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Country by Country Reporting Becoming Mandatory in EU

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Country_by_Country_Reporting_EU.jpgThe European Commission released a proposal on 12 April 2016 to introduce mandatory public country-by-country reporting for large multinational entities operating within the EU.

The intention is that this information would be made available for each company by way of a stand-alone report which should remain accessible by the public for a period of at least five years through the organisation’s website.

Furthermore, the EC suggests that this report would also have to be filed with a business register within the EU.

Background to the Legislation

The proposal is the result of an assessment launched by the EC in June 2015. This investigated the impact of the introduction of multinational entities within the EU publicly reporting their tax affairs.

The proposal also bears close links with both the Administrative Cooperation Directive agreed by the EU in 2016, requiring multinational entities to submit country-by-country reporting to EU tax authorities. The revision also implements the OECD’s BEPS Action Plan which was endorsed by G20 members.

Related: OECD Guidance On CbC Reporting 

Requirements of the Legislation

The latest proposal intends making it a legal requirement, that all EU-based parent companies of multinational groups operating in the EU with global revenues exceeding €750 million a year will publish key information on:

  • The nature of the activities;
  • The number of employees;
  • The total net turnover, which would include turnover made with related and unrelated parties;
  • Profit or loss before income tax;
  • The amount of income tax accrued (current tax expense) as a result of profits made in the relevant year;
  • The amount of income tax paid during the year;
  • Accumulated earnings;
  • Where the company makes its profits; and
  • Where the company pays its taxes in the EU on a country-by-country basis.

These rules would also apply to multinational companies headquartered outside the EU where the group has in excess of €750 million net turnover, and the group operates in Europe through medium or large subsidiaries or branches.

The qualifications for this would be based on current EU thresholds. These companies would have to additionally publish aggregate figures for total taxes paid outside of the EU, and if the group includes a company incorporated in a State deemed to be a tax haven, the information for same would have to be disclosed on an individual country basis.

Related: Beneficial Ownership, Transparency & AML in Britain

Increasing Transparency

The European Commission views the proposal as an effective solution to increase large multinationals’ tax accountability while limiting damage to their competitiveness.

The proposed legislation will affect thousands of large firms operating in the EU without affecting small and medium-sized companies. It aims to supplement other proposals by the EC to further strengthen the sharing of information between tax authorities. It also increases transparency in countries that do not presently observe the international standards set for good governance with regard to taxation.

The EC will use this initiative to establish the first common list of EU tax jurisdictions which do not meet these standards.

Related: The Small Business, Enterprise & Employment Bill – PSC Register

Implementation

Should the EC proposal be adopted, it would then be implemented through amendments to the existing EU accounting directive which governs the disclosure of income tax information.

The proposal does not attempt to harmonise the tax rules of the EU member States, which would require unanimous agreement. Therefore, a qualified majority is required which would represent 16 Member States, before the European Parliament would ultimately approve.

The current corporate tax avoidance regimes are estimated to cost EU countries €50-70 billion per year in lost tax revenues. The proposed legislation will transform the transparency of multinationals, some of whom have received significant public attention in the media regarding their tax affairs.

In turn, this should increase public trust in the international taxation system in that large corporations with complicated tax regimes can now be further held to account.

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