Capital Requirements Directive IV and for large logging industries under the Accounting Directive and the current debate is regarding whether this requirement should be extended to all large MNEs operating in the EU.[23]


Tax avoidance, though, is a global problem and so ‘anti tax avoidance measures must look beyond the borders of the EU in order to be effective’.[24] To this end, the research being conducted by the EU institutions builds on the premises of the OECD’s ‘Base Erosion and Profit Shifting’ (BEPS) initiative. This is a global soft-law programme designed to give functional recommendations, or ‘Actions’, on how to ensure profits are taxed where they are generated. ‘Action 13’ of the BEPS Action Plan has been developed into a recommendation for a country-by-country company data reporting obligation[25] (or state-by-state in EU terminology).


It is believed that extending the existing disclosure obligations to all large MNEs operating in the EU would help to deter aggressive tax planning by making transfer-pricing and other profit-shifting practices subject to closer regulatory scrutiny.[26] Where current forms of transfer-pricing disclosure obligations exist, they have been witnessed to reduce the profit-shifting of MNEs by around 50%.[27] It is left to presumption of the effect that a more detailed obligation would have but in theory an expanded state-by-state reporting requirement would assist in fulfilling true outward transparency in the EU. Indeed, even the very threat of it is purportedly working to encourage greater voluntary disclosure of company data.[28]


However, the ability of an obligation of this type to do so must be critically analysed in this respect. By whom, to whom, and what detail of information ought to be disclosed should an Action 13-style general reporting obligation be implemented into EU law was put to public consultation following the Commission’s Action Plan,[29] given the need to ‘carefully assess the objectives, benefits, risks and safeguards needed for such a move’.[30] One consideration that individual respondents to the public consultation pointed out is how a general obligation applicable to all large MNEs would require coherent cooperation between the EU and OECD and implementation in unison to be properly constructive. This is in order that the EU market is not disadvantaged by a disclosure obligation that increases administrative costs and improves regulatory scrutiny against companies that is not also required in competing markets internationally.[31] However, the OECD’s non-binding law-making ability could make voluntary adoption of such a restrictive obligation by international tax havens unlikely. This is liable to precipitate capital flight out of the EU, thereby undermine the  very purpose of the obligation.


What is needed is consolidation and extension of the sectoral forms of the obligation that currently exist. The difficulties faced by such a general reporting obligation are sizeable but not insurmountable so long as there is global coordination against tax avoiding transfer-pricing manipulation in support of such an obligation. The issues must be reconciled if true outward transparency is to be facilitated and the new paradigm for EU corporate taxation realised.


Inward Transparency: A Missed Opportunity?

A proposal that has as its substance the matter of greater inward transparency is for the mandatory and automatic exchange of information regarding cross-border tax rulings between the Member States. Tax rulings - on the surface a tool to clarify existing legislation - have been prone to tactful use by Member States in a fashion that supports structures used by MNEs to reduce tax liabilities.[32] The idea to make tax rulings more transparent has its origins in the Directive on Administrative Cooperation, and it is the second extension of this Directive[33] that is most relevant to the current discussion of tax avoidance.


The fallacy of our current system, whereby a spontaneous, non-compulsory process obligates information to be exchanged amongst Member States only where it is deemed ‘relevant’ is revealed in its discretionary nature; a Member State that has offered a ‘sweetheart deal’ tax ruling to a MNE and is benefiting from profit-shifting into its jurisdiction is prone to seek reasons to avoid the supplying information that may affect its tax competitiveness.[34] The new Directive - which must be implemented into the domestic law of the Member States by 31st December 2016[35] - is predicted to confront the challenges national authorities face in acquiring information on tax rulings[36] and the problems Member States have in enforcing their own internal taxation systems when they are so dependent on receiving information from other Member States.[37]


Through providing unequivocal rules that remove the discretionary element of the old system and obligate immediate and efficient (‘automatic’) exchange of information regarding cross-border tax rulings, the new Directive will make mandatory without prior request and at pre-established intervals[38] the exchange of all tax rulings given to parties not resident in the issuing Member State for tax purposes[39] (‘cross-border’). It is this increased ability to detect exploitation that will allow other Member States to respond with the necessary amendments to their own tax regimes regarding the relevant MNE. This is considered of paramount importance in order to deliver the kind of inward transparency necessary to detect corporate tax avoidance abuse by MNEs in the EU.


However, it must critically analysed why some consider the proposal a ‘missed opportunity’.[40] As the new requirement was built into the existing legislative framework for information exchange it was able to be rapidly implemented, but this has come at a cost. The final provisions have been ‘watered down’ by the Council, resulting in an obligation lacking any retrospective effect and implementing a heavily protracted information exchange. The Directive decrees only that tax ruling exchanges should occur ‘within three months following the end of the half of the calendar year during which the ruling was issued’.[41] It is incredible to think that this means for rulings made in June 2017, information need not be exchanged until the end of February 2018, challenging the very definition of ‘automatic’ and allowing a significant delay in the benefit that other Member States would gain from having access to the relevant details of the tax ruling.


Additionally, an automatic rule creates the difficulty of substituting qualitative judgements for routine, meaning information of possibly non-abusive MNEs or Member States, with no method for appeal, is exchanged in the same manner as the true perpetrators of tax avoidance in the EU. Those who have nothing to hide need not fear sanction, of course, but if fundamental rights and principles of privacy cannot be upheld then the new obligation raises questions regarding the principle of subsidiarity and the limits of the EU’s sovereignty. Is it right for EU law to impose an objectionable scheme in replacement of a framework that is albeit imperfect but nevertheless regulates legal agreements between democratic states and private institutions?


Further, there are numerous debates about whether the new requirement should obligate delivery of information to other parties affected by tax avoidance. This includes developing nations, who are said to suffer the worst from illicit financial outflows,[42] and the general public, who are also excluded from the new requirement despite the contemporary prominence of convincing research from the charitable sector endeavouring to portray the feasibility of public access to corporate information.[43] With the information due to be available only to EU tax authorities and the Commission to a lesser extent it does mean that the primary objective of tax transparency for rulings can be quickly achieved[44] but leaves these concerns about the duty of the law to cause vexation.


On the whole, one can remain hopeful that these concerns remain sidelines to the central necessity to give Member States more information on cross-border tax rulings than exists currently. This will help the new obligation yield the kind of inward transparency necessary to facilitate the move of EU corporate law towards the new paradigm, however it is yet to be seen how well the new obligation will be enforced by the Commission. This leaves the new obligation’s efficacy in combatting the prominence of uncooperative Member States complicit in corporate tax avoidance as yet unclear.


The Need to Choose a Side

It is incontrovertible that corporate tax avoidance is a momentous concern within the EU but it is not an issue that is easily resolved. The implementation of greater transparency is a solution that would not combat the problem in substance but it would provide a disincentive to abuse and would enable the Commission and national tax authorities to become cognizant of the ambiguities that are currently causing problems with enforcement of the rules. With an organic problem that breathes life through two separate lungs, it is necessary that this transparency should come in two separate dispositions. The current discussions and proposals do contain imperfections but a precarious legislative balance has to be struck. This lies between the obvious need to amend the status quo and the danger the jeopardy that reform could cause. EU law has to select a side, and it should elect to realise the significant need for transparency because, if MNEs have to choose, ‘they'll always pick avoiding court over avoiding taxes’.[45]


[1] Commission, ‘Accompanying the document: Communication from the Commission to the European Parliament and the Council on a Fair and Efficient Corporate Tax System in the European Union: 5 Key Areas for Action’ (Staff Working Document), 17.06.2015, SWD(2015) 121 final, 7.

[2] Commission, ‘A Fair and Efficient Corporate Tax System in the European Union: 5 Key Areas for Action’, 17.06.2015, COM(2015) 302 final, 6.

[3] The Economist, ‘New Rules, Same Old Paradigm’ (2015) <> accessed 5 January 2016.

[4] Gabriel Zucman, The Hidden Wealth of Nations: The Scourge of Tax Havens (The University of Chicago Press, 2015) 104.

[5] SWD(2015) 121 final, 4-7.

[6] Commission, Eurostat, ‘Taxation Trends in the European Union: Data for the EU Member States, Iceland and Norway’, 2015 Edition, 147.

[7] SWD(2015) 121 final, 5-9.

[8] Commission, ‘tax transparency to fight tax evasion and avoidance’ (Communication), 18.03.2015, COM(2015) 136 final.

[9] Parliament, ‘Bringing transparency, coordination and convergence to corporate tax policies in the European Union: I - Assessment of the magnitude of aggressive corporate tax planning’, September 2015, PE 558.773, 4.

[10] Richard Murphy (Tax Research UK), ‘Closing the European Tax Gap: A report for Group of the Progressive Alliance of Socialists & Democrats in the European Parliament’, 10.02.2012, 22.

[11] Commission Recommendation (2012/772/EU) of 6 December 2012 on aggressive tax planning [2012] OJ L338/41, 41 - 42.

[12] Commission, EU Joint Transfer Pricing Forum, ‘JTPF Program of Work 2015 - 2019 (“Tools for the Rules”) Meeting of 25 June 2015’, August 2015, JTPF/005/FINAL/2015/EN, 5.

[13] Commission, ‘Public consultation on further corporate tax transparency’ (Consultation Document), June 2015, 4.

[14] Commission, ‘Combatting corporate tax avoidance: Commission presents Tax Transparency’ (Fact Sheet), 18.03.2015, MEMO/15/4609, 5.

[15] Ibid 2.

[16] Claire Micheau, ‘Tax selectivity in European law of state aid: legal assessment and alternative approaches’ [2015], European Law Review 40(3), 328.

[17] COM(2015) 302 final, 7.

[18] Ibid 11.

[19] Corporate Reform Collective, Fighting Corporate Abuse Beyond Predatory Capitalism (Pluto Press, 2014) 15.

[20] MEMO/15/4609, 1.

[21] Commission, ‘Accompanying the document: Proposal for a Council Directive amending Directive 2011/16/EU as regards exchange of information in the field of taxation’ (Staff Working Document), 18.03.2015, SWD(2015) 60 final, 11.

[22] PE 558.773, 23.

[23] COM(2015) 302 final, 13.

[24] European Commission, ‘Acting Globally’ <> accessed 5 January 2016

[25] OECD, ‘Action 13: Country-by-Country Reporting Implementation Package’ (OECD Publishing 2015), 5.

[26] MEMO/15/4609, 7.

[27] SWD(2015) 121 final, 25.

[28] The Economist, ‘New Rules, Same Old Paradigm’ (2015) <> accessed 5 January 2016.

[29] Commission, ‘Commission launches public consultation on corporate tax transparency’ (Press Release), 17.06.2015, IP/15/5156, 1.

[30] MEMO/15/4609, 7.

[31] JTPF/005/FINAL/2015/EN, 13.

[32] 2015/2066(INI), 8.

[33] Council Directive (EU) 2015/2376 of 8 December 2015 amending Directive 2011/16/EU as regards mandatory automatic exchange of information in the field of taxation [2015] L 332/1.

[34] MEMO/15/4609, 2.

[35] Directive 2015/2376 Art 1(3)(1).

[36] COM(2015) 136 final, 4.

[37] SWD(2015) 60 final, 13.

[38] Directive 2015/2376 Art 1(1)(a).

[39] Ibid Art 1(1)(b).

[40] Parliament, ‘Mandatory exchange of tax rulings proposal: a "missed opportunity” say MEPs’ (Press Release), 13.10.2015, <> accessed 5 January 2016.

[41] Directive 2015/2376 Art 1(3).

[42] Knobel & Meinzer, ‘Automatic Exchange of Information: An Opportunity for Developing Countries to Tackle Tax Evasion and Corruption’ (June 2014, Tax Justice Network), 1.

[43] e.g. ‘Open Data: ensuring public access to information’, Financial Transparency Coalition, <> accessed 5 January 2016.

[44] MEMO/15/4609, 4.

[45] The Economist, ‘State raid’ (2015) <> accessed 5 January 2016.

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