The most important tools in fighting tax evasion are the exchange of data among the relevant tax authorities (country-by-country reporting or CbCR), a method already in practice, and the international coordination of transfer prices. This is one of the conclusions drawn by a study commissioned by the Foundation for Family Businesses and conducted by the Leibniz Centre for European Economic Research (ZEW).
As a result of the confidential sharing of data among tax authorities in different jurisdictions, effective tax rates have risen by between one and two percentage points. This demonstrates that the rules in place are working. By contrast, the publication of sensitive corporate data online makes no clearly verifiable contribution to the fight against tax evasion, money laundering and terrorism financing. On the contrary, it can result in unjustified competitive disadvantages for the companies concerned.
It was agreed as part of the OECD’s BEPS initiative that the tax authorities of the OECD member states would share confidential corporate information with each other. More than 100 states across the globe have joined the initiative and Germany has already implemented the rules in national law. The OECD is evaluating the success of this global initiative on an ongoing basis.
As the study conducted by Professor Christoph Spengel and his team states: “Companies respond to the introduction of CbCR by adapting their tax-planning measures. While such adjustments attributable to the launch of the OECD’s confidential CbCR regime have also caused the relevant companies’ effective tax burdens to grow, the same effect cannot be clearly proven in relation to the EU’s CbCR regime for financial institutions.”
As the authors of the study warn, the damage caused by the obligation to publish confidential business data online can be enormous, especially for industrial companies. Competitors, customers and suppliers could use the data for their own purposes, for example, without being subject to a similar disclosure obligation themselves. Public CbCR would have a negative impact, in particular, on family businesses competing against smaller companies in technological niches.
“For three years now, tax authorities worldwide have been exchanging the country-by-country breakdowns of tax and business data provided by companies. Their initial experiences have been positive,” says Professor Rainer Kirchdörfer, Executive Board member of the Foundation for Family Businesses. “Instead of considering more stringent rules, we should first thoroughly analyse the impact of current disclosure practice. Tax confidentiality must not be curtailed on the basis of speculation and political opportunism. Any solo effort on the part of the European Union would be detrimental to our companies and undermine global efforts to fight tax evasion.”
Professor Kirchdörfer’s remarks refer to the European Commission’s proposal to require multinational companies with annual revenues of more than €750 million to publish sensitive corporate data online, for instance about profits and tax payments for each country. The proposal is controversial, in part because of the damage it could cause to businesses.
The authors of the study suggest that global efforts to achieve fairer taxation should focus more closely on improving international coordination in the area of transfer prices, which are those set by international corporate groups to value products and services exchanged across borders – for example, with a subsidiary or between affiliates. Inappropriate transfer prices are a prominent element in aggressive tax planning.
“More cooperation between the relevant tax authorities and clear rules are the keys to tax justice,” says Professor Kirchdörfer. “The OECD should promote and coordinate efforts aimed at achieving this. What is more, the German fiscal authority should improve the process whereby tax offices provide binding information on transfer prices in advance. Greater clarity at the international level and more assistance from the tax offices in transfer-pricing matters would also be in the interests of our family businesses. The current uncertain legal position is a constant problem during tax audits.”