On 4 June 2021, the Council of the European Union (the “Council”) published the terms of a draft European directive on a new public country-by-country reporting regime. The Directive, which amends the Accounting Directive 2013/34/EU, represents the compromise position agreed between negotiating teams of the European Parliament and Council on 1 June 2021.
This Directive will require certain multinational enterprises (whether headquartered in the EU or outside) and standalone undertakings with a total consolidated revenue of more than EUR 750 million (USD 915 million) in each of the last two consecutive financial years to publicly disclose certain information in respect of its activities in each EU member state, as well as in certain third countries.
What does this mean for in-scope multinationals?
Under existing EU law, MNEs are already required to automatically disclose certain details (such as total net turnover, profits before tax, amounts of tax paid and numbers of employees in each EU country) on a country-by-country basis to European tax authorities and the European Commission (known as ‘country-by-country reporting’). The key difference under this new regime is that much of this information would now become publicly available on the company’s website and on a central register.
Proponents of this public regime have welcomed an increase in transparency regarding levels of tax payments made by large corporates. However, critics have highlighted concerns that information disclosed under this regime could be used by competitors to obtain an unfair competitive advantage. It has also been argued that the prescribed data to be publicly disclosed under this regime could potentially be misleading without further context, such as the master and local file transfer pricing documentation that is available to tax authorities.
Information to be disclosed
Where a reporting obligation arises, the information to be publicly disclosed must include:
- name of the parent company / standalone company, its functional currency and a list of all subsidiary undertakings in the EU or in countries listed on the EU blacklist or greylist;
- a brief description of business activities;
- number of full-time employees;
- details of revenues, profit or loss before income tax and accumulated earnings;
- amount of income tax paid and accrued for the financial year.
This information needs to be provided on a country-by-country basis for each EU member state and for each country that is listed on the EU blacklist or that has been listed for two consecutive years on the EU greylist. Information in respect of all other third countries can be compiled on an aggregated basis and provided as a single line item.
Countries currently on EU blacklist
American Samoa Guam Trinidad and Tobago Anguilla Palau US Virgin Islands Dominica Panama Vanuatu Fiji Samoa Seychelles Countries currently on EU greylist (those in bold have been included for 2 consecutive years)
Australia Eswatini (formerly Swaziland) Maldives Barbados Jamaica Thailand Botswana Jordan Turkey The relevant information must be published in an electronic machine-readable format within 12 months of the date of the balance sheet of the relevant financial year, and must be made available free of charge and for a minimum of five consecutive years on the parent company’s or subsidiary’s website. Financial information can be published in the MNE’s functional currency and does not need to be converted to EUR.
Are there any exceptions from reporting?
Non-EU Parent
For MNEs headquartered outside the EU, no reporting obligation will arise where the MNE does not have any “medium-sized” or “large” subsidiary companies[1] or branches of comparable size in the EU.
Where a non-EU headquartered MNE does have such an EU subsidiary company, the reporting obligation will fall on an EU subsidiary rather than the parent itself. If the MNE has no medium-sized or large subsidiary company in the EU but does have an EU branch that has exceeded the comparable net turnover threshold for two consecutive years, the reporting obligation will fall on that EU branch.
If the relevant EU subsidiary / branch does not possess all the relevant information to be reported, it must request this information from its non-EU parent. A ‘comply or explain rule’ provides that the EU subsidiary must disclose all information in its possession, obtained or acquired and to the extent its parent has not made necessary information available it must also disclose this fact as part of its public report.
Single EU member state operations
No reporting obligation will apply to standalone undertakings or groups that operate exclusively within a single EU member state and not in any other jurisdiction.
Business sensitive infomation
The Directive provides for a ‘safeguard clause’ whereby certain business-sensitive information can be temporarily omitted from public disclosure. Any such omitted information must be published within five years of its original omission.
Information which, if disclosed, would be seriously prejudicial to the commercial position of the undertakings to which it relates may be omitted from the report. However, information relating to jurisdictions listed on the EU’s blacklist and greylist cannot be omitted under this safeguard clause. Where information has been omitted, this must be clearly indicated on the public disclosure and a duly reasoned explanation must be provided for the cause of any omission.
When will these rules come into force?
It is expected the European Parliament will wait until after the summer recess (until September 2021) before holding a final vote on the draft Directive. Once passed, EU member states will have 18 months to transpose the Directive into national law. Therefore, these rules will likely come into effect in Ireland in 2023 and apply for accounting periods from 1 January 2024. A review will be undertaken four years after the Directive has come into effect to consider the effectiveness and levels of compliance with this new regime.
Action items
MNEs should take the opportunity to review the information that could become publicly available under this new regime once enacted and consider the potential implications of such public disclosure. Certain MNEs may decide to take a proactive approach to voluntarily publish certain information with a view to demonstrating transparency and providing further context to the limited set of data to be included in any disclosure under this EU regime.
The Matheson tax team will continue to keep you updated as to the progress of this draft Directive and will provide further details on the implementation of this regime in Ireland once available. Should you have any questions on the above or if it would be helpful to discuss further with a member of our tax team please do not hesitate to contact us.
[1] Medium-sized and large companies are defined in Articles 3(3) and (4) of the Accounting Directive 2013/34/EU and are, broadly, companies that exceed at least two of the following three criteria:
(i) balance sheet total: €4,000,000;
(ii) net turnover: €8,000,000;
(iii) average number of employees during the financial year: 50