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Eurodad: EU proposal helps curb corruption but fails to tackle tax dodging

October 26, 2011

Eurodad

Eurodad

BRUSSELS – Today’s EU proposals are a welcome development in the fight against corruption in resource rich countries, but there is the potential to do much more.

Marta Ruiz, Eurodad’s senior policy and advocacy officer, said: “Disclosure of payments to governments on a Country-by-Country and project by project basis is a very welcome step to combat corruption but it will only give a very partial picture of a company’s activity”. She added: “this proposal will not address tax dodging by multinational companies, which represents the biggest share of illicit capital flight”.

Only broader country-by country disclosure including data such as the name of subsidiaries in all countries, and financial performance including sales, purchases, labor costs, finance costs and profits would enable authorities to assess whether companies are paying taxes consistent with their real activities and economic performance in each country where they operate.

“This reporting requirement should apply to all sectors not just extractives and forestry as illicit practices such as tax dodging are widespread in every industry”.

Raymond Baker, director of Global Financial Integrity, said: “The European Commission through this proposed Country-by-Country Reporting legislation has taken the first step towards ensuring people in developing and emerging nations can hold their governments and the companies that operate in their countries to account. This is to be welcomed.
“But the European Commission has missed a real opportunity to bring transparency that would further reduce endemic corruption and aggressive corporate tax avoidance. The European Commission’s draft legislation is disappointing because it only includes the extractive and forest related industries. And crucially, there are no provisions for production or sales data in these proposals. The Commission must include this within its legislation to ensure all stakeholders can clearly assess whether countries are getting a fair deal for the natural resources in their countries.”

Background

The EU proposals, reforming the Transparency and Accounting Directives, will require extractive industry and forestry companies to declare the payments they make to governments in every country they operate in. This will help tackle the corruption that has prevented those living in poverty from benefiting from the raw materials in their country. It marks another key step in helping hold governments to account.

But crucially it is not just governments that need to be held to account. There is a clear need to increase corporate accountability because corporate tax avoidance is a huge issue for developing countries. Illicit financial flows cost developing countries $10 for every $1 they receive in aid according to the Task Force on Financial Integrity and Economic Development. “Over 50% of all illicit flows result from companies mis-pricing imports and exports in order to avoid income tax, VAT tax and customs duties.” Tax dodging is also contributing to the debt crisis in Europe.

Full country-by-country reporting, covering all sectors, not just extractive industries, including a range of financial information such as production figures, the name of subsidiaries, profits/revenues and staffing levels would help tax collectors spot tax dodging and collect what they are due.

Current proposals do not require companies to detail their annual production figures and this is a terrible omission. It means today’s proposal which requires the companies to publish payments made to governments, including tax data, in each country in which they operate, is in itself insufficient to assess whether a country is getting a fair deal from its natural resources.

Increased transparency by corporations would also help restore the connection between corporations and the societies they operate in, allowing citizens to see the full picture of the contribution being made, to support those who are behaving well, and hold to account those who are not.

Both Member States and the European Parliament now have the chance to change these proposals, to make them better, to make them tackle both corruption and tax dodging, both of which are helping keep people in poverty.

Notes to Editors

EURODAD (European Network on Debt and Development) is a network of 54 non-governmental organisations (NGOs) from 19 European countries working on issues related to debt, development finance and poverty reduction.

Global Financial Integrity is a Washington-based think-tank leading international efforts to curtail illicit financial flows and enhance global development and security.

The Publish What You Pay coalition point out that the terms of this proposal contain loopholes undermining its effectiveness for tackling corruption and ensuring countries get a fair deal for their natural resources.

The Proposal for Country-By-Country in the extractive and forestry industries forms part of the the Transparency and Accounting Directives.

Contact:

Marta Ruiz 0032(0)2894 4648
Nick Mathiason 0044 (0) 77 99 348 619

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