A proposal for a public country-by-country reporting has been presented by the EU Commission. This would mean that groups with global annual revenues exceeding EUR 750 million will be required to publicly publish on their website in which country they make their profits and where in the EU they pay tax. The proposal thus goes further than the current country-by-country reporting which is not public.
Due to the fact that a majority of EU Member States support the proposal, it will be discussed further. On the other hand, criticism has been leveled at the proposal, since it can become administratively burdensome, costly and lead to competitive disadvantages. Furthermore, companies may need professional advice to proactively prepare and identify potential audit and PR risks.
A more detailed explanation of the proposal and the criticism of it is described below.
Background to the proposal
The proposal, published on April 12th, 2016, is based on the Commission’s efforts to combat tax evasion by preventing base erosion and profit shifting. This is to be implemented by the companies publishing where they make their profits within the EU, where in the EU they pay taxes and the amount of taxes paid outside the EU. The report must be published on the companies’ websites in at least one of the EU’s official languages. According to the proposal, multinational companies operating in the EU with a global annual revenue exceeding EUR 750 million will be covered, including non-European companies operating within Europe.
The idea is that the public should be able to review the activities of certain companies within the EU by the companies publishing an annual country-by-country report in which profits as well as accrued and paid taxes from all member countries are reported. The report must contain background information such as turnover, number of employees and type of business, and is required for each individual EU state where the companies are operating, including so-called “tax havens”. Information on activities in the rest of the world must also be reported in accordance with the Commission’s proposal. The expected result is that companies are encouraged to pay taxes where they make a profit and to create better transparency in the Member States’ tax systems and thereby identify, for example, loopholes.
The EU Council held a video conference on 25 February 2021 where the public country-by-country reporting was discussed and how the proposed directive from 2016 can be taken forward. Overall, a majority of the Member States supported the proposal, including Austria and Slovenia which previously opposed the proposal. The Portuguese Presidency have been appointed to lead the negotiations with the European Parliament for a swift adoption of the proposal. If the parties do not reach an agreement, a conciliation committee is convened where the proposal is either adopted or rejected depending on whether the parties can reach a compromise.
Legal basis and criticism
A number of Member States, including Sweden, expressed concern about the legal basis on which the proposal is based. These Member States opposed the proposal because they considered that the proposal should be decided in accordance with the legislative procedure applicable to tax matters in the EU, i.e., tax issues are decided unanimously, not by simple majority.
Further criticism of the proposal concerns the impact on competition. It has been stated that the public reports can be used by competitors to gain insight on information and valuable business methods without having to publish comparable data themselves. It has also been pointed out that tax authorities outside the EU may lose motivation to participate fully in the BEPS project and the mutual exchange of information may become redundant for these third countries.
Furthermore, the publication of such a report could put the companies in an unfavorable position if the published information is misinterpreted without a context. Finally, the report is likely to increase both compliance fees and PR risk reduction fees. Companies may need advisory to proactively prepare the report to identify potential audit and PR risks. The General Secretariat of the Council states in its report from 13 January 2021 that it should be possible to postpone certain information for a limited number of years under certain conditions. What information, how long and for what reasons is still unclear, although there are indications that the information should be sensitive from a competition point of view.
As for the situation now, the proposal will be considered further in order to reach a swift adoption. However, the outcome is still uncertain as the proposal still can be rejected if the parties do not reach an agreement. If the proposal is adopted in the future, it will mean a significant change for the companies covered, where routines and reporting will need to be reviewed to manage the risks that may arise.
If you want to know how your company may be affected or have any other concerns, you are welcome to contact us.