The UK Department for Business Innovation and Skills has released updated draft legislation to implement Chapter 10 of the EU Accounting Directive. The legislation introduces country by country reporting for UK extractive companies or groups of tax payments to governments. Payments include corporate taxes, royalties, licence fees, production entitlements, bonuses, dividends and infrastructure payments.
The legislation, published on Thursday 21 August 2014, follows the initial draft published in March 2014 and the consultation process. The industry working group are drafting guidance to the legislation, which will also be published in due course and is expected to be endorsed by BIS.
The Chapter 10 requirements will pose a significant compliance burden on extractive companies and groups as it requires country by country reporting of all cash payments by project and by receiving government.
Challenges in the application of the requirements include:
The EU Accounting Directive was enacted in June 2013 and all EU member states are required to implement the regulations by July 2015.It is one of a number of proposals for the reporting of tax and financial data for oil and gas companies. The Extractive Industries Transparency Initiative (EITI), established in 2002, was seen as the first driver for greater transparency in the industry. The UK is expected to implement EITI reporting over the course of the next 12 months and will require UK oil and gas companies to report taxes paid to an independent reconciler.
This year the OECD will be finalising a framework that will require all multinationals operating in OECD or G20 countries to report financial and tax information on a country by country basis to tax authorities as part of the Base Erosion Profit Shifting action plan.
Scope of legislation
The UK implementation requires UK companies to report payments to governments if they:
1. Balance sheet of more than £18 million;
2. Net turnover of more than £36 million;
3. Average number of employees during the financial year to which the balance sheet relates exceeds 250.
UK groups or sub groups are required to prepare consolidated reports if:
Exemptions apply to small or medium sized groups or UK subgroups ultimately owned by an EU company.
Some observations in respect of the legislation:
The rules will apply for financial years commencing on or after 1 January 2015. The reporting deadline is 11 months after the year end. Therefore groups with a December year end will be required to file before 30 November 2016. Where groups will report UK figures in another EU member state as part of consolidated reporting a grace period of one year is given to allow for later implementation in those countries. This is a response to industry lobbying and avoids UK companies needing to prepare a one off report to the UK Government in respect of 2015.
Other EU Member States will be implementing the Chapter 10 requirements over the next year and it will be important to monitor and understand any differences in local legislation.
To discuss any of the above, please contact us, and also see The Reports on Payments to Governments Regulations 2014.
This article represents the views of the author only, and does not necessarily represent the views or professional advice of KPMG in the UK.