The European Union (EU) has at last, after five years of debate, finalised a country-by-country reporting directive designed to force multinational companies (MNCs) to reveal publicly what profits they make, and taxes they pay, in every country in which they operate.
The goal is to stop MNCs hiding behind consolidated group financial reports that conceal when they might pay taxes in low-tax jurisdictions where trading has been light.
A final vote at the European Parliament (EP) is expected on 10-11 November, backing a text approved by the EU Council of Ministers, representing member states, on 28 September. This was thrashed out over the summer in negotiations between EU ministers, MEPs and the European Commission.
The law will come into force 20 days after publication in the EU Official Journal and member states have 18 months to implement the directive in their national laws. ‘By mid-2024, the first rules of the directive will apply to businesses,’ says an EP spokesperson.
The ‘directive will require multinational companies to report on where they make their profits and where they pay their tax’
In a press release, Zdravko Počivalšek, the economic development and technology minister for Slovenia, currently holding the EU’s rotating presidency, stressed that the ‘directive will require multinational companies to report on where they make their profits and where they pay their tax’. This, he said, ‘is more crucial than ever to ensure a fair economic recovery from the current pandemic crisis’.
Beyond BEPS
The EU law, which can be enforced by the European Court of Justice (ECJ) in 27 countries, moves ahead of the OECD Base Erosion and Profit Shifting (BEPS) principles by insisting on public disclosures. It also builds on the 2016 EU directive on mandatory automatic exchange of tax information, which – as with BEPS – only insists on country-based financial reports being submitted to tax authorities.
The new EU law insists that MNCs with €750m consolidated group revenue or more publish information including:
- pre-tax profit or loss
- income tax paid and accumulated
- earnings
- local staff numbers and commercial activities on their activities in each EU member state
They must also reveal this information regarding taxes paid (and work undertaken) in jurisdictions on EU grey and black lists deemed insufficiently transparent regarding taxation. These rules apply in full to EU–headquartered MNCs. Non-EU groups are only covered when they operate in the EU through medium-sized or large subsidiaries or branches (as defined in EU law).
Worth the burden?
As for the law’s benefits, there is some scepticism. Luxembourg-based tax advisory firm ATOZ, part of the Taxand network, released a paper that commented: ‘One may wonder if providing the public with this data is worth the additional administrative burden and the risk of damaging the European undertakings if the information is misinterpreted, misunderstood or commercially confidential information is exposed.’
While the law allows EU member states to allow temporary omissions of data from a country report if it risked serious damage to a company’s commercial position, ATOZ questioned whether many governments would exercise this option, and how.
Strong narrative
Phil Greenfield, a senior manager on global tax policy for PwC, also stresses the need for persuasive explanations should companies take advantage of any national exemptions. This is because the directive allows member states to refuse such exemptions, and a deferral of reporting in one member state may trigger a demand for information in another country where that data may have relevance.
One additional ambiguity is that the directive does not define a ‘seriously prejudicial’ commercial impact, so a ‘strong narrative’ may be especially helpful in heading off problems.
Paul Gisby, tax specialist at Accountancy Europe, Europe’s accounting profession group, says that compliance will mean hard work. This was made clear from the UK, which has since 2016 insisted that MNCs with a turnover of €750,000 or more publish their tax strategies.
These requirements for UK subsidiaries of foreign headquartered MNCs caused companies to ‘sweep up [information on] their global tax policy’, Gisby says. Indeed, many affected businesses ‘had no single record of all the taxes paid globally, let alone tax paid in each jurisdiction’. Considerable effort was therefore spent obtaining data from all group entities and creating systems to collect such information going forward, he says.
Need for explanation
Moreover, even where companies are fully transparent and hold nothing back, they should add additional narrative to reports to avoid unfair criticism about published data and tax policies. Gisby says that experience from the Extractive Industries Transparency Initiative has shown that country reports may need to explain legitimate tax planning such as using legal government tax reliefs and incentives, because they deliver lower taxation payments than the public might expect.
‘This narrative has to be comprehensible by non-tax specialists, so the tax and accounting functions have to work with communications colleagues,’ Gisby says.
Indeed, a public perception issue may force MNCs to publish data on countries not covered by EU country-by-country reporting requirements. According to Accountancy Europe, it may not be a simple matter for an MNC not to disclose specific jurisdictions where it is known to have a substantial presence, because some commentators may accuse it of trying to withhold key information.
Complex compliance
Søren Dalby, partner at KPMG Acor Tax in Denmark, says that, when complying with country-by-country reporting requirements, ‘the extraction and aggregation of data are significant undertakings’. Ensuring the completeness, accuracy and consistency of such reports is tough because many groups use multiple enterprise resource planning (ERP) systems, complicating any centralised data gathering.
One key problem is that accounting and bookkeeping systems have not been designed to collect and report tax data, so MNCs will probably need to create a dedicated project to deliver country-by-country reports, involving local finance teams.
Dalby agrees that additional narrative work to set the data in context for public consumption will add cost and complexity, requiring additional investment in process and systems and strong data governance measures. Ultimately, that is one impact of country-by-country reporting upon which there is a consensus – it will cost a lot of money.
Further information
Public trust in the tax system is just one of the many subjects that will be discussed at ACCA’s Accounting for the Future conference on 23-25 November. Register or watch on demand.
