The Commission’s proposal focuses on MNEs with a worldwide consolidated net turnover of more than EUR 750 million, in line with the scope of the global OECD initiatives on tax transparency (action 13 of the BEPS Action Plan) which are being adopted by the EU through revision of the Administrative Cooperation Directive. But where these initiatives only require disclosure of information provided to tax authorities, the current Commission proposal concerns public disclosure. Under the Commission proposal, the country-by-country report has to be made publicly available on the MNE’s website for at least five years. Companies will also have to file the report with the relevant national commercial register. The report will need to be audited before it is published.
The information MNEs are required to disclose consists of: (i) a description of the nature of the activities that they engage in, (ii) the number of employees, (iii) the total net turnover (including turnover made with related parties), (iv) the pre-tax profit or loss, (v) the amount of income tax accrued (not including deferred taxes or provisions for uncertain tax liabilities), (vi) the amount of income tax actually paid, and (vii) the accumulated earnings of the group. In addition, any material discrepancy between the tax accrued and the tax paid will need to be explained at group level in the report. The report will have to cover every member state of the EU where the MNE has activities, on a country-by-country basis. In addition, MNEs with undertakings in jurisdictions that are designated “tax havens” will have to present the required information separately for each of these jurisdictions, unless the report explicitly confirms that no transactions between these undertakings and their EU affiliates have taken place. To this end, the Commission will draw up a common EU list of “tax havens”. Information on activities in other third countries may be aggregated for disclosure purposes.
Any qualifying MNE that has activities in the EU, even if only by way of a subsidiary or branch, will have to comply with the reporting standards. For EU MNEs, it is the parent company that has the responsibility to prepare the report. For non-EU headquartered MNEs, the responsibility for publication of the report lies with the EU subsidiary or branch. The penalties provided in the Accounting Directive will apply to non-compliant MNEs.
The proposal for country-by-country reporting overlaps with other, already existing reporting requirements for the banking industry and the extractive and logging industries. However, the proposal contains an exemption for banking groups established in the EU, which are already subject to stringent public reporting rules under the Capital Requirement Directive IV. For non-EU banks operating in the EU, the proposal complements the existing banking legislation, requiring these banks to publish a country-by-country report if their turnover exceeds EUR 750 million. With regard to companies involved in the extractive and logging industries, no such exemption exists. Extractive and logging companies operating in the EU with a net turnover exceeding EUR 750 million will therefore have to comply with this proposal in addition to their existing reporting requirements (for further information on the existing requirements see our In context article of January 2016.)
Before the proposal is adopted, it will need to be approved by the ECOFIN Council and the European Parliament. There appears to be considerable opposition to the proposal. Nonetheless, we consider it likely that the proposal will be adopted, taking into account that the proposal is not subject to unanimity in the ECOFIN Council but instead can be approved by a qualified majority (16 member states representing at least 65% of the EU population).