On 25 May 2016, the European Council adopted a Directive (EU) 2016/881 amending Directive 2011/16/EU as regards mandatory automatic exchanges of information in the field of taxation (“Directive”).
The Directive entered into force on 3 June 2016 and requires Member States to transpose the Directive into their domestic law by 4 June 2017. However, the law is required to have effect for accounting periods starting on or after 1 January 2016.
The Directive introduces into EU Law the so-called country-by-country reporting of information by multinationals to tax authorities as foreseen under Action 13 of BEPS (1) by the OECD(2).
Multinational enterprise groups (“MNE Group”) are required to report country-by-country information to the tax authority of the Member State in which the ultimate parent entities are resident for tax purposes. The country-by-country report has to be made annually.
The reporting requirements apply to MNE Groups with consolidated group revenue exceeding EUR 750 million. An entity will be regarded as a constituent entity of an MNE Group if:
- it is a separate unit that is included in the consolidated financial statements of the MNE Group for financial reporting purposes or would be if equity interests in such a business unit of an MNE Group were traded on public securities exchanges; if it is a permanent establishment of a separate business unit of the MNE Group or if the business unit is excluded from the MNE Group’s consolidated financial statements solely on size or materiality grounds;
- it is a business unit that is excluded from the MNE Group’s consolidated financial statements solely on size or materiality grounds;
- it is a permanent establishment of a separate business of the MNE Group.
The competent authority of a Member State where the country-by-country report was received shall communicate the country-by-country report, by means of automatic exchange, to any other Member State in which, on the basis of the information in the country-by-country report, one or more constituent entities of the MNE Group of the reporting entity are either resident for tax purposes or subject to tax with respect to the business carried out through a permanent establishment. The country-by-country report shall contain the aggregate information with regard to each jurisdiction in which the MNE Group operates.
For each jurisdiction in which the MNE Group operates, the reporting shall cover:
- profit/loss before income tax ;
- income tax paid and accrued ;
- stated capital ;
- accumulated earnings ;
- number of employees ;
- tangible assets other than cash and cash equivalents.
The companies concerned will have to establish the country-by-country report within twelve months following the last day of the tax year to which the report relates. The objective of the reporting according to the Directive shall be to assess high-level transfer pricing risks and other risks related to base erosion and profit shifting.
The application of the report by obligation can lead to some technical difficulties that are not solved by the Directive. Notably, issues may arise due to the diverging tax analysis from one country to the other, for example the entities concerned can be regarded as being tax transparent in one state and fully taxable in other states. The difficulty here will be in determining in which country the profit of the firm should be allocated.
Furthermore, multinational companies that are part of the same group may have divergent fiscal years resulting in difficulties in determining which period the subsidiaries with a different accounting year from the rest of the group will need to prepare the information to be reported to the parent company.
(1) Base Erosion and Profit Shifting Action Plan
(2) Organisation for Economic Development and Cooperation