What is ‘Public’ Country-by-Country Reporting?
The first public Country-by-Country Reporting (“CbCR”) Directive (“Public CbCR Directive”) was proposed in April of 2016, as part of the European Commission action plan to foster corporate tax transparency. However, CbCR is not a new concept. It was established by the OECD as part of BEPS Action 13 and has already been implemented in many countries. The new Public CbCR Directive further aligns EU law with the existing OECD standard and introduces a new ‘public’ element to the scheme.
The Public CbCR Directive has a number of objectives, but in particular it is designed to strengthen tax transparency by way of the automatic exchange of information between EU Member States (“ EU MS”) on potentially aggressive tax planning arrangements as well as enabling public scrutiny.
The above-mentioned objectives and the presumed benefits from this Directive, as stated in the resolution, are:
- “It is necessary to enhance public scrutiny of corporate income taxes borne by multinational undertakings carrying out activities in the Union”;
- “It is necessary to promote a better-informed public debate regarding, in particular, the level of tax compliance of certain multinational undertakings active in the Union and the impact of tax compliance on the real economy”;
- “The public should be able to scrutinize all the activities of a group of undertakings if the group has certain types of entities established within the Union”;
- The Public CbCR Directive “will contribute to regaining the trust of citizens of the Union in the fairness of national tax systems”;
- “The civil society will become more involved, and employees will be better informed and investors less risk averse”;
- “Undertakings will benefit from better relations with stakeholders, which will lead to greater stability, along with easier access to finance due to a clearer risk profile and an enhanced reputation”
Putting the ‘Public’ in Public CbCR
The initial proposed text of the Directive became colloquially known as the ‘Public CbCR Directive’, which is also arguable its key feature. The decision by the EU to not just impose disclosure requirements to a limited selection of stakeholders, such as the tax authorities, but creating an obligation to also publish the report to the general public, supports the tax transparency policy objective of the EU but takes the approach further than the OECD CbCR scheme. Recital 10 of the Public CbCR Directive lays out underlying reasoning for the requirement enterprises to publish the reports; “the public should be able to scrutinize all the activities of a group of undertakings if the group has certain types of entities established within the EU”. By extension, it is also argued to influence the behavior of Multinational Enterprises (“MNEs”) with respect to profit shifting through reputational loss suffered as a result of publishing data that could suggest tax avoiding behavior.
This goes beyond the initial policy objective underlying BEPS Action 13; to reduce information asymmetries between tax authorities and MNE taxpayers. The efficacy and appropriateness these measures is subject to debate with some arguing that transparency with the public, as well as naming and shaming, are good tools to account for the fact MNEs have the capacity to shift profits internationally and correct for related competitive distortions within taxation. Conversely, others argue that public CbCR creates issues around fairness and that the content of the report is not sufficient to draw definitive conclusions about the enterprises tax behavior and that the general public lacks the knowledge to make informed judgements with the data presented.
What Caused the Deadlock?
A disagreement concerning the legal basis of the act caused a 5 year-long wait until its approval. The discussions were centered on whether the proposal needed to be based on:
- Article 50 of the Treaty on the Functioning of the European Union (“TFEU”), meaning that it would be subject to the ordinary legislative procedure – requires qualified majority voting in the Council, or;
- Article 115 TFEU, meaning that it would be subject to the special legislative procedure, the common procedure used in tax matters and subject to unanimous approval at Council level.
This Public CbCR Directive comes as an amendment of the EU Directive 2013/34 (“the Accounting Directive”) for undertakings with revenues above EUR 750 million to publicly disclose a variety of financial data (including non-EU group members).
In order to reach a political agreement, 3 rounds of inter-institutional negotiations between European Council and the European Parliament were held, mediated by the EU Commission (“tripartite meeting”) was ultimately necessary. On 1 June 2021, a provisional agreement was negotiated by the relevant European Parliament Committees and by Member State representatives in Permanent Representatives Committee.
The proposal was finally approved on 28 September 2021, by the European Council under the subject to the ordinary legislative procedure (which required qualified majority voting in the Council).
Who is Affected?
Under the Public CbCR Directive, multinationals will be required to prepare, publish, and draw up a report concerning financial and tax data as defined by the Chapter 10A of Public CbCR Directive. Pursuant to Article 48b, the following entities will be subject to such public CbCR Directive under the following conditions:
|EU based MNEs
EU based ultimate parent undertaking with consolidated revenue exceeding for each of the last two consecutive financial years a total of EUR 750 million
|Non-EU based MNEs
|Medium-sized and large subsidiary undertakings[i] or a qualifying branch established in an EU MS controlled by a foreign ultimate parent undertaking and where their consolidated revenue exceeds EUR 750 million for each of the last two consecutive financial years
Exemptions From the Report Requirements
However, for the purposes of Public CbCR Directive the following exemptions will apply:
- Total revenue less then EUR 750 million – Undertakings will not be subject to the reporting obligations if their total revenue falls below this threshold for each of the last two consecutive years;
- Presence in only one MS – Where an undertaking (including its subsidiaries and branches) is only present in a single EU jurisdiction, they are exempted to the reporting rules under Public CbCR Directive. Furthermore, the same would apply to the standalone undertakings or ultimate parent undertakings and their affiliated undertakings where such undertakings, including their branches, are established and or have their fixed places of business or permanent business activity, within the territory of a single EU MS and no other tax jurisdiction;
- Banking sector – Undertakings within the banking sector were already under a CbCR obligation through Directive 2013/36/EU. In order to avoid double reporting requirements for the banking sector, qualifying financial institutions are exempt from the reporting requirements;
- Overlapping reporting – Where a controlled subsidiary or branch, otherwise falling under the Directive’s reporting requirements, has a foreign (non-EU) ultimate parent undertaking that is subject to public disclosure requirements meeting the reporting requirements set out in Public CbCR Directive, may be exempt from the directive’s reporting obligation pending certain conditions.
What Should be Reported?
The Public CbCR Directive additionally provides specific content requirements for the report to be prepared, which are closely aligned with the existing reporting requirements established by the OECD as part of BEPS Action 13. Under this Directive a new chapter was introduced, in referral to the information which shall be included to the report on income tax information. Article 48 (c) of the Public CbCR Directive requires the following items be included the in the report:
- Name of the ultimate parent undertaking (or standalone entity), financial year, currency used, (where applicable) a list of consolidated subsidiary undertakings established in jurisdiction in the EU or a jurisdictions included in Annexes I and II to the Council conclusions on the revised EU list of non-cooperative jurisdictions for tax purposes.
- Description of the nature of their activities.
- Number of employees on a fulltime (or equivalent) basis.
- Profit (loss) before income tax.
- Income tax accrued for the year.
- Income tax paid on a cash basis.
- Accumulated earnings.
Furthermore, article 48 (c) states that the data above should be presented separately for each jurisdiction relevant under the new reporting requirements. The text of the Directive shows that the EU is closely aligning the reporting requirements with the existing OECD CbCR requirements. There are some deviations in the content requirements from the OECD CbCR reporting requirements, for example, the plain text of the Public CbCR Directive does not make reference to requiring the stated capital to be provided as part of the report. In addition, these requirements have been packaged in the form of a directive, meaning that these rules will ultimately have to be transposed into national law.
When and Where Should You Publish?
The Public CbCR Directive notes that the report must be published within 12 months of the close of the balance sheet, in at least one of the official languages of the EU. Additionally, the report should be published on the website of the reporting undertaking:
- The EU ultimate parent undertaking or the EU standalone undertaking;
- The EU subsidiary undertaking or an affiliated undertaking of the non-EU ultimate parent undertaking; or
- The branch or the undertaking which opened the branch, or an affiliated undertaking.
Furthermore, where the financial statements of an undertaking are required to be audited, the audit report should include a statement on whether a report was prepared concerning the preceding’s years tax and financial data and whether that report was prepared and published in compliance with the Public CbCR Directive.
How Can Grant Thornton Assist?
- Provide support for the CbCR documentation reflecting the changes as of the new Directive;
- Preparing Master-file and Local-file documentation in accordance with the OECD’s guidance to document and support the arm’s length nature of the inter-company transactions;
- Assistance in further procedures with Luxembourg Tax Authorities if necessary.
[i] Medium-sized and large subsidiary undertakings as defined in Directive 2013/34/EU of the European Parliament and Council