On April 12, 2016, the European Commission published its proposal to introduce public tax disclosure rules for certain multinational enterprises (MNEs). As currently drafted, the disclosure obligations would fall on MNEs that have a footprint within the EU and a global consolidated turnover in excess of €750 million. This is the case regardless of whether the MNE is headquartered within the EU.
In summary, the proposed rules would require certain MNEs annually and publicly to disclose, among other information, the jurisdictions in which they make their profits and the amount of tax they suffer.
Who must comply?
Under the current proposals, MNEs that fall within any of the following four categories would be subject to these rules:
- MNEs that have an EU parent and a global consolidated net turnover exceeding €750 million;
- EU companies (not part of a group) that have a net turnover exceeding €750 million;
- MNEs that do not have an EU parent but have one or more EU subsidiaries and have a global consolidated net turnover exceeding €750 million; and
- MNEs that do not have an EU parent but have one or more EU branches and have a global consolidated net turnover exceeding €750 million.
There are circumstances in which certain smaller EU branches and subsidiaries would not trigger the disclosure obligation. In practice, however, it is expected that such an exception would only apply to a limited number of such branches and subsidiaries.
Consequently, the public disclosure obligations would have a broad application and would be expected to apply to many businesses with an EU presence, regardless of where the ultimate parent company may be based.1
What information must be publicly disclosed?
As currently drafted, an affected entity must annually report (in respect of itself, its parent undertaking and other group entities consolidated for financial reporting purposes) information on the nature of its activities, number of employees, net turnover (including turnover with related parties), profit/loss before tax, tax accrued on such profits and the amount of tax actually paid, and accumulated earnings. To the extent that there are material discrepancies between the taxes accrued and taxes actually paid, the report must include, at group level, an explanation of such material discrepancies.
The above information would need to be presented separately for each EU Member State. Where the information relates to activity in non-EU jurisdictions, it could be presented in aggregate, unless it relates to certain jurisdictions that the EU considers do not respect “international tax good governance standards.”2
The report would need to be published on both the company website and in the company register and be publicly accessible for at least five years. The European Commission has stated that non-compliance will be sanctioned by “effective, proportionate and dissuasive penalties.”3
The proposal includes a requirement for auditors to check and confirm that the report has been provided and made accessible in accordance with the rules. It is not clear whether this is just a “mechanical” check (i.e., has the report been made and in the correct manner) or whether the audit obligation is more extensive.
The proposal has been submitted to the European Parliament and the Council of the EU for approval. Once adopted, the new rules would have to be transposed into national legislation by all EU Member States within one year after entry into force.
Since the announcement of the proposal, it is understood that further discussions have taken place. Two key aspects on which discussions have centered relate to whether the €750 million threshold should be lowered, and whether reporting of non-EU jurisdiction information should be aggregated (as is currently proposed) or instead reported on a country-by-country basis.
It is clear that the proposal could have far-reaching consequences for any company with business dealings within the EU. Consequently, it is important for potentially affected MNEs to closely monitor further developments and consider the impact the proposal could have on their business operations.
1 These rules do not modify similar rules already applicable to banks and other financial institutions pursuant to Article 89 of Directive 2013/36/EU (CRDIV). Such entities are, however, exempted from double reporting where the information already provided for CRDIV purposes encompasses all the activities of the group (banking and non-banking). This will generally be the case only if the bank is headquartered in the EU.
2 These would include jurisdictions that do not comply with transparency and exchange of information rules, fair tax competition, G20, OECD or Financial Action Task Force standards. The EU has undertaken to agree on and publish a common list of such jurisdictions.
3 Such penalties may be applied pursuant to Article 51 of Directive 2013/34/EU.
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