With the European Commission’s recent finding in the Apple Inc. state aid case, there has been greater attention on the need for more public transparency on taxes. European Union (EU) Competition Commissioner Margrethe Vestager recently said, “If public country-by-country reporting laws on profits and taxes paid had been in place over the past two decades, the $14.4 billion back tax demand imposed on Apple Inc. would not have occurred as the tech giant’s tax affairs would have been exposed.”
In response to outcries for more public disclosure, the European Commission proposed public tax disclosure rules for certain multinational enterprises (MNEs) earlier this year. These rules, as currently proposed, would impose reporting requirements on those companies (including U.S.-based companies) that have a presence in an EU member state and have a turnover in excess of €750 million. The rules have yet to be approved by both the European Parliament and the European Council — but once they are, each EU member state would be required to enact country-by-country reporting rules in accordance with the directive.
Below is an overview of the class of companies affected, the information requested and the political outlook of the EU “Country-by-Country” (CBC) reporting requirements.
The companies required to report under the EU CBC proposal are MNE groups, whether headquartered in the EU or outside, with a total consolidated group revenue exceeding €750 million. For any MNE group headquartered outside of the EU, the reporting requirement will fall on its subsidiaries or branches in the EU. Those MNE groups exceeding €750 million but without a presence in the EU — headquarter, subsidiary, branch or otherwise — would not be subject the reporting requirements. Importantly, the EU CBC proposal does not distinguish between public and private companies, and private companies would be subject to the rules. Imposing these requirements on private companies to the extent required under the proposal poses unchartered challenges to these companies.
The proposal would require the companies to disclose publicly not only the amount of income tax paid within the EU, on a country-by-country basis, but also the amount of income tax paid outside the EU on an aggregated basis. The disclosure is on a disaggregated basis for “tax jurisdictions that do not abide by tax good governance standards (so-called tax havens).”
Additional disclosure requirements, on a country-by-country basis, include: (1) nature of the activities, (2) number of employees, (3) the total net turnover made, (4) the profit made before tax, (5) the amount of income tax due in the country as a result of the profits made in the current year, (6) the amount of tax actually paid during that year, and (7) accumulated earnings. Moreover, this information would be made available in a stand-alone report accessible to the public for at least five years on the company’s website.
The European Commission is eager to move forward with the tax disclosure rules in its EU member states. Other jurisdictions already have moved forward on this front. For example, the UK adopted an amendment authorizing HM Treasury to introduce public country-by-country reporting, and the United States proposed regulations on CBC reporting. It appears that the global trend for tax transparency is garnering support.
The EU CBC proposal currently awaits approval by both the European Parliament and European Council, but it is expected to be approved quickly, even as soon as spring 2017. When both the European Parliament and Council have agreed to and approved of the proposal, the EU member states would enact national legislation imposing the reporting requirements within a year’s time. With the proposal moving swiftly along, multinational companies with exposure to the EU should consider the potential concerns raised with the public disclosure of such tax information.