Executive summary

On 11 November 2021, the European Parliament formally approved the proposed public country-by-country reporting (CbCR) directive (the Directive). This follows a provisional agreement reached by representatives of European Union (EU) institutions¹ on 1 June 2021² and a formal adoption of the proposal by the Council of the European Union (EU), i.e., the EU Member States on 28 September 2021.³ The Directive will be signed shortly and subsequently be published in the Official Journal of the EU. It will enter into force on the 20th day following that publication. After entry into force, Member States will have 18 months to transpose the Directive into national legislation.

The rules set out in the Directive will require both EU-based multinational enterprises (MNEs) and non-EU based MNEs doing business in the EU through a branch or subsidiary with total consolidated revenue of more than €750 million in each of the last two consecutive financial years to disclose publicly the income taxes paid and other tax-related information such as a breakdown of profits, revenues and employees per country.

Such information needs to be disclosed for all 27 EU Member States and all jurisdictions included in the Annex I and Annex II of the Council conclusions on the EU list of non-cooperative jurisdictions for tax purposes (so-called EU black list and gray list). For all other jurisdictions, it is sufficient for aggregated data to be disclosed. For more information on the content of the Directive and the context in which it will be applied, please find a replay of the recent EY webcast on the Public Tax Transparency – from voluntary to mandatory – here.

Detailed discussion

Background

On 12 April 2016, the European Commission (the Commission) proposed to amend the Accounting directive (Directive 2013/34/EU). The proposal built upon the Base Erosion and Profit Shifting (BEPS) work of the Organisation for Economic Co-operation and Development (OECD) and G20, in particular on Action 13 regarding CbCR. However, it went beyond the OECD/G20 BEPS standards, requiring large MNEs with operations in the EU and stand-alone undertakings established in the EU to draw up and publicly disclose in the public register and on their website income tax information, including a breakdown of profits, revenues, taxes paid and employees per country.

The Commission’s proposal was presented under Article 50(1) of the Treaty on the Functioning of the European Union (TFEU), which concerns the right of establishment and is the regular legal basis for initiatives in the areas of company law, accounting and corporate financial reporting. Proposals put forward under this article are subject to qualified majority voting in the Council (the ordinary legislative procedure under Article 114 TFEU), not unanimity as is the case for legislation dealing with the harmonization of direct tax rules (the special legislative procedure under Article 115 TFEU). Moreover, for direct tax legislation, the European Parliament only has an advisory role, while for proposals based on Article 50(1) TFEU, the Parliament has co-legislative powers together with the Council.

In 2019, during the Competitiveness Council (COMPET) meeting, no qualified majority of Member States supported public CbCR.⁴ Prior to the COMPET meeting, 10 Member States issued a joint statement opposing the proposal, asserting that the introduction of this legislation would require unanimity among EU Member States as it should be considered a taxation proposal.

Portugal, who held the Council Presidency for the first six months of 2021, issued a new compromise text and brought up the proposal for discussion during the 25 February 2021 COMPET meeting.⁵ This meeting concluded with a qualified majority of Member States supporting the proposal. Austria and Slovenia, who were against the proposal in 2019, reversed their position and expressed their support for the proposal.

After that, trilogues (i.e., between the Commission, Parliament and Council) started in March 2021 during which co-legislators continued their discussions based on their respective negotiation mandates. Co-legislators reached a provisional compromise deal on the proposal during a final round of negotiations on 1 June 2021.

Following this agreement, formal adoption of the proposal by the Council and the European Parliament was set in motion. On 28 September 2021, the Council formally adopted its position which was broadly in line with the compromise text provisionally agreed on 1 June 2021, with two main amendments:⁶

Clarification on the reporting on a country-by-country basis of data for jurisdictions included in Annex II of the EU list of non-cooperative jurisdictions for tax purposes (so called ‘EU gray list’)

Update of the wording for the commencement date of the reporting

European Parliament approves public CbCR Directive

During its plenary session on 10 November 2021, the European Parliament scheduled a debate on the public CbCR Directive as amended by the Council on 28 September. The Directive was then put to a vote the following day which resulted in the formal approval of the Council position by the European Parliament.

The adopted Council’s position, as now also approved by the European Parliament, is broadly in line with the compromise text provisionally agreed on 1 June 2021 and most of the changes to the compromise text are linguistic. The two main updates to the text of the Directive are summarized below.

Data to be disclosed on a country-by-country basis

The compromise text of 1 June mentioned that the information should be disclosed on a country-by-country basis, and thus be disaggregated, for all 27 EU Member States and all jurisdictions included in Annex I and Annex II of the Council conclusions on the EU list of non-cooperative jurisdictions for tax purposes. For Annex I, the jurisdictions in scope must have been listed on 1 March of the financial year for which the report should be drawn up. For Annex II, the jurisdictions in scope must have been mentioned on 1 March of the financial year for which the report should be drawn up for two consecutive years. For all other third jurisdictions, the information should be disclosed on an aggregated basis.

The requirement for jurisdictions to be mentioned in Annex II on 1 March for two consecutive years gave rise to uncertainties as to the interpretation of the consecutive nature of the listing. The updated Council’s position has now clarified that for Annex II, the jurisdictions that are in scope are those that were mentioned in that Annex on 1 March of the financial year for which the report on income tax information is to be drawn up and on 1 March of the preceding financial year.

The EU updates its lists on a recurring basis, typically in February and October of each year.

Commencement date

The commencement date for reporting was described in the compromise text of 1 June as no later than (“at the latest”) the first financial year starting on or after one year after the transposition deadline. The Council’s position has amended the wording to no later than the first financial year starting on or after two years and six months after the date of entry into force of the Directive.

This amendment could imply that different times of transposition of the Directive by individual Member States would no longer affect the commencement date of the rules as now the triggering point is the entry into force of the Directive and not the transposition deadline. However, the use of “at the latest” also in the updated text may mean that Member States would still have the opportunity to apply the rules sooner if they consciously choose to do so.

Next steps

Following the approval by the European Parliament, the next steps would be:

Signature of the Directive by the President of the European Parliament and the President of the Council

Publication of the Directive in the Official Journal of the EU

Entry into force of the Directive on the 20th day following the publication in the Official Journal of the EU

Member States will have 18 months to transpose the directive into national law following its entry into force

The first financial year of reporting on income tax information will be the year starting on or after two years and six months after the date of entry into force of the Directive

The reporting will take place within 12 months from the date of the balance sheet of the financial year in question

In practical terms, this means that if the Directive is published in the Official Journal of the EU on 30 November 2021 and enters into force on 20 December 2021, the first financial year of reporting on income tax information will be the year starting on or after two years and six months following the entry into force of the directive, i.e., the first financial year starting on or after 20 June 2024.

Implications

The public CbCR Directive will have a significant impact on both EU-based MNEs and non-EU based MNEs doing business in the EU. Moreover, it comes on top of a trend where voluntary Non-Financial Reporting Standards (such as the Global Reporting Initiative (GRI)), investors and the public ask for more public tax reporting by businesses. Furthermore, metrics from CbCR will play an important role in future tax rules, as new measures such as those under development in the BEPS 2.0 project. Going forward, CBCR will therefore become increasingly under scrutiny and will directly affect companies’ tax positions. Please find a more detailed discussion on the implications of the proposal in the replay of the recent EY webcast on the topic here.

Companies should closely monitor the progress on the transposition of the Directive by individual Member States and assess the impact of the Directive on their business and, in particular, their broader public tax reporting strategy.

_______________________________

For additional information with respect to this Alert, please contact the following:

EY Société d’Avocats, Paris

Jean-Pierre Lieb | jean.pierre.lieb@ey-avocats.com

Ernst & Young GmbH Wirtschaftsprüfungsgesellschaft, Munich

Klaus von Brocke | klaus.von.brocke@de.ey.com

Ernst & Young Belastingadviseurs LLP, Rotterdam

Marlies de Ruiter | marlies.de.ruiter@nl.ey.com

Maikel Evers | maikel.evers@nl.ey.com

Ernst & Young Belastingadviseurs LLP, Amsterdam

Konstantina Tsilimigka | konstantina.tsilimigka@nl.ey.com

Roberto Aviles Gutierrez | roberto.aviles.gutierrez@nl.ey.com

Ernst & Young LLP (United States), Global Tax Desk Network, New York

Jose A Bustos | JoseAntonio.Bustos@ey.com

_______________________________

Endnotes

The Council of the EU, the European Parliament and the European Commission.

See EY Global Tax Alert, EU co-legislators reach agreement on public CbCR, dated 2 June 2021

See EY Global Tax Alert, EU Member States adopt public CbCR Directive, dated 28 September 2021.

See EY Global Tax Alert, EU: Public CbCR fails to move forward in latest European vote, dated 4 December 2019.

See EY Global Tax Alert, EU negotiations on public CbCR move forward as majority of Member States back proposal, dated 26 February 2021.

See EY Global Tax Alert, EU Member States adopt public CbCR Directive, dated 28 September 2021.