Latindadd and other civil society organisations recently sent their contributions to the UK parliamentary inquiry into tax in developing countries. In its call, the International Development Committee of the UK parliament highlighted that “developing countries lose an estimated $ 160 billion each year through tax avoidance by multinational companies (including those based in the UK)” and the important role of the extractive industries, “where payments to governments are often not disclosed and may not contribute to development or poverty reduction.”
Publish What You Pay and Eurodad have launched a briefing paper (PDF) calling on the EU to propose legally binding measures to require natural resource companies to publish key financial information for each country and project in which they operate.
In recent months, civil society groups working on financial transparency and on tax and development have actively engaged the European Commission and other European institutions responsible for drafting key legislative and non-legislative proposals that will potentially reform European financial reporting standards.
This paper aims to contribute to the current debate around country-by-country reporting which we strongly believe will have implications for the future of financial transparency across the European Union and globally.
The EU must prove itself as a promoter of development, by ensuring that more funds flow from the North to the South rather than vice versa. The case of tax-dodging Zambian copper mining company Mopani, shows that money from the ‘EU bank’ – The European Investment Bank (EIB) – continues to find its way into tax havens.
The EU likes to purvey itself as a benefactor for the developing world. It is the largest ODA donor and proponent of many policy documents underwriting its engagement to promote sustainable development in developing countries. However, partly due to a lack of regulation at the EU level, developing countries lose more than one and half times the amount of development aid they receive, in lost tax revenue due to transfer mispricing by multinational companies. This amounts to USD 160 billion, and is a serious blow to the EU’s image.
Tough stances on tax havens taken by European leaders contrast sharply with the actions of the EU. Strong posturing by Nicolas Sarkozy and Gordon Brown after the financial crisis in 2008 strongly contrast with the actions the EU has undertaken to stop huge capital flows to offshore financial centres. Efforts to define tax havens – such as the OECD grey/black lists – have been undermined, and transparency rules for banks and multinational corporations are still not in place.
Last week, the European ministers made a call to establish a country-by-country reporting standard for multinational companies in the extractive sector – a much needed first step to curb tax evasion and avoidance in poor countries. This decision follows groundbreaking reports by the European Parliament to enhance global tax policies which would allow mobilising further development finance to meet internationally agreed development goals.
This is a partial victory for civil society organisations in Europe who have been strongly advocating for specific policy reforms to make global tax policies work for the poor.
European ministers take first steps to curb tax dodging from poor countries
On 10 March the European Competitiveness Council called upon “the Commission to come forward with initiatives on the disclosure of financial information by companies working in the extractive industry, including the possible adoption of a country-by-country reporting requirement, International Financial Reporting Standards (IFRS) for the extractive industry, and the monitoring of third-country legislation.”
This year, the European Union will review a number of European laws that spell out what types of information companies must disclose in their annual financial reports. Although at first sight this change in accounting rules seems like a dull technical exercise, well designed and transparent accounting standards have the potential to lift the veil of opacity that has contributed to the recent global financial drama and which, for years, has been preventing developing countries from properly taxing the activities of multinational companies operating within their jurisdictions.
Civil society groups are calling on the European Union to live up to the highest standards of financial integrity and, by making the right legislative decisions on EU accounting rules, to help curb the untaxed USD 800 billion that flows out of developing countries each year.
Why are European accounting laws crucial for the fight against capital flight?
Firstly, European accounting laws (EU Directives) are legally binding for all companies within the European Union who invest as much as €290 billion a year in countries outside the EU (according to latest 2009 figures). This figure represents more than one third of global foreign direct investment (FDI). Hence, EU accounting laws could have a massive impact in the financial transparency of a big share of investments across the world.
In November 2010, the European Commission (EC) opened a public consultation to “seek stakeholders’ views on financial reporting on a country-by-country basis by Multinational Companies (MNCs).” Country-by-country reporting standards would require that MNCs provide information on the profits earned and taxes paid in each of the countries where they operate. Eurodad and other civil society organisations believe that such reporting standards would enhance financial transparency and would provide crucial information needed by developing countries to enhance collection of taxes on the profits made by companies in their countries.
While several NGOs, including Eurodad, contributed to the public consultation with a strong plea for the EC to put in place country-by-country reporting standards for all sectors, more than half of the contributions to the consultation were from private sector companies, the vast majority of which wholeheartedly oppose the enhancement of financial transparency.
BRUSSELS—A debate was held on transparency and extractive industries in Africa at the European Parliament on 15 September 2010, organised by CIDSE, an international alliance of Catholic development agencies and its partner organisation SECAM, the pan-African bishops’ conference.
The debate highlighted how “the lack of transparency is killing the African people,” as stated by Bishop Louis Portella-Mbuyu of Congo-Brazzaville, who for years has fearlessly challenged his government and transnational extractive companies.
EU legislation could contribute to recuperating the huge amount of uncollected tax revenue, far surpassing development aid. The European Commission recently reviewed its EU transparency regulation setting up transparency requirements for European Multinational companies (the TOD Directive) however; country by country reporting has not yet been included. It is critical that information be reported and measures implemented that enable countries’ tax authorities and citizens to hold companies and governments accountable for the money earned on their natural resources. As expressed by Bernard Pinaud, Director of CCFD-Terre Solidaire, “the US has recently set the right example by passing such legislation, the EU should follow suit.”
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