Representatives of the Portuguese presidency of the Council of the EU announced via press release on 1 June 2021 that political agreement has been reached on the proposed public country by country reporting (“CbCR”) directive. A final compromise text has since been made available by the Council as of 9 June 2021.

Building on existing CbCR rules, the European Commission proposed a form of public reporting in April 2016 which would require the disclosure of income tax information by certain undertakings and branches. Since then, discussion has been ongoing regarding the scope of any public reporting with a view to reaching political agreement. The press release of 1 June 2021 would suggest that at least a provisional agreement and expected future changes to CbCR in the medium term.

Timeline for implementation of public CbCR

It is understood that member states would have to transpose the directive into their national legislation within 18 months after the formal adoption of the directive. The first reporting obligation would apply to the first financial year opened after the date of transposition. In principle, the first financial year to be reported should be the one starting on or after the transposition deadline, i.e., two years after the directive’s entry into force, which should be the 20th day following publication in the EU Official Journal. For example, if the directive were to be published in the EU Official Journal on 30 September 2021:

• The directive would enter into force on 20 October 2021;
• The directive would have to be transposed by each member state no later than 20 April 2023;
• FY 2024 would be the first year to be reported for calendar year-end groups; and
  
• The first public CbC report would have to be made available by 31 December 2025, i.e., within 12 months after the balance sheet date.

Individual member states would have the option to implement the rules earlier.

The origin of public CbCR

CbCR forms part of the OECD’s Base Erosion and Profit Shifting (BEPS) Action Plan 13 which recognises the need for enhancing 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.

In April 2016, the European Commission presented a proposal for a directive to include new obligations regarding public disclosure of income tax information by certain undertakings and branches. The amendment would effectively require MNEs with consolidated worldwide turnover of more than €750million to disclose tax information annually in a common template and for such information be made publicly available.

Please click here to access our previous comments on public CbCR of August 2017.

Despite initial agreement from the European parliament in favour of the proposals (per a press release of 4 July 2017), a compromise proposal put forward by the Finnish presidency on a public CbCR directive failed to gather sufficient support.

Final compromise text

The final compromise text would require multinationals, either EU-parented groups or non-EU-parented groups with large EU subsidiaries or branches, with annual global consolidated revenue exceeding EUR 750 million to disclose publicly, on a country-by-country basis, corporate income tax information relating to their operations in each of the 27 member states, as well as information for certain third countries on the EU list of noncooperative jurisdictions.

The information to be disclosed on a country-by-country basis would include the:

• Nature of the activities;
• Number of employees;
• Total net turnover (derived from both 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; and
• Accumulated earnings.

Reporting also would require explanations of any discrepancies between the amounts of income tax paid and accrued. The information would be made available in a separate report accessible to the public for at least five years on the company’s website. Companies also would have to file the report with a business register in the EU.

It is understood that the compromise text agreed at the Council has evolved over the course of the negotiations with the EU Parliament:

• The safeguard clause, that allows companies to omit to report commercially sensitive information, has been reduced from six to five years in justified cases if business secrets are at risk;
• The “comply or explain” clause proposed by the Council has been removed. The Council initially included a clause to allow subsidiaries of multinational companies headquartered outside the EU either to comply with the public CbC reporting obligation or explain the reasons why they are unable to report partly or fully, notably the inability to obtain the required information from their non-EU parent. European subsidiaries of non-EU headquartered multinational groups now would be obliged to provide as much information as possible where the parent company does not cooperate. They also would be required to publish a statement indicating that the non-EU company has not provided all the required information;
• Review clause: The compromise text provides for a review of the directive to take place 4 years after the transposition date. This would review the effectiveness and adequacy of the directive, notably in relation to the EUR 750 million annual consolidated threshold, the geographical scope, the safeguard clause, and the information that companies would have to disclose. The shorter deadline was a concession to the European Parliament;
• As part of the overall compromise package, the Presidency compromised to a transposition period of 18 months, down from 2 years.

Commercially sensitive information

A key question for many MNE groups in the wake of the press release of 1 June 2021 will be what may qualify as “commercially sensitive information” and therefore may be excluded from the scope of public CbCR. A recent communication dated 4 June 2021 from the General Secretariat of the Council notes the following with respect to commercially sensitive information:

Member States may allow for one or more specific items of information otherwise required to be disclosed in accordance with paragraph 2 or 2a to be temporally omitted from the report when their disclosure would be seriously prejudicial to the commercial position of the undertakings to which it relates. Any omission shall be clearly indicated in the report together with a duly reasoned explanation regarding its causes.

Member States shall ensure that all information thus omitted is made public in a later report on income tax information within no more than five years from the date of its original omission.

Member States shall ensure that information pertaining to tax jurisdictions included in Annex I and Annex II of the Council conclusions on the EU list of non-cooperative jurisdictions for tax purposes as referred to in paragraph 3 may never be omitted.

Exact guidance as to the meaning of “commercially sensitive information” remains outstanding and will likely be expanded on in due course. However in the interim, the term would likely refer to information where its disclosure would significantly impact on the commercial position of the undertakings, an assessment largely focussed on the fact pattern at hand.

Next steps

The final compromise text now must be endorsed by the Council Committees on Economic and Monetary Affairs and Legal Affairs and the Parliament as a whole, as well as the Council. The vote in plenary is expected after the summer recess.

Likely impact

Domestic provisions governing existing CbCR have been in place in Irish law for some time, but the revised agreement 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. Groups should consider the impact of the imminent public reporting sooner rather than later; while implementation may look far off based on the transposition deadline, Member States have the option of implementing public reporting early and groups should be prepared for this.

The future 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.