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02 December 2021

EU Public CbCR Directive enters into force on 21 December 2021

Executive summary

On 1 December 2021, the public country-by-country reporting (CbCR) directive (the Directive) was published in the Official Journal of the European Union (EU). According to the published text, the Directive will enter into force on 21 December 2021 and Member States will have to transpose the Directive into national legislation by 22 June 2023.

The publication of the Directive follows the formal adoption of the proposal by the Council of the EU, i.e., the EU Member States, on 28 September 20211 and its approval by the European Parliament on 11 November 2021.2

The rules set forth 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, you may listen to a replay of the recent EY webcast on the Public Tax Transparency – from voluntary to mandatory. 

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.3 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.4 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:5

  • 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

A few weeks later, on 11 November 2021, the European Parliament formally approved the public CbCR Directive as adopted by the Council.6

Entry into force of public CbCR Directive

Following the completion of the formal approvals, the Directive was published in the Official Journal of the EU on 1 December 2021. This is an important development as it triggers the date of entry into force of the Directive and the transposition deadline.

More specifically, the concrete timeline is:

  • Entry into force of the Directive on 21 December 2021, i.e., the 20th day following the publication in the Official Journal of the EU.
  • Member States will have to transpose the directive into national law by 22 June 2023.
  • The first financial year of reporting on income tax information will be the year starting on or after 22 June 2024 at the latest, i.e., Member States could also choose to apply the rules earlier.
  • The publication will take place within 12 months from the date of the balance sheet of the financial year in question.

The table below provides an overview of the key elements of the public CbCR Directive:

Who is covered

·    EU-based (headquartered) MNEs with total (global) consolidated revenue exceeding €750 million for each of the last two financial years and that is active in more than one jurisdiction.

·    Non EU-based MNEs with total (global) consolidated revenue exceeding €750 million for each of the last two financial years and controlling: (i) A "medium-sized" or "large" subsidiary "governed by the national laws" of a Member State; or (ii) A qualifying branch in any of the Member States in the EU.

·    Financial institutions established in the EU are already required to publish CbCR under Directive 2013/36/EU. Where these are MNEs which fall within the scope of public CbCR, they will be exempted from reporting. 

What to publish

·   Information to be disclosed includes:

    • Name of the ultimate parent undertaking or the standalone undertaking, the financial year concerned and the currency used

    • Nature of the activities

    • Number of employees

    • Total net turnover made

    • Profit made before tax

    • Amount of income tax due in the country by reason of the profits made in the current year in that country

    • Amount of tax actually paid during that year

    • Accumulated earnings

Where to publish

·   The report should be made accessible on the public registry of the relevant Member State and on the company website free of charge for a minimum of five consecutive years.

·   There is the option for Member States to exempt companies from publishing on their websites if the access to the report in the public registry is free of charge to any third party located in the EU.

When to publish

·    Within 12 months after the balance sheet date and made available for five years.

Optional deferral

·    Member States may allow for one or more specific items of information to be omitted when its disclosure would be seriously prejudicial to the commercial position of the group. 

·    Any information omitted shall be made public in a later report within no more than five years from the date of its original omission.

·    Information concerning tax jurisdictions listed in the EU list of non-cooperative jurisdictions may never be omitted.

Penalties

·    Non-compliance with any of the obligations may give rise to a penalty. Member States can decide the type/amount of penalties imposed under domestic law. This means that there could not be uniform penalties among the Member States.

Audit requirement

·   The statutory auditor of an (EU based) undertaking that is required to produce audited financial statements shall state in the audit report whether the undertaking was required to draw up a report on income tax information, and if so, whether this report was published.

·   The audit can only perform a factual check of publication of the report, and not on its content.

Implications

The public CbCR Directive has 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, for example in newly developed international tax rules such as those under development in the BEPS 2.0 project. Going forward, CBCR will therefore come increasingly under scrutiny and will directly affect companies’ tax positions.

Companies should closely monitor the progress on the transposition of the Directive by individual Member States, in particular since Member States are allowed to have the rules enter into effect sooner than 22 June 2024. They should assess the impact of the Directive on their business and, in particular, their broader public tax reporting strategy.

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

EY Société d’Avocats, Paris

Ernst & Young GmbH Wirtschaftsprüfungsgesellschaft, Munich

Ernst & Young Belastingadviseurs LLP, Rotterdam

Ernst & Young Belastingadviseurs LLP, Amsterdam

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

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Endnotes

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 Member States adopt public CbCR Directive, dated 28 September 2021.

  • Document ID: 2021-6313

     
     

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