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April 21, 2016

Country-by-Country Reporting May Soon be Made Public on Company Websites
On 12 April 2016, the European Commission (“EC”) published a draft directive that if adopted would require multinational groups (or stand-alone undertakings) to publicly disclose tax-related information comprising seven data points—including tax paid within the European Union—on their websites. The draft directive would amend the existing EU Directive on disclosure of tax information. The proposed reporting requirement — timed nicely to enter the slipstream from the recently released Panama Papers — can be considered a public, albeit truncated off-shoot of the country-by-country reporting requirements published in the recent OECD BEPS initiative. As with the BEPS initiative, the EC proposal applies to large multinationals reporting worldwide consolidated net turnover in excess of €750 million. Tax data to be disclosed will range from tax paid in EU states to the nature of operations and employee count per jurisdiction. Further, the EU has promised to develop a new list of tax haven countries, for which special disaggregated reporting will be required for MNEs doing business therein. 

EU Country-by-Country Reporting: Who Reports and What?
This latest tax reporting initiative differs from previous ones in that its target audience is the public—citizens and taxpayers whom the European Commission believes entitled to visibility into the tax-paying behavior of the locally operating multinationals. With this audience in mind, the new proposal would provide only seven data points—in contrast with the 12 proposed by BEPS—but on a more public platform: the company’s own website.  

Reporting will be required for every EU country in which the multinational is active, with disaggregated detail provided on operations in so-called tax havens, and aggregated data for operations in rest of the world. The data will be published with business registers in the EU, as well as in a standalone report downloadable from the company’s website, which must remain online for five years.

Data will be required in the following seven categories, broken down by jurisdiction:

  • The nature of operations (activities undertaken)
  • The number of employees
  • Total net turnover (including both intracompany and third-party revenues)
  • Pre-tax profit
  • Income tax due
  • Income tax paid
  • Accumulated earnings

The EC has estimated that 6,000 large multinationals[1] will be affected by the proposal. Further, the medium or large-sized subsidiaries (and branches) of non-EU headquartered groups would be required to report on behalf of their ultimate parents—posting the reports on their websites and delivering the reports to EU business registers. As an alternative, the non-EU parent could post the information for the whole group to the parent’s website, while entrusting a local subsidiary to deliver the reports to the relevant business registers.

According to the Commission, penalties for non-compliance with the new initiative are already provided for in the Accounting Directive, and would take the form of fines to be applied by national competent authorities or courts. The Commission has stated that the penalties should be “effective, proportionate and dissuasive”.

Background and Legal Basis
In June of 2015 the European Commission met to develop its Action Plan for Fair and Efficient Corporate Taxation in the EU. One of the five key goals of the plan was to improve tax transparency in the EU. Within several months, the European Commission unveiled its Anti-Tax Avoidance Package, in January 2016. This package included a plan for implementing country-by-country reporting as described in the OECD BEPS action plan—and formed the precursor to the discussed proposal.

The two main differences with the OECD BEPS action plan—which also lays out country-by-country reporting standards—are the target audience and the number of data points required. The target audience for the OECD BEPS initiative is much more traditional: the taxing authorities of the relevant operational jurisdictions. Additional data points that taxing authorities will receive (and the public will not), include the following: stated capital, tangible assets, and main business activity classification. The rationale behind limiting publicly available data points is to restrain anti-competitive behavior, as non-reporting companies could benefit from asymmetrical information releases from their competitors.

The authority underlying the proposal is Article 50 of the Treaty on the Functioning of the Union, and the proposal would specifically modify Accounting Directive 2013/34/EU, which sets out rules on financial reporting obligations. As the proposal has been crafted as an update to extant reporting rules, the proposal would require a qualified majority vote by the European Council, unlike tax harmonisation initiatives (requiring full unanimity). The new proposal has now been submitted to the European Parliament and Council for voting. Final adoption will require a qualified majority vote by the Council, and approval will necessitate transposition into national legislation by all EU Member States within one year of its entry in force. Exact timing of implementation is difficult to gauge at this stage given the number of readings that the proposal may have to go through.

Non-conforming Jurisdictions
Further to the passage of the main proposal, the European Commission has promised to make an initial assessment of countries’ tax systems for compliance with tax good governance standards, as part of its External Strategy for Effective Taxation.  Nonconforming jurisdictions—“tax havens” in common parlance—will be flagged as locations requiring disaggregated reporting on transactions by multinationals operating within their bounds. The EC will also be proposing further counter-measures to coax those nonconforming jurisdictions into international norms—or alternatively to coax multinationals out of those jurisdictions.

In June 2015[2], the EU published distinct lists of nation states deemed to be non-conforming by various EU member states. However, this new proposal will create a single unified EU-wide list. According to the European Commission, this new list will be based on “clear and internationally-justifiable criteria and a robust screening process”.[1]  However, as noted by some commentators, there does not appear to be much consensus amongst EU states on the definition of noncompliance, as perhaps shown by the wide divergence in length (and to some extent content) of Member States’ previously published tax haven lists. The Commission is expecting to present the new EU-wide list to Member States in autumn 2016.

A&M Taxand UK says
The new EC country-by-country reporting initiative will require reporting on tax practices for multinationals—in the very public format of standalone reports uploaded to company websites. The initiative dovetails with the current tax reform climate promoted by the OECD, the political landscape, and the media frenzy on perceived tax avoidance. And whilst the new reporting requirements may not place much additional administrative burden on a given company (beyond that already required by BEPS), the additional public aspect of the reporting may add an additional layer of scrutiny for multinational companies operating in the EU.

Key Contacts
Thomas McFarlane

Managing Director



[1] European Commission Fact Sheet, “Introducing public country-by-country reporting for multinational enterprises”, 12 April 2016