EU inches towards more corporate tax transparency

Good morning and welcome to Europe Express.

A deal was reached last night on introducing reporting obligations for multinational corporations on revenues they made in EU countries. We will explore what this means and to what extent it nudges the bloc towards more tax justice.

With the European Commission announcing it will start borrowing on the markets to fuel the €800bn post-pandemic recovery plan, we will lay out the options the EU has in policing the use of those funds in Hungary and Poland.

And we are getting a dispatch from Warsaw, where a trial has started into an espionage case involving China’s Huawei company.

In search of tax justice

EU negotiators last night concluded a painstaking deal on rules to force large companies to publicly disclose where and how much tax they pay inside the EU, writes Mehreen Khan in Brussels.

Brussels’ “country by country” tax reporting rules reached a successful conclusion after nearly a decade of flailing talks over transparency measures that reveal the tax multinationals pay in each EU member state. 

The long-awaited agreement comes hot on the heels of revived international talks to set a minimum effective corporate tax rate at the OECD spearheaded by the Biden administration. 

Later this month, Brussels will also unveil its plan for an EU digital tax and governments across the rich world are also starting to get serious about tax justice as they look to recoup money to fund mass Covid-19 stimulus measures. 

Brussels’ transparency rules were largely celebrated by policymakers as an important first step in revealing the extent of corporate tax avoidance in Europe. Companies are already obliged to report where they book profits and pay tax to national authorities, but that information has never been made public.

Yesterday’s deal should help increase scrutiny on multinationals by giving politicians, voters and activists the data they need to expose the profit-shifting and aggressive tax planning that many corporate giants (and the governments that facilitate them) have been accused of.

But tax justice campaigners and leftwing MEPs are wary of calling the breakthrough an unmitigated success. 

For a start, the disclosure rules apply only to the EU’s 27 member states and the jurisdictions Brussels has slapped on its tax haven blacklist. For campaigners such as Tove Maria Ryding, at the European Network on Debt and Development, the limited geographic scope of the rules means companies can simply shift profits to places where disclosures remain private. “This is not real country by country reporting,” says Ryding. 

Another source of frustration are the get out clauses for companies which deem some information too “sensitive” to disclose. Under last night’s deal, corporates can escape disclosing such data for five years. The overall effectiveness of the system will also only be reviewed after four years — a timespan that transparency activists say will help many companies escape the obligations for now.

Despite signs of changing political winds on taxation, some EU member states have staged a rearguard action to ensure the rules do not reveal too much too fast. France for example has come under fire after it was revealed that the government’s formal position was based largely on the views of business lobby group, MEDEF.

Chart du jour: Inflation creeps up

After a spell below zero in 2020, inflation rose steadily in the eurozone this year with estimates it will touch 2 per cent in May, the first time in more than two years it has reached such heights. With inflation on the rise globally, the FT has kicked off a new series on inflation with the first story asking is inflation coming back for good?

Policing gaps

With the ratification process completed, the wheels have now been set in motion for the commission to borrow up to €800bn on the markets to fund the bloc’s post-pandemic recovery. A new prosecutor’s office has also just opened up shop, tasked to pursue cases of fraud and corruption with EU funds.

But jurisdictional gaps remain, notably in Poland and Hungary, which are significant recipients of both EU recovery funding and traditional cohesion grants. They are among the handful of member states that have chosen not to participate in this rare expansion of EU power into nations’ judicial systems, write Valentina Pop and Sam Fleming in Brussels. (Denmark, Ireland and Sweden are also outside the prosecutor’s jurisdiction, though Stockholm has signalled it plans to join.)

Unlike the existing EU anti-fraud office (Olaf), which can only recommend that prosecutors in the respective countries pick up their investigations and bring defendants to court, the new European Public Prosecutor’s office (EPPO) has the power to pursue cases in national courts and retrieve the defrauded money.

So what does the EU’s arsenal look like when it comes to ensuring recovery fund money is not frittered away, ending up in the pockets of corrupt officials or acolytes of those in power?

1. Olaf, the original EU anti-fraud office, still has jurisdiction over the two countries and can investigate (though not prosecute) misdeeds and publicise its findings.

2. A rule of law “conditionality” process can freeze up parts of the EU funding for member states if the commission finds that the breaches of the rule of law compromise the management of EU funds. 

3. In time and faced with the threat (or reality) of funding freezes, Warsaw and Budapest could eventually feel compelled to join the EPPO.

European Public Prosecutor Laura Kovesi said Hungary had signed up to at least co-operate with her office. And she did signal that any cross-border case that has a Hungarian or Polish component could still be pursued in a country that is part of EPPO. “I hope our work will convince them to join,” Kovesi said.

The EU commissioner in charge of the rule of law, Vera Jourova, said yesterday that Brussels could start using the new rule of law “conditionality” tool in the second half of this year. “We are going to trigger the process after assessing if and which member state would qualify for . . . the procedure which may end up in freezing part of the funds allocated,” she said.

The rule of law “conditionality” mechanism was agreed in December after a months-long stand-off, in an attempt to assuage concerns in richer EU countries about the policing of EU spending in countries including Hungary and Poland.

Jourova yesterday observed that Poland and Hungary’s refusal to participate in the EPPO made them prime targets for the rule of law conditionality.

The two member states are both still under legal proceedings under article 7 of the EU treaty, which in theory could end up with financial sanctions or the countries’ voting rights being suspended.

But critics note that all these “bureaucratic” proceedings have so far had very little impact.

“In the EU we pretend everything can be solved in a technocratic way,” said Sophie in ‘t Veld, a Dutch liberal MEP involved in the rule of law discussions. She said the leaders of Poland and Hungary were “doing politics, while the others try to use technocratic tools to kick the can down the road”.

Chinese espionage claims

A former Huawei employee and a former member of Poland’s internal security service went on trial in Warsaw yesterday in a high-profile espionage case, writes our central Europe correspondent, James Shotter.

Poland arrested the two men, Wang Weijing, who worked for the Chinese group, and Piotr D, who worked for Poland’s ABW domestic counter-intelligence agency, in January 2019. The pair were charged last year with taking part in Chinese espionage activities directed against Poland. Both deny any wrongdoing. Huawei declined to comment.

At the request of prosecutors, the court agreed to hold the trial behind closed doors, because of the secret nature of some of the evidence. No date has been set for a verdict, but the trial is expected to run for at least several months.

The arrest of the two men came at the height of a tussle between the US administration of then-president Donald Trump and China, during which US officials pushed for European countries to shut Huawei out of their 5G-networks over fears that Chinese intelligence services could use the company’s infrastructure to snoop on host countries.

Huawei has repeatedly denied that it is involved in such activities. However, some European countries, including Sweden, Lithuania and the UK, have already decided to exclude the company from their 5G programmes.

Two things to watch

1. European Commission puts forward its spring semester package (We previewed it here)

2. European Commission makes a proposal for an EU digital wallet (Read more here)

Notable, Quotable

The vaccines are clearly working — protecting you, those around you and your loved ones

• The UK recorded no daily deaths from Covid-19 for the first time since the start of the pandemic in March 2020. (FT)

• Italy narrowly dodged a technical recession, as its gross domestic product grew 0.1 per cent, better than most were expecting.

• Steel giant ArcelorMittal, as well as German and Italian companies are bidding to buy the French steel plants of beleaguered metals tycoon Sanjeev Gupta. (More here)

• The diplomatic rift between Spain and Morocco widened yesterday when a Madrid judge declined Rabat’s request to detain Brahim Ghali, the leader of the Western Sahara independence movement, whose arrival in Spain precipitated a migrant crisis last month.

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