As has been shown by the recent work from the Organisation for Economic Cooperation and Development (OECD) on Base Erosion and Profit Shifting (BEPS), the question of how to tax multinational enterprises in the modern, digitally connected world is extremely complex.
Large businesses now operate on a global basis, yet they are taxed by countries whose boundaries have largely been determined by various accidents of politics, history and geography. How to reconcile the global footprint of a modern business with the fiscal rights and obligations of separate tax jurisdictions is at the heart of country-by-country reporting (CbCR).
A number of different approaches to CbCR have been taken, but in essence it is the reporting by a business of its taxes (usually corporate income taxes), other payments to governments and potentially other financial data, by country. The reporting may either be public or private to tax authorities or other regulators.
There are already two Europe-wide regimes that require public CbCR. The first is the reporting of certain payments to governments by extractive companies under the EU Accounting and Transparency Directives. The second is the reporting by banks and certain other financial institutions of key financial and corporate income tax data by country under Article 89 of the EU Capital Requirement Directive IV (CRD IV).
In addition, there is the OECD proposal for groups with consolidated turnover in excess of €750m to report financial and corporate income tax data by country to tax authorities on a confidential basis.
These regimes are relatively recent, with the first reports under the CRD IV having been produced in 2014, the first reports for extractive companies not being due until 2016, and the first reports under OECD rules being due by the end of 2017.
For a number of MEPs these regimes do not go far enough and they have continued to argue for public CbCR to be introduced for all large and listed companies in the EU.
This led to a proposal that was passed by the EU parliament in plenary session on 8 July 2015, as part of the Shareholder Rights Directive.
The proposal will now go to trialogue negotiations between the European Parliament, the European Commission and the Council of Ministers. The negotiations were due to start in late October 2015 and it’s not possible to predict the outcome, though we understand that a number of member states are likely to oppose public CbCR.
If the proposal is adopted in trialogue it is likely to be amended before making it on to the statute books. In its current form however the proposed provisions state that:
“…In the notes to the financial statements large undertakings and public interest entities shall also disclose, specifying by Member State and by third country in which they have an establishment, the following information on a consolidated basis for the financial year:
(a) name(s), nature of activities and geographical location;
(c) number of employees on a full-time equivalent basis;
(d) value of assets and annual cost of maintaining those assets;
(e) sales and purchases;
(f) profit or loss before tax;
(g) tax on profit or loss;
(h) public subsidies received;
(i) parent companies shall provide a list of subsidiaries operating in each Member State or third country alongside the relevant data.”
In addition, undertakings that on a consolidated basis have more than 500 employees and either: 1) a balance sheet total of more than €86m; or 2) net turnover of more than €100m would have to “…publicly disclose essential elements of and information regarding tax rulings, providing a break-down by Member State and by third country in which the large undertaking in question has a subsidiary. The Commission shall be empowered to set out … the format and content of publication”.
Tax ruling in this context is defined as meaning “any advance interpretation or application of a legal provision for a cross-border situation or transaction of a company which might lead to a loss of tax in Member States or which might lead to tax savings for the company resulting from artificial intra-group transfers of profits”.
Many of the items to be disclosed are identical to those required by Article 89 of CRD IV. However (d) value of assets and annual cost of maintaining those assets and (e) sales and purchases are not included in Article 89, nor in the OECD’s CbCR disclosures. The requirement to disclose details of tax rulings is also not included in any other EU-wide CbCR regulations.
Interpreting and applying CbCR regulations presents a number of challenges for companies as can be seen from the European Commission’s economic impact assessment for Article 89 of CRD IV, which drew on a study prepared for the Commission by PricewaterhouseCoopers. In the Commission’s view the “beneficial effects of Article 89 could be increased by addressing some elements related to the implementation of that provision”.
As the wording of the proposal in the Shareholder Rights Directive mirrors to a large extent the wording of Article 89, similar issues of interpretation and implementation are likely, including:
- How will the rules apply to non-EU headquartered groups with EU operations, especially if the EU entities within the group do not share a common EU parent?
- How should data be consolidated or aggregated for the purposes of reporting and how should consolidation adjustments be treated?
- Which taxes are covered by “tax on profit or loss”? Is it tax paid or tax accrued and does that include deferred tax and/or tax on uncertain tax positions?
- Will reporting by different companies be sufficiently consistent to allow the data to be properly understood and analysed?
- Will the rules be interpreted and applied consistently by all member states?
For many companies, however, the most significant challenge will be the costs and resources required to produce a CbCR report. The amount of effort needed is likely to be substantial, though it will vary between groups depending on their size, the number of countries in which they operate and the coherence and sophistication of their reporting systems.
Time and effort will need to be spent in understanding the reporting requirements and how they apply to the business in question. For many businesses their reporting systems will need adapting before they can produce the data required for CbCR.
The cost burden will clearly be greater for companies that have to comply with a number of different CbCR regimes. All the regimes discussed above differ in their scope and application and for many companies one of the best ways to reduce the administrative burden of any new CbCR regime would be for legislators to align it as closely as possible with existing requirements.