European bank reform: A boon for tax authorities?

The proposed package of European bank reform measures, known as the Capital Requirements Directive Four (CRD4), could be a boon to European tax authorities, giving them a clearer view of when banks attempt to shift profits out of country to avoid tax, observers say.

“Such profit-shifting is currently a severe problem for many governments, including the UK’s but also those of developing countries,” said Joseph Stead, senior adviser on economic justice for the group Christian Aid, in a prepared statement.

EU finance ministers discussed the CRD4 proposal at their March 5th meeting in Brussels after the European Parliament agreed to it last week. They “broadly endorsed” agreement with the European Parliament on the CRD4 package and called for the EU’s Permanent Representatives Committee to finalise negotiations with the European Parliament and reach a deal by the second half of March.

If adopted, CRD4 would require lenders to hold more capital and liquidity reserves, would lay the groundwork for a single banking supervisory agency in the euro zone and would curb bankers’ bonuses. It would also require banks to report their finances on a country-by-country basis, meaning they would have to publish details of profits made, subsidies received and taxes paid separately for each country in which they operate.

It is this country-by-country financial reporting requirement that would open the banks up to tax scrutiny. “That will make it much easier for tax authorities to spot when banks are artificially shifting profits out of the countries where they were really made and into tax havens,” said Stead.
 
Vicky Ford, a British member of the European Parliament and one of the chief negotiators on CRD4, applauded the transparency rules, saying that the public “need to know how much banks are paying in tax,” at a press conference on February 28th. Philippe Lamberts, a European Parliament member from Belgium, called them “crucial” in the efforts to combat tax avoidance.

The Organisation for Economic Co-Operation and Development recently noted that multinational companies in general—not just banks—have become more aggressive in pursuing profit-shifting strategies to lower their overall taxes, and Christian Aid’s Stead called for the CRD4 country-by-country reporting financial rules to be extended to all industries.

CRD4 still needs to be approved by a majority of the 27 EU member states before it can go into effect.

—Alistair M. Nevius (anevius@aicpa.org) is CGMA Magazine’s editor-in-chief, tax.