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EU states back country-by-country tax reporting

The EU member states have voted in favour of introducing country-by-country tax reporting, which would hit the global tech giants hard. The Imprudent Accountant considers the implications for the UK and the profession.

5th Mar 2021
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During its campaign to persuade voters that United Kingdom should leave the European Union, Vote Leave emphasised the prospect that the departure would make the country more competitive.

It may have been less explicitly stated but there were also hints that one means of achieving this goal would be to tinker with the tax system.

The underlying intention would be to make the United Kingdom into a tax haven.

That may still be one of the current government’s long-term goals but their bluff could soon be called as a result of a recent decision by the ministers of EU countries to back legislation on country-by-country tax reporting.

I admit that this may sound like the dullest of dull subjects but the implications could be profound, particularly for the likes of Amazon, Apple and Google.

The background

Country-by-country tax reporting is such an obvious step that it should have been in place years ago.

The principle is very simple. As we all know, many companies utilise complex tax strategies to minimise liabilities, typically by ensuring that profits fall to be taxed in countries with low rates of tax or, conceivably, no tax at all.

This explains why jurisdictions such as Ireland, Luxembourg and Cyprus have managed to attract disproportionate amounts of business from highly profitable organisations.

Looking further afield, many British dependencies such as the British Virgin Islands and the Cayman Islands have been popular both with those looking to minimise tax liabilities and also, perhaps coincidentally, individuals or corporations seeking to hide the proceeds of crime.

How much is at stake?

According to a news report in the Guardian last week, the world’s biggest companies are managing to avoid an estimated $500bn a year in taxes by rigging rates in this fashion. In sterling terms, that comes to something over £350bn.

What is it?

The implementation of a scheme of country-by-country tax reporting would oblige multinationals to publish additional information (in their accounts one presumes). This would state the amount of profit that they had made in each country where they carried on business and the amount of tax paid on those profits.

The EU vote

It may come as no surprise to learn that while there was a majority vote in favour of the implementation of country-by-country tax reporting, the 27 countries were divided.

Predictably, Cyprus, Ireland, Luxembourg, Malta and a handful of other countries were very much against. Quite why Germany should have joined this band is less clear.

On the other side of the equation, there was a mix of traditional member states like France, Netherlands, Italy, Belgium and Spain and some of the new entrants including Estonia, Romania and Poland.

Why should the UK care?

The proposal by the member states to broaden the scope of the regulation would include tax on profits paid in every country, not just those within its remit and others on a blacklist of tax havens.

Countries that fail to play ball would then be prevented from operating in the bloc.

A strategic decision

If these proposals move forward towards implementation, Boris Johnson and Rishi Sunak will have to decide whether they wish to fall into step with their “friends” in the European Union or fancy their chances as a burgeoning tax haven.

Will it happen?

Country-by-country tax reporting has been a popular concept for years, without ever quite reaching fruition. That may well be due to the vested interests who would naturally be keen to oppose it and, as we all know, have far greater sway than the leaders of some countries.

And for us?

There could be a number of consequences for accountants. Primarily, those who act for large conglomerates that will fall into this regime should get a considerable amount of additional business for their global networks.

If the UK does go the tax haven route, then there could be rich pickings for accountants as covens of dodgy new clients seek our services.

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By AndyC555
06th Mar 2021 10:12

"According to a news report in the Guardian last week, the world’s biggest companies are managing to avoid an estimated $500bn a year in taxes by rigging rates in this fashion"

Well, the report is in The Guardian and the amount is mentioned without saying where it comes from. I actually estimate The Guardian avoids Bontyzillion pounds tax every day so they can hardly talk. I arrived at my estimate by imagining that they could make lots more profit and have it taxed in the highest taxing country in the world. Can't get more scientific than that.

And, how, exactly will CbCR affect this? Is there any accusation of any illegality taking place? What are companies 'rigging'? If I was in charge of a multinational company and could put my HQ anywhere in the world, where should I look? In the country with the highest tax rate? So my company could pay the most tax possible? Why?

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