Tax Transparency: Groups must be prepared for the new levels of transparency required by public reporting

The introduction of public country-by-country reporting will, for the first time, put new tax reporting obligations on large non-EU multinationals writes Emma Storey. She outlines these new rules and their impact of company reporting, the timeline for implementation and suggests a renewed engagement with tax technologies and data analytics could aid in-scope companies overcome some of the challenges they face in meeting the new requirements.

On 22 June 2023 the Department of Enterprise in Ireland announced the signing of the European Union Regulations 2023. The regulations relate to Public country-by-country reporting (CbCR) which will now take effect in Ireland and builds upon the existing CbCR rules. This transposes the Directive (EU) 2021/2101 into Irish legislation, which was previously entered into force on 21 December 2021. CbCR forms part of the OECD’s Base Erosion and Profit Shifting (BEPS) Action Plan 13 which recognises the need to enhance transparency for tax administrations and are provided for in an EU context in Council Directive (EU) 2016/881, adopted on 25 May 2016. Ireland introduced CbCR legislation and regulations pursuant to the Council Directive effective for accounting periods commencing on or after 1 January 2016.

The public CbCR requires for the first time that non-EU multinationals with significant turnover, doing business in the EU must comply with the same tax reporting obligations as EU multinationals. The directive was published in an effort to fight aggressive tax avoidance and planning by large Multinational Enterprises (MNEs). The European Commission intends for this reporting to showcase the taxes paid by large multinationals and allow third parties in the EU to have greater transparency on large MNEs, how much tax they pay, and in what jurisdictions. Public transparency on tax is also an important part of companies’ corporate social responsibility programmes.

Domestic provisions governing existing CbCR have been in place in Irish law for some time, but the new regulations will mean that it is the first time for many groups that reporting will be made publicly available. The key focus for MNE groups within scope will therefore be managing the transparency of the group’s tax affairs and ensuring that a consistent message is delivered.

Who does reporting apply to

In line with the regulations, Public CbCR will apply to MNEs with turnover exceeding €750 million for each of the last two consecutive financial years and that are active in more than one jurisdiction.

Non-EU multinationals with subsidiaries and branches in the EU must comply with the same reporting obligations as EU multinational undertakings. If information is not available the subsidiary or branch must request the information from the ultimate parent or standalone company. Further to this, should the information not be provided, the subsidiary or branch must publish a report of all the income tax information available and a statement that the ultimate parent or standalone company did not provide the necessary information. The reporting obligations only apply to branches where the net turnover of a branch exceeded €12 million for the last two consecutive financial years.

The directors of an ultimate parent or standalone undertaking have collective responsibility for ensuring that the report on income tax information is drawn up, published, and made accessible to the public. The relevant persons in a subsidiary or the authorised persons of a branch have collective responsibility for ensuring, to the best of their knowledge and ability, that the report on income tax information is drawn up, published and made accessible to the public. These persons have responsibility to ensure compliance with the new regulations and failing to comply with same shall result in the relevant person being guilty of a category 3 offence.

What needs to be reported

MNEs will be required to publicly disclose corporate income tax information separately for each Member State and third country on the EU list of non-cooperative jurisdictions, and an aggregate figure for all other third countries.

The information that will be required to be included on the report, on a country-by-country basis, is as follows:

• Description of the nature of activities.

• Number of employees.

• Total net turnover (from third party and intragroup transactions).

• Profit or loss before tax.

• Amount of income tax payable in the country as a result of the profits derived in the current year in that country.

• Amount of income tax actually paid during the year.

• Accumulated earnings.

The information must be broken down for each EU member state where the group is active and for each jurisdiction deemed “non-cooperative” by the EU or that has been on the “grey list” for a minimum of two years. All other jurisdictions are reported on a “rest of the world” basis.

The report would also be required to explain any discrepancies between the amounts of income tax paid and accrued.

The tax reports must be published on the relevant undertaking’s own website unless it makes the report available to the public for free on the website of the Companies Registration Office (CRO). Should the company choose to include on the CRO website, the company must reference this on its own website and provide information on where the report can be found. The report should be accessible to the public for at least five years.

Where financial statements are required to be audited, the audit report must state whether the undertaking was in scope for the preceding year and if the report was published.

Timeline

The reporting will take place within 12 months of the date of the balance sheet for the financial year in question. Further conditions are also set out in the regulations under which a company may defer the disclosure of certain commercially sensitive information for up to five years.

Application of the regulations begins the first financial year on or after 22 June 2024, with 2025 the first potential year for reporting, to be published in 2026.

Conclusion and next steps

Ireland has had domestic provisions governing existing CbCR in place in Irish law for some time, but further to the new regulations it will be the first time for many groups that reporting will be made publicly available.

Groups should consider the impact of the imminent public reporting sooner rather than later. By now all Member States should have implemented public reporting and therefore groups should review the reporting requirements across the jurisdictions that they operate in (especially if the Member State has opted to implement public reporting early) to ensure that they are in a position to comply with same.

The introduction of public reporting may also be viewed as a greater opportunity for business leaders to further engage with tax technologies, and to make better use of tax data analytics to assist in future decision making and understanding any potential inconsistencies.

Please note this article first featured in Finance Dublin in June 2023 and was re-published kindly with their permission on our website.