The European Commission (“the Commission”) has issued a draft Directive, “DAC 4”, which was released on 28 January and endorsed by ECOFIN at a meeting of EU finance ministers held on 8 March 2016. When DAC 4 comes into force, it will oblige EU Member States to enact EU compliant CbyC reporting obligations into their local law. The CbyC measures set out in the proposed Directive are identical to the OECD/Irish rules in many respects (i.e. €750m turnover threshold, the financial information that gets reported, the ability to nominate a surrogate parent, and the effective date for primary reporting (accounting periods commencing on or after 1 January 2016).
Most EU Member States have already introduced CbyC legislation or announced that it will, on foot of the OECD recommendation in October 2015. Those countries will now need to review the EU rules in order to determine the impact of the draft Directive on their domestic rules/plans.
There are two important issues which require clarification as the text of DAC 4 is finalised for adoption (expected to be in time for the May 2016 ECOFIN meeting):
EU subsidiaries of MNCs will have an obligation to file an EU-compliant CbyC report where the Group’s ultimate parent or a surrogate parent does not file a CbyC report, or the relevant parent’s country of residence does not automatically share it. Under OECD and Irish rules, this “secondary reporting” obligation is applicable at the same time as the primary reporting obligations i.e. for accounting periods commencing on or after 1 January 2016. However, at the 8 March 2016 meeting, ECOFIN appears to have agreed that EU Member States will be given the option to defer the enactment of secondary CbyC reporting obligations for one year i.e. to periods commencing on or after 1 January 2017.
This development is understood to address the position faced by US parented MNCs with calendar year ends. The US has issued draft CbyC regulations which are expected to become final by 30 June 2016 to take effect for accounting periods of US MNCs commencing after the date of finalisation of the regulations. This means that it is likely that 2017 will be the first accounting period for which US parented MNCs with 31 December year ends will be in a position to file CbyC reports in the US, as the ultimate parent jurisdiction. For 2016 accounting periods, these US MNCs face the choice of appointing a surrogate parent entity to prepare and file a group-wide CbyC report or meeting secondary reporting obligations in jurisdictions which have enacted secondary reporting requirements.
The current Irish legislation requires Irish resident, US Parented MNCs with a calendar year-end to file a “secondary” CbyC report in Ireland for the 2016 period. Other EU Member States which have introduced domestic CbyC rules to date have also taken this approach.
In the course of transposing the final DAC 4 requirements into Irish law, Ireland will have the opportunity to review whether it should amend its existing CbyC regulations to defer implementation of secondary reporting requirements in Ireland until 2017.
The draft text of the Directive suggests that a secondary EU-compliant CbyC report should cover the entire MNC Group, from parent downwards. However, it recognises that, even where subsidiaries within a group request group-wide information from the parent entity, this information may not always be made available to them. The Directive suggests that a secondary EU CbyC report is confined to information which is in the possession of the reporting entity or which it can obtain or acquire – to be supplemented by explanatory notes where reportable information is missing. We will need to await guidance which may be made available in tandem with release of the final Directive in order to understand the scope of secondary reporting obligations in circumstances where an EU resident subsidiary does not have access to all group-wide information.
Irish legislation requires a secondary filer to file an “equivalent” CbyC report which is a report containing the information which the Irish resident company has the “power to obtain or acquire”.
The Directive does not include a provision for EU CbyC reports to be made public. However, the EU is carrying out an Impact Assessment on the impact of potentially introducing such provisions, on foot of which the Commission has stated it may decide in the future to propose imposing public disclosure obligations on companies.