Explanatory Memorandum to COM(2016)198 - Amendment of Directive 2013/34/EU as regards disclosure of income tax information by certain undertakings and branches - Main contents
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This page contains a limited version of this dossier in the EU Monitor.
| dossier | COM(2016)198 - Amendment of Directive 2013/34/EU as regards disclosure of income tax information by certain undertakings and branches. |
|---|---|
| source | COM(2016)198  |
| date | 12-04-2016 |
1. CONTEXT OF THE PROPOSAL
• Reasons for and objectives of the proposal
A healthy Single Market needs a fair, efficient and growth-friendly corporate tax system, based on the principle that companies should pay taxes in the country where profits are generated. Aggressive tax planning undermines this principle. The majority of companies do not engage in aggressive tax planning and suffer a competitive disadvantage to those that do. Small and medium-sized companies are particularly affected by this phenomenon.
Fighting against tax avoidance and aggressive tax planning, both at EU and global level, is a political priority for the European Commission. As part of a broader strategy for a Fair and Efficient Corporate Tax System in the EU 1 , public scrutiny can help to ensure that profits are effectively taxed where they are generated. Public scrutiny can reinforce public trust and strengthen companies' corporate social responsibility by contributing to the welfare through paying taxes in the country where they are active. In addition, it can also promote a better informed debate on potential shortcomings in tax laws.
The Commission announced in March 2015 a comprehensive list of initiatives in its Action Plan on a Fairer Corporate Tax System (COM(2015)302) and proposed as part of the subsequent Anti-Tax Avoidance Package 2 (ATAP), to implement in the Union Action 13 of the OECD Action Plan endorsed by the G20 to fight base erosion and profit shifting (hereafter, BEPS). As a result, tax authorities will receive a country-by-country report from multinational enterprises (MNEs) on income tax paid which should enable better compliance with tax laws.
Responding to the calls from the G20 and elsewhere, greater transparency on the side of companies is needed to enable public scrutiny of whether tax is paid where profits are produced. This proposal requires that MNEs disclose publicly in a specific report the income tax they pay together with other relevant tax-related information. MNEs, whether headquartered in the EU or outside, with turnover of more than EUR 750m will need to comply with these additional transparency requirements. For the first time, not only European businesses but also non-European multinational companies doing business in Europe will have the same reporting obligations.
Third country jurisdictions which do not respect international tax good governance standards create particular opportunities for tax avoidance and tax evasion. If MNEs are active in such jurisdictions, special transparency requirements should apply.
This proposal focusses on corporate groups with a worldwide consolidated net turnover of more than EUR 750 million, in line with the scope of global OECD initiatives on tax transparency. The proposal does not impose any obligations on small and medium-sized companies 3 . It is proportionate both in terms of scope and information to be disclosed so as to limit compliance and other costs for affected companies, as well as to avoid jeopardising their competitiveness or expose them unduly to double taxation risks. It fits into the multilateral approach supported by the G20 and the OECD. The Commission will continue to work proactively on these issues with all relevant international partners.
• Consistency with existing policy provisions in the policy area
This proposal complements undertakings' current financial reporting requirements and does not interfere with these requirements in relation to their financial statements, for example.
This proposal does not modify the rules already in place on non-financial reporting and sectoral CBCR for both the banking sector 4 and the extractive and logging industries 5 . However it introduces an exemption clause to avoid double reporting for the banking sector, which is already subject to stringent public reporting rules in the EU banking legislation.
• Consistency with other Union policies
In the wake of the endorsement by the G20 of the Action Plan designed by the OECD to fight base erosion and profit shifting, the ATAP that was tabled in January 2016 requires very large MNEs 6 to report CBCR information to tax authorities. The information reported to tax authorities will not be disclosed to the public. The CBCR requirement in the ATAP is a tool that will assist tax authorities in orienting their tax audits and in ensuring compliance.
This proposal complements the ATAP proposal but has a different purpose. It will require the same MNEs to disclose publicly certain items of the information submitted to tax authorities.
This proposal contributes to EU policies on Corporate Social Responsibility, growth and jobs. This proposal responds to calls by the European Parliament to introduce a CBCR on corporate income tax.
2. LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY
• Legal basis
Article 50, paragraph 1 TFEU has been determined to be an appropriate legal base for this initiative, since it amends an existing Directive, which is based on that Article.
• Subsidiarity (for non-exclusive competence)
In an increasingly global integrated and digitalised economy, corporations and production value chains reflect less national and indeed regional boundaries. By contrast, tax policies and administration remain primarily a national responsibility. Due to the cross-border nature of numerous tax planning structures and transfer pricing arrangements, MNEs can easily relocate their tax base from one jurisdiction to another within or outside the Union. The EU action is thus justified on the grounds of subsidiarity in order to address the cross-border dimension where there is aggressive tax planning or transfer pricing arrangements.
• Proportionality
This initiative builds largely on the international consensus developed by the G20 in terms of scope and content. It ensures the right balance between benefits derived through public transparency and the need for a strong and robust EU economy. This initiative responds to the concerns expressed by interested parties about the distortions in the single market without compromising EU competitiveness. It should not cause undue administrative burden on companies, generate further tax conflicts or pose the risk of double taxation. It is limited to what is necessary to achieve the objective of greater transparency.
• Choice of the instrument
Having regard to the legal base and the strong connection of the initiative with corporate reporting, including non-financial reporting, an amendment of the Accounting Directive is proposed.
3. RESULTS OF EX-POST EVALUATIONS, STAKEHOLDER CONSULTATIONS AND IMPACT ASSESSMENTS
• Ex-post evaluations/fitness checks of existing legislation
This proposal introduces Country by Country Reporting which is new for most industry sectors. Similar reporting requirements have been introduced for the banking, logging and extractive industries. The evidence of the CBCR published by banks since it came into force in 2015 is that CBCR is a useful tool for enabling the assessment of whether taxes are being paid where profits are bring generated.
• Consultations
The Commission services held a wide consultation between June and December 2015, generating views from over four hundred respondents representing business, industry associations, NGOs, citizens and think tanks. The factual summary of this consultation is available on the web site of the European Commission 7 . In addition, ad hoc exchanges, meetings and a high level roundtable 8 allowed the Commission to obtain a further understanding of the challenges at stake, including both the benefits and the risks of greater public transparency in the area of corporate income tax. All inputs received during the consultation have been carefully considered and taken into account.
Most individuals who responded to the public consultation called for the EU to lead the debate, and if necessary to go beyond the current initiatives at international level on country by country reporting. NGOs and trade unions tended to agree with this position. On the other hand, most businesses preferred to go no further than implementation, at EU level, of the G20/OECD BEPS Action Plan requiring disclosure of a country-by-country report just to tax authorities.
• Collection and use of expertise
The Commission services held a meeting on tax transparency with the Platform for Tax Good Governance on 24 September 2015 9 . Amongst other research, the Commission services commissioned a study from PwC 10 in 2014 on the potential economic consequences of country-by-country reporting for banks. A synopsis report on all the consultation activities carried out by the European Commission to support this initiative is available on the web site of the European Commission.
• Impact assessment
The proposal is supported by an impact assessment which was positively received by the Regulatory Scrutiny Board. Following the opinion of the Board, the impact assessment was improved in several ways. First, it better distinguishes measures designed to directly tackle the corporate tax avoidance problem from the indirect benefits that are expected through increased transparency. Second, it elaborates further on a voluntary disclosure option (labelling system). Third, the assessment of the estimated impacts is more clearly separated from the impact of other tax avoidance measures included in the baseline scenario.
The proposal made today is based on the preferred option identified in the impact assessment, which is a public CBCR on worldwide operations broken down by EU Member State and aggregated for non-EU operations. The proposal applies to all EU and non-EU MNEs with a consolidated turnover of at least EUR 750 million, having activities in the EU by way of at least an establishment. The type of information to be disclosed includes income tax paid and accrued as well as the necessary contextual information. The proposal diverges from the impact assessment in two areas: it has been refined with respect to reporting for non-EU operations, where the same level of detailed assessment applying to EU Member States will also be required for certain tax jurisdictions. Moreover, it is proposed to require the disclosure of accumulated earnings on a country-by-country basis and to seek explanations at the corporate group level where there are material discrepancies between the taxes accrued and the taxes effectively paid.
In terms of societal benefits, this initiative responds to the increased demand for transparency regarding the tax affairs of MNE groups. By providing more information in a more convenient form, it should also contribute to increasing public trust in the fairness of the tax systems.
In terms of economic impact, the proposal does not imply significant additional administrative burdens as very large MNEs will in any case have to submit a more comprehensive CBCR to tax authorities when the ATAP is implemented. All very large MNEs with activities in the EU will have the same disclosure requirement, whether they are headquartered in the EU or in a third-country. Moreover, this public CBCR presents in a single document information that is already largely accessible in the business registers of each Member State. The competitiveness of undertakings will therefore not be affected. The risk of generating further tax conflicts and double taxation will be limited as publicly available tax information will be broken down only for a limited number of tax jurisdictions. The information is in general aggregated as regards operations in other jurisdictions.
• Regulatory fitness and simplification
No new obligations are imposed on micro or small undertakings in the EU. The measure targets only multinational companies that are the best equipped to engage in tax planning activities; that is companies whose consolidated turnover exceeds EUR 750 million. It is estimated that at least 6 000 multinational companies will need to draw up a country-by-country report due to being active in the EU markets. Of those, around 2 000 companies are headquartered in the EU, i.e., only a fraction of the total 7.5 million European companies. In order to cover multinational companies that are established in non-EU countries, the medium-sized and larger subsidiaries in the EU – alternatively, branches of a comparable size – will be subject to obligations.
Digitalised reports facilitate access and processing by any interested party (whether an interested investor, or members of civil society). For this reason, a publication on the undertakings' web site is required. No particular format or language is imposed.
• Fundamental rights
Overall, the extent of information envisaged is proportionate to the objectives of enhancing public transparency and scrutiny. Reporting builds on information generally published in financial statements of most of MNE groups in the EU.
4. BUDGETARY IMPLICATIONS
There are no budgetary implications of the initiative.
5. OTHER ELEMENTS
• Implementation plans and monitoring, evaluation and reporting arrangements
The Commission will monitor the implementation of the policy in cooperation with Member States. Five years after the transposition date, the Commission will produce an evaluation of this Directive.
The evaluation will examine the effectiveness, efficiency, relevance, coherence and added value in terms of public information of the proposal, including any significant impacts on undertakings or in third countries. The evaluation will also take into account new international developments.
• Explanatory documents
CBCR is a relatively new concept that requires technically sound implementation. In order to fulfil the objective of this proposal and avoid potential loopholes and mismatches in terms of Member State implementation into national law, explanatory documents will be necessary to assist with transposition and to allow effective verification.
This justifies the need for Member States to accompany the notification of their transposition measures with explanatory documents in the form of e.g. a correlation table.
• Detailed explanation of the specific provisions of the proposal
Scope – very large MNE groups
To ensure an appropriate balance of reporting burden, only MNE Groups with a total consolidated group revenue exceeding EUR 750 million will be required to prepare the CBCR. This is the same threshold as that set out in the OECD/BEPS and in the ATAP. In light of the specific objectives of public tax transparency, and going further in some respects than the rules currently applicable in the sectors of banks and extractive industries, the threshold of EUR 750 million will be calculated on a worldwide basis, and MNE groups are required to submit information on their worldwide activities. According to the OECD, based on this threshold, only 10-15% of MNEs will be required to submit a CBCR; but the turnover of those MNEs will represent approximately 90% of the turnover of all MNEs. Small and medium-sized companies are not affected by the proposal 11 .
For any MNE headquartered in a third country, the obligation will fall on its subsidiaries or branches in the EU unless the non-EU MNE makes the CBCR group report publicly accessible and indicates which subsidiary or branch in the EU is responsible for the publication of the CBCR on behalf of the 'parent' company.
This is in line with the Directive on Administrative Cooperation 12 which provides that subsidiaries or branches in the EU must provide the CBCR of its third country parent's group to tax authorities. The objective is to provide the tax administration with a complete set of information required to consider potential harmful tax practices rather than to provide the wider public with a general set of country-by-country data to improve transparency.
Given the threshold proposed for multinational companies to fall within the scope of this initiative and given the current reporting obligations in the EU, it is proportionate and efficient to impose the reporting obligation only on medium-sized or larger subsidiaries established in the EU. There are thus no new obligations placed on small companies, who represent more than 95 % of all companies in the EU.
Contents
Banking groups established in the EU are already required to publish a CBCR under Article 89 of Directive 2013/36/EU of the European Parliament and of the Council. Where these are MNEs which fall within the scope of this initiative, they will be exempted from the obligation to report on income tax information, provided that the report disclosed under Article 89 of Directive 2013/36/EU encompasses the activities of the ultimate parent undertaking in the EU and of all of its affiliated undertakings 13 .
Only information that is necessary and sufficient to meet the stated objectives of this initiative will be disclosed, namely: the nature of the activities, the number of persons employed, the net turnover made (including with related parties), the profit made before tax, the amount of income tax due in the country as a reason of the profit made in the current year, the actual payments made to the country's treasury during that year, and the amount of accumulated earnings.
In order to ensure a level of detail that will enable citizens to better assess how MNEs contribute to welfare in each Member State, the information should be broken down by Member State. In addition, because some third countries refuse to respect good governance standards in taxation and pose specific tax challenges, the information on operations of MNEs should also be shown with a high level of detail. The EU has undertaken to draw up a common list of certain tax jurisdiction on this basis in line with the Commission Communication 14 of 28 January 2016, which specified the proposed approach and the criteria to draw up such a list.
As set out in that Communication, the common EU list will be based on clear and internationally justifiable criteria, based on internationally-agreed standards as set out in the Directive and a robust screening process. The list will be developed by the Commission and Member States. The Commission proposes that a final decision on the tax jurisdictions to be included in the common EU list would be made in a Delegated Act allowing a role for both Council and Parliament.
Apart from the exception noted above in relation to some third country jurisdictions which pose particular challenges, the same information on the activities of the group in other tax jurisdictions will be provided on an aggregated basis. Where more than one entity of a group is involved in a given country, the CBCR will present the sum of the information relating to each entity in that country.
The consolidated report on income tax information will be published in a business register with the objective of ensuring certainty and availability over time. Moreover, as the objective of this initiative is to enable public scrutiny, those reports will also be made accessible to the public on company websites. To allow for comparisons over time, reports will remain accessible for at least five consecutive years on the websites.
Enforcement of this initiative will be ensured with a combination of provisions. Member States should introduce collective responsibility of the administrative, management and supervisory bodies for these reports. The statutory auditor of any local subsidiary in charge will have to verify whether the CBCR has been provided and made accessible on the Internet. In the case of a branch of a third country MNE, that responsibility will be borne by those persons in charge of disclosure formalities. Finally, Article 51 of Directive 2013/34/EU will apply, ensuring that infringements will be sanctioned by effective, proportionate and dissuasive penalties for MNEs or their subsidiaries or branches.