EU Directive for Tax Transparency Threatens Location Attractiveness
ResearchZEW Study on Creating a Level Playing Field in the EU Single Market
The EU directive on public country-by-country reporting requires multinational corporations to make their tax activities more transparent starting this year. The aim is to create a level playing field between purely domestic and multinational companies. However, a study by ZEW Mannheim and the University of Mannheim reveals that the directive primarily imposes obligations on European companies. The study, headed by Christoph Spengel, Research Associate at ZEW and Professor of Taxation at the University of Mannheim, is based on an expert survey and corporate financial data from the Orbis database.
Unlike firms that operate purely domestically, multinational corporations have the option to shift their profits to low-tax jurisdictions. The EU directive’s country-by-country reporting of tax payments, number of employees, profits, and other financial indicators aims to expedite the detection of profit shifting. “On average, EU companies affected by the directive will have to disclose 80 to 90 per cent of their global operations on a country-by-country basis. In contrast, companies domiciled outside the EU only need to disclose about half of that in such detail,” explains Stefan Weck, a researcher in ZEW’s “Corporate Taxation and Public Finance” Unit. “Slightly more than 50 per cent of the affected companies are based in Europe, while the rest are evenly distributed across the Americas and Asia,” adds ZEW economist and co-author Hannah Gundert.
Disparities within the EU
The study also shows that within the EU, the disclosure requirement leads to unequal treatment of companies that fall under the directive. While most Member States allow deferring the disclosure of particularly sensitive business data for a limited number of years, reporting companies from Belgium, Hungary, and Greece do not have this option. Furthermore, Member States impose varying requirements on the data basis underlying the country-by-country reports and on the location where the reports must be made available to the public.
However, the study also suggests ways to eliminate these newly created disparities. “In our view, the best option would be to repeal the entire directive, but this is unlikely to happen for political reasons. Much more feasible is adjusting the disclosure requirements for companies domiciled outside the EU,” notes Stefan Weck. “Moreover, the selection of countries requiring country-level disclosure should be reconsidered. To reduce disparities between EU countries, we recommend limiting the Member States’ discretion in implementing the directive” concludes Hannah Gundert.
