Committee seeks government view on EU tax transparency initiative

• Read the Report: Documents considered by the Committee on 17 March 2021
• European Scrutiny Committee

In its latest regular report scrutinising the effect on the UK of new or proposed EU legislation, the Committee asked the Financial Secretary to the Treasury, Rt Hon. Steve Barclay MP, whether the government would be willing to discuss cooperating with the EU in this area of taxation and corporate reporting.

The full Committee report, which also includes analysis of the impact on the UK of other new or proposed EU legislation, is attached.

After nearly five years of negotiations, the Committee noted, a majority of EU member states in February 2021 supported the introduction of public ‘country by country’ reporting of tax information by large multinationals which have operations in the EU. Negotiations are currently taking place on the final text of the legislation between EU countries and the European Parliament.

The Committee report observed that in the field of tax policy, a long-term concern of policy makers has been that large multinationals are able to exploit the differences between the tax rules of different countries. They can use these differences to artificially eliminate their profits or shift them to lower-tax jurisdictions, resulting in lower overall taxes being paid.

Country by country reporting would seek to show where profits are recorded and where – and how much – tax is being paid. The (un-tested) logic, the report said, is that increased public scrutiny of the tax affairs of multinationals would put pressure on them to reduce tax avoidance arrangements.

Although the government has repeatedly said it would consider introducing country-by-country tax reporting requirements for large companies under UK law on a multilateral basis, it is unclear if it would be willing to take such a step in tandem with the EU in light of these recent developments in Brussels.

Fears about the impact that country-by-country reporting might have on the competitiveness of UK-based companies are the reason that, to date, the government has ruled out introducing such requirements unilaterally. Some EU member states have expressed similar concerns. It is still possible that the EU Directive could be challenged by one or more member states in the EU Court of Justice.

The letter to Mr Barclay said that while “there is of course no suggestion that the UK would be required” to implement any European country--by-country legislation, as it has exited the EU, it was still open to the government to have a joint approach with the EU or introduce similar measures unilaterally once the EU had its measures in place.

The Committee’s letter to Mr Barclay said it would welcome in particular information on:

• whether or not the future introduction of country-by-country reporting throughout the EU could allow for the UK to also introduce such a requirement (since it would take effect in a significant number of jurisdictions at the same time and therefore have less of an impact on the UK’s competitiveness), and the government’s basis for that assessment.
• whether the government has recently engaged, or is planning to engage, with the EU on the substance of its legislation; and
• if there are other international initiatives on public country-by-country reporting on-going which the government believes would be preferable as the basis for the introduction of such disclosure under UK law, and if so, which.

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