Country by County reporting and EU citizens

Mihael Sket, 7.9.2016

1. Impact of news on corporate taxation on investors

Last week we had two major mobile phone producers in the news:

EU demands from one to pay 13 billion EUR to Irish government because it did not pay enough taxes and this kind of treatment is considered illegal state aid. Irish government does not want this payment and US is not satisfied with EU procedures. This is politically complex news. After that, the company’s stock fell less than 1%.

In the case of the other company the phone batteries in some cases explode. The shipment of models to market was delayed. It was simple, technical news. After that, the company’s stock fell for more than 3%.

Investors in stocks are rational. They calculate their future cash flows from investments. They expect that the mentioned technical problem can affect their cash flow from investment more than the mentioned tax issue. If company can not pay lower taxes in one country, it can still move to another country.

2. Impact of civil society on the companies

In theater play “Oni” (Them) that was produced in June by Ekvilib Institute as part of project for tax justice, there is shown impact of unfair business practices on civil societies. The characters in the play are with a lot of disadvantages in their lives, but at the end of the play, they all have a common enemy, the immigrants.

One of the characters is a part-time saleswomen in a clothes shop, and she works overtime with no payment. Her boss promised her many times she will get a full time contract, but noting changed. Saleswomen is not very satisfied with this situation. But she gets really angry when telling her bosses story from the time the boss went to Paris and an immigrant stole her purse.

In April as part of Tax on Tracks tour, Ekvilib organized a discussion with tax activists from Nigeria, Argentina and Zambia. In those countries the tax avoiding is more aggressive than in EU. I remember 3 advices from them: do not trust the media, request from companies more information that is required by the law, choose what product you buy and from what companies. With this approach EU citizens can have an impact on their companies.

3. Information about companies in financial report

The financial reports are written for investors and others. Investors are most active in stock exchanges. Stock exchanges need that information from financial reports is comparable and they need the common standards of reporting. Those standards are International Accounting Standards (IAS, IFRS). EU accepted them and all EU companies that are public (have stocks in EU stock markets) and have their headquarters in EU, and have a group of companies, have to prepare financial report under IFRS. So all EU based multinationals (shareholders companies) have to use IFRS. Non-governmental organizations are not satisfied that IFRS is not making Country by Country reporting (CBCR) mandatory. Under IFRS, there is mandatory segment reporting, but segment is defined as part of organization for that the management performance is measured and whose operations are planned. In our multinational Krka (one of our 6 big multinationals), the segment reporting is for East Europe markets. IFRS financial reports are audited.

4. Information about CBCR in EU directive

EU proposed public CBCR in accounting directive for companies in EU that do not have to report under IFRS. CBCR is not part of annual report by multinationals under IFRS. It will not be audited. The reporting is foreseen for taxes paid in EU member states and in some countries with “bad” tax regulation.

5. Conclusion

I think that proposed public CBCR is political. It will be used for harmonization of tax regimes within EU, and it could affect some non EU countries.

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