On 25 May 2016, the European Council adopted a Directive that amends Directive 2011/16/EU with regard to mandatory automatic exchanges of information in the field of taxation. Among other changes, the Council introduced country-by-country (“CbC”) reporting to European Union (“EU”) law following the recommendations made by the Organisation for Economic Development and Cooperation (“OECD”) under Action 13 Base Erosion and Profit Shifting Action Plan (“BEPS Action Plan”).
The obligation of preparing a CbC report will apply to very large multinational enterprise (“MNE”) groups for which the total consolidated group revenue exceeds €750 million (or an amount in local currency approximately equivalent to €750 million)1.
The CbC reporting concerns both MNE groups headquartered in an EU Member State and those headquartered outside the EU. If the parent entity is headquartered outside the EU, one of the subsidiaries or branches established within the EU and appointed by the parent entity will be in charge of the CbC report on behalf of the parent2.
This amendment to the Directive does not address the public disclosure of income tax information by certain MNE groups as proposed by the European Commission on 12 April 2016.
The information to be reported within this document is similar to that described in Action 13 of the BEPS Action Plan. Indeed, MNE groups should provide annually and for each tax jurisdiction in which they do business the amount of revenue, profit before income tax, and income tax paid and accrued. MNE groups should also report the number of their employees, stated capital, accumulated earnings and tangible assets in each tax jurisdiction. Finally they also should identify each entity within the group doing business in a particular tax jurisdiction and provide an indication of the business activities in which each entity is engaged3.
The information above should be reported on an aggregated basis for all entities resident in a specific jurisdiction and not entity-by-entity as described within Action 13 of the BEPS Action Plan.
The obligation of preparing a CbC report will apply for the fiscal year commencing on or after 1 January 2016 (subject to exceptions).
MNE groups falling into the scope of the Directive will need a CbC report within twelve months following the last day of the fiscal year to which the CbC relates4. This deadline will have to be considered in light of the deadlines established by other non-EU countries, either at the parent entity or subsidiary level, should there be a more stringent deadline than the one established within the EU.
The preparation of the CbC report triggers some technical problems not solved by the Directive which will need to be monitored and addressed over time by the MNE groups. Among others, these include:
In conclusion, when a MNE group falls into the scope of the Directive, it will have to ensure that it has developed efficient internal reporting instruments to allow the identification and timely reporting of information required by the CbC report. Moreover, this report may highlight discrepancies within the value chain as disclosed in existing documentation compared to the actual financials of each entity/jurisdiction which will need to be carefully monitored by the group. The master-file and local files will definitely become tools that will give some colour to the rough results disclosed in the CbC report and will be used to explain the value chain and remuneration of entities within a group throughout the world.
1 Council of the European Union – Council directive amending directive 2011/16/EU as regards mandatory automatic exchange of information in the field of taxation. Annex III
2 Council of the European Union – Council directive amending directive 2011/16/EU as regards mandatory automatic exchange of information in the field of taxation. Section II
3 Council of the European Union – Council directive amending directive 2011/16/EU as regards mandatory automatic exchange of information in the field of taxation. Point 6 and article 8aa
4 Council of the European Union – Council directive amending directive 2011/16/EU as regards mandatory automatic exchange of information in the field of taxation article 8aa
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.
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