Our alert of 24 March 2016 outlined the contents of the draft text of a proposed Accounting Directive to effect public EU CbyC which was leaked to the media. This essentially requires multinational groups to make their CbyC reports publicly available, disclosing information including the profit and the tax accrued and paid in each EU Member State on a country-by-country basis. This information would remain available for five years and would be published on the relevant companies’ websites.
The EU officially published the proposal and accompanying explanatory documents yesterday after it was approved by ECOFIN. The proposal broadly reflects the measures in the media reports, with additional provisions requiring information in relation to certain entities in certain non-EU jurisdictions to be reported on a per country basis, rather than on an aggregate basis.
The commercial implications of the proposal for multinational groups are potentially significant.
Groups in scope and who has to publish
It is important to note that non-EU parented groups are also within scope of the proposal if the Group has EU resident subsidiaries or branches/permanent establishments in the EU.
The proposal would require groups in scope of EU CbyC reporting (multinational groups with a total consolidated revenue of €750 million or foreign currency equivalent) to make CbyC reporting information easily accessible to the public by requiring publication of the information on the websites of the relevant companies.
An EU parented group would publish the report for the entire group on the parent company’s website. For non-EU parented Groups with EU subsidiaries or branches, the reporting could be done by the non-EU parent entity publishing the group’s CbyC report (including CbyC data for EU subsidiaries and branches and non-EU aggregated data) on its website and designating an EU subsidiary which would also publish the group report on its website.
If the non-EU parent does not publish the information, the obligation falls upon EU subsidiaries (or branches) to publish the group-wide report on their website. This obligation could be satisfied where one designated EU subsidiary publishes the group-wide information and other EU group members refer to this disclosure on their websites. Where group-wide information is not available to the EU entity, the information which EU resident subsidiaries of non-EU parented groups are required to report is limited to the information which the company’s directors can obtain to the best of their knowledge and ability.
The statutory auditor of the reporting entity is obliged to check whether the report has been provided and made accessible.
Information to be reported
Under the proposal, the public report would require information on all members of the taxpayer group (i.e., including non-EU members) including activities, number of employees, net turnover (including related party turnover), profit or loss before tax and tax accrued and paid and accumulated earnings
That information must be listed for each EU Member State where the group is active, but may be aggregated for non-EU jurisdictions (rather than broken down by non-EU country). However there is an exception to this rule for entities which are tax resident in certain non-EU jurisdictions which have yet to be defined (see below).
There is a carve out for “small” EU subsidiaries and branches as well as a general carve out for financial sector groups that already report equivalent information under the CRD IV rules.
Information for certain non-EU resident entities to be reported on a disaggregated basis
For those tax jurisdictions that do not abide by good tax governance, the required information would have to be disclosed on a disaggregated basis. This means that the information relating to that non-EU entity will be reported for that entity only, and will not be aggregated with the information relevant to other non-EU entities. Work to identify those jurisdictions which will be regarded as not abiding by good tax governance is still in progress and will be principally based on transparency and fair tax competition. The EU is making an initial assessment of non-EU country tax systems in order to compile a common EU list of countries.
There is an exception to the above “disaggregation” rule where the CbyC report explicitly confirms that the EU resident members of the Group do not directly transact with the particular non-EU resident entity.
The precise timing of implementation and the final shape of the measures will depend on the manner in which the legislative debate proceeds.
The proposal is now to be submitted to the European Parliament and to the European Council for consideration and final adoption by qualified majority of the European Council. While tax-related legislation requires unanimous approval by Member States, in the case of the current proposal - which would amend the ‘Accounting’ Directive (2013/34/EU) - only a qualified majority is required (i.e.16 EU Member States representing at least 65% of the EU population).
The current proposal envisages that, once the final amending Directive comes into force at EU level, Member States would have one year to transpose the measures into local law. The draft Directive then suggests that it should take effect for financial periods no later than one year after the transposition deadline. For 31 December year end companies, financial statements for the 2019 period could therefore likely be in scope.
We will keep you updated with any further developments as they arise.