To the Nordic finance ministers: Mr. Anders Borg (Sweden) Ms. Oddný G. Harðardóttir (Iceland) Mr. Sigbjørn Johnsen (Norway) Ms. Jutta Urpilainen (Finland) Ms. Margrethe Vestager (Denmark)
Joint letter to the Nordic finance ministers about the Council of Ministers for Finance meeting
We, Nordic civil society organisations working for transparency and tax justice, would like to raise some concerns regarding the current review of the accounting directive and the transparency directive in the EU. Our concerns and recommendations regard the section dealing with countryby-country reporting (CBCR).
Transparency is a pillar of Nordic societies and a vital part of our open democracies. It has curbed corruption and built stability. Solid tax systems and states have supported companies by supplying a well educated, healthy and stable labour force and well-functioning infrastructure. At the same time transparency ensures well-functioning markets and foster competition.
Today these advances are being undermined in developed countries and denied developing countries by the secrecy provided by secrecy jurisdictions or tax havens. The result is massive illicit capital flight and tax losses that cancels investment, hurts competition and drains hardcurrency reserves in developing countries. Above all it reduces tax collection that is crucial to fulfil basic human rights and the ability of countries to reduce the dependence on aid. Estimates put the yearly tax loss at around 160 billion dollars, which is around one-and-a-half times the development aid.
Country-By-Country Reporting (CBCR) is an accounting standard that will make it possible to curtail illicit capital flight and reveal if multinational companies are paying the right amount of taxes, in the right place at the right time.
The proposed revision of the accounting directive and transparency obligation directive contains elements of CBCR in relation to the extractive industries and is a step in the right direction, but it will not as it stands solve any of the problems listed above. It will however provide information about payments between companies and government. This will make it possible to uncover corruption and hold governments to account for their spending of revenues from the extractive sector.
It will not provide sufficient information to limit illicit capital flight or uncover tax evasion or aggressive tax avoidance. In order to do this more financial information beyond payments are required, e.g. profit before tax, external as well as internal sales and turnover within the group and production volume. For comprehensive information on the information needed in full country-by-country reporting see Eurodad’s Exposing the lost billions.
While the European Directive is an important first step, such reporting should apply to all sectors and not be limited to the extractive and forestry sectors as the problems connected to lack of transparency and tax loss applies across all sectors. In fact research shows that the extractives is not the highest risk sector. For example minerals, chemicals and metals account for less than 30% of global mispricing in all cases for trade with both the EU and US (Christian Aid, False profits: robbing the poor to keep the rich tax-free, March 2009 and Eurodad, Exposing the lost billions, November 2011).
The extractive industries are, however, very important for developing countries and the source of severe challenges. The examples of environmental problems, conflict, missed opportunities for economic development and very low tax payments related to the extractive industries are called the resource curse. This is the reason why we argue that the extractive industries need to report on a project-by project level. This is crucial to fight local corruption and ensure that local communities benefit and see the impact of investments in their communities.
Moreover, the current positions on the directives both from the EU-commission and the EU-council allows for exemptions from reporting if a company by doing so violates laws in a third country. Nordic countries should oppose such exemptions. Contrary to what has been tabled today no countries have legislation in place where this would apply. It is therefore a hypothetical case and if it were to stand it would create a push towards such legislation, which could foster corruption. In fact most companies make sure that they are allowed to follow home-country laws when they enter into agreements with developing countries.
Finally, we would like to stress that details matter. One such detail is the materiality threshold set in the current directives. Both the Commission and the Council have set this at 500 000 euro in payments by one company to one government over a year. The ECON committee in the EUparliament recently argued that 30 000 euro is the correct threshold. We have argued for 15 000 euro. The point is that such reporting must capture the relevant payments in order to uncover corruption and highlight income to local government. A high threshold will make the masks in the net way too big for this purpose.
We therefore think it is crucial that the Nordic countries due to their history of transparent societies unite in an effort to change these key parts of the EU legislation. If this fails the Nordic countries should consider putting in place stricter rules on top of the EU-directives in order to influence the built-in review of the directives in 5 years time and thus become the European leaders on transparency. Together the Nordic countries have a unique opportunity to take a lead in fighting illicit capital flight and paving the way for sustainable growth.
We wish you a fruitful round of discussion in Oslo and look forward to continued dialogue on this issue.
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