Following the European Council conclusions on May 22 2013, a review clause was introduced in Directive 2013/34/EU. This required the Commission to consider the possibility of introducing an obligation on large undertakings of additional industry sectors to produce, on an annual basis, a CbCR, taking into account the developments in the Organisation for Economic Cooperation and Development (OECD) and the results of related European initiatives.
Public CbCR had already been established in the EU for the banking sector by Directive 2013/36/EU, as well as for the extractive and logging industry by Directive 2013/34/EU. Companies subject to Directive 2013/36/EU which already provide public CbCR will be exempt from the new requirements.
This marks a significant point in the demand for tax transparency. It goes further than the OECD guidance but not as far as some commentators thought. Restricting the public submission to groups with consolidated review of over €750 million ($860 million) in reality has limited the push for corporate transparency to about 10-15% of all MNEs (per the OECD’s own statistics in the Transfer Pricing Documentation and Country-by-Country Reporting, Action 13 - 2015 Final Report). The key difference therefore is the public submission.
The European Parliament considers the public submission of the reports necessary to promote a better-informed public debate regarding the level of tax compliance of certain multinational undertakings active in the EU and the impact of this on the real economy. The public submission is ‘policed’ to a certain extent by statutory auditors or audit firms who will have to state in the audit reports whether an undertaking was required to issue a report and, if so, whether it was published.
This Directive has a significant impact on both EU based MNEs and non-EU based MNEs doing business in the EU, increasing the compliance burden not only from the perspective of submitting data but in terms of monitoring when and what they have to disclose. This is because there is a risk of countries interpreting the legislation in different ways, with different implementation timelines and requirements.
Groups will also need to carefully think about if they are able to temporarily omit data points which could lead to a loss of competitiveness through disclosure of confidential business information or lead to reputational damage through misinterpretation of the standardised CbCR format. Narrative on material discrepancies between the data points may also be included. This narrative will need to be carefully worded so as not to be misconstrued by the public audience.
It will also be important for groups to consider the public disclosure of information in the CbCR alongside other reporting requirements such as for environmental, social and governance (‘ESG’) purposes. Given the potential uses of this data, businesses should consider how they access and analyse the information, ensuring that they have assurance over the process and quality of what they submit
The rules will require affected multinationals to file a report on tax and related information concerning the whole group. This includes data concerning non EU–related operations, in an EU commercial register, and also to publish the report on their corporate website
A reporting obligation will arise when there is a multinational group or stand-alone undertaking with a (consolidated) net turnover of at least €750 million in each of the last two consecutive financial years. Either the ultimate parent or a member of the group that exceeds a certain size threshold is an undertaking (subsidiary or branch) governed by the law of a Member State or has a branch in a Member State. For non-EU headquartered companies, the legislation is relevant if they exceed the threshold and their EU presence includes either medium-sized or large subsidiaries.
Medium-sized or large subsidiaries (as defined in Directive 2013/34/EU) must meet at least two of the following three requirements:
1 Have an average number of employees exceeding 50
2 Have a balance sheet greater than €4 million; or
3 Have net revenue greater than €8 million
A branch simply needs to meet the revenue threshold.
The report should cover specified data for the whole group. The data should be provided on the following basis:
- The name of the ultimate parent undertaking or the standalone undertaking, the financial year concerned, the currency used, and where applicable, a list of all its subsidiary undertakings consolidated in the financial statement of the ultimate parent undertaking established in the EU or in tax jurisdictions included in Annex I or Annex II of the EU list of non-cooperative jurisdictions for tax purposes
In the case of groups where the ultimate parent company is based in the EU, the disclosure obligation lies with the EU parent. For non-EU parented groups that operate in the EU through qualifying subsidiaries or branches, the main rule is that each of the EU subsidiaries and EU branches is required to publish and make accessible (on their website or publicly accessible commercial registers) the report on income tax information of their ultimate parent, to the extent that the information is available to them.
If the information is not available to the EU entities, they will have to publish a statement indicating that their parent has not made the necessary information available (the ‘comply or explain’ clause). There is one exception to this rule, whereby the EU subsidiaries and branches are exempt from their obligations if the non-EU parent has published the report on their website and has assigned one of the EU subsidiaries or branches to file the report with their national trade registry.
The report should be drawn up and published annually within 12 months after the balance sheet date for the financial year of the group. The information would need to be submitted to the trade registry of the relevant EU Member State and also be made available on the internet, using a common template, and in a machine readable format. No general time limits are prescribed, but non-EU parents must publish the online version within 12 months of the balance sheet date if a single EU subsidiary or branch files. Online versions of the report should remain accessible for at least five years.
Member States will have 18 months to transpose the Directive into local law and the rules will likely become applicable from 22 June 2024 at the latest. However, as with other BEPS movements, Member States have been known to jump the gun, so this should be closely monitored.
If you would like to discuss any of the issues arising above please contact Kirsty Rockall.
We would be happy to advise you on how the Directive may apply to your Group, and help you collate, analyse, understand and submit the information..