Executive summary
On 1 June 2021, representatives of European Union (EU) institutions, i.e., Council of the EU, European Parliament and European Commission, reached an agreement on the proposed public country-by-country reporting (CbCR) directive. The directive, initially proposed by the European Commission in 2016, requires both EU-based multinational enterprises (MNEs) and non-EU based MNEs doing business in the EU through a branch or subsidiary with a total consolidated revenue of more than €750 million in each of the last two consecutive financial years to disclose publicly the income taxes paid in each Member State and other tax-related information such as a breakdown of profits, revenues and employees per country.
The overall compromise package resulted in some changes to the proposal, including the disaggregate reporting obligation, the timing of the review clause and the transposition deadline. The duration of the safeguard clause, which allows companies to delay the publication of commercially sensitive information, remains five years.
The proposal will now move forward to the formal adoption process in the Council and the European Parliament. Once adopted, Member States will have 18 months to transpose the directive into national law. The first financial year of reporting on income tax information will be the year starting on or after one year following the transposition deadline.
Detailed discussion
Background
On 12 April 2016, the European Commission proposed to amend the Accounting directive (directive 2013/34/EU). The proposal built on the Base Erosion and Profit Shifting (BEPS) work of the Organisation for Economic Co-operation and Development (OECD) and G20, in particular on Action 13 regarding CbCR. However, it went beyond the OECD/G20 BEPS standards, requiring large MNEs and stand-alone undertakings operating in the EU to draw up and publicly disclose on their website income tax information, including a breakdown of profits, revenues, taxes paid and employees per country.
The Commission’s proposal was presented under Article 50(1) of the Treaty on the Functioning of the European Union (TFEU), which concerns the right of establishment and is the regular legal basis for initiatives in the areas of company law, accounting and corporate financial reporting. Proposals put forward under this article are subject to qualified majority voting in Council, not unanimity as is the case for legislation dealing with the harmonization of tax rules. Moreover, for tax legislation, the European Parliament only has an advisory role, while for proposals based on Article 50(1) TFEU, the Parliament has co-legislative powers together with the Council.
In 2019, during the Competitiveness Council (COMPET) meeting, no qualified majority of Member States supported public CbCR.1 Prior to the COMPET meeting, 10 Member States issued a joint statement opposing the proposal, asserting (pdf) that the introduction of this legislation would require unanimity among EU Member States as it should be considered a taxation proposal.
Portugal, who holds the Council Presidency for the first semester of 2021, issued a new compromise text (pdf) and brought up the proposal for discussion during the 25 February COMPET meeting (pdf).2 This meeting concluded with a qualified majority of Member States supporting the proposal. Austria and Slovenia, who were against the proposal in 2019, reversed their position and expressed their support for the proposal.
Following that, trilogues (i.e., between Commission, Parliament and Council) started in March 2021 during which co-legislators continued their discussions based on their respective negotiation mandates, with the aim to reach a final deal on the proposal.
Trilogue meeting concludes with agreement
On 1 June 2021, representatives of the EU institutions held the third trilogue meeting on public CbCR to continue their discussions based on their respective negotiation mandate. The main points of disagreement between the co-legislators related to the aggregation or disaggregation of information outside of the EU and the safeguard clause.
Despite the disagreements, the meeting concluded with a provisional political agreement on public CbCR. The overall compromise package resulted in the following main changes on the proposal:
- It now requires multinational companies to disclose details on their economic activity in every EU Member State, as well as in every third country that either is on the Annex I of the EU list of non-cooperative jurisdictions (the so-called “blacklist”) or spends two consecutive years on the Annex II of the EU list of non-cooperative jurisdictions (the so-called “gray list”).
- It contains a five-year safeguard clause which would mean that companies could delay the publication of commercially sensitive information during that time period. Information pertaining to tax jurisdictions listed on the EU list of non-cooperative jurisdictions for tax purposes can never be omitted.
- It includes a review clause of its application by the Commission in four years.
- The transposition deadline into national law was reduced from 2 years to 18 months.
According to the latest compromise text (pdf) available, information to be disclosed would include:
- The name of the ultimate parent undertaking or the standalone undertaking, the financial year concerned and the currency used
- The nature of the activities
- The number of employees
- The total net turnover made
- The profit made before tax
- The amount of income tax due in the country by reason of the profits made in the current year in that country
- The amount of tax actually paid during that year
- The accumulated earnings
Next steps
Following the agreement in trilogue, formal adoption of the proposal by the Council and the Parliament is required. According to the Parliament press release, the vote in plenary is expected after the summer recess.
Once adopted, Member States will have 18 months to transpose the directive into national law. The first financial year of reporting on income tax information will be the year starting on or after one year following the transposition deadline. The reporting will take place within 12 months from the date of the balance sheet of the financial year in question.
In practical terms, this means that if the directive is formally adopted on 30 September 2021, the first financial year of reporting on income tax information will be the year starting on or after one year following the 18-month transposition deadline, i.e., the first financial year starting on or after 30 March 2024. Member States may choose earlier transposition and reporting deadlines.
Implications
Despite the initially different aspects on the proposal among the EU institutions, the agreement that was reached in the trilogue illustrates that tax and financial transparency is at the very top of the agenda of the EU. Once adopted, the proposal will have a significant impact on both EU-based MNEs and non-EU based MNEs doing business in the EU. Moreover, it comes on top of a trend where voluntary Non-Financial Reporting Standards (such as the GRI), investors and the public ask for more public tax reporting by businesses.
Companies should closely monitor the progress on the adoption process and assess the impact of the proposal on their business and in particular their public tax reporting strategy.
For additional information with respect to this Alert, please contact the following:
EY Société d’Avocats, Paris
- Jean-Pierre Lieb
Ernst & Young GmbH Wirtschaftsprüfungsgesellschaft, Munich
- Klaus von Brocke
Ernst & Young Belastingadviseurs LLP, Rotterdam
- Ronald van den Brekel
- Marlies de Ruiter
- Maikel Evers
Ernst & Young Belastingadviseurs LLP, Amsterdam
- Konstantina Tsilimigka
- David Corredor Velasquez
- Roberto Aviles Gutierrez
Ernst & Young LLP (United Kingdom), London
- Chris Sanger
Ernst & Young LLP (United States), Global Tax Desk Network, New York
- Jose A. (Jano) Bustos
For a full listing of contacts and email addresses, please click on the Tax News Update: Global Edition (GTNU) version of this Alert.
