EU Directive on Country by Country Reporting

On the 25 May 2016, the EU Council adopted amendments to the EU Administrative Cooperation Directive in order to further extend the exchange of information to include mandatory country-by country reporting (CBCR). Through these amendments, CBCR shall be added to the categories of information subject to automatic exchange of information between Member State tax administrations. These amendments are intended to implement the recommendations of action 13 of the OECD BEPS (base erosion and profit shifting) action plan in the EU. Member States (including Malta) have to transpose the CBCR provisions into national law by the 4 June 2017.

The amendment to the Administrative Cooperation Directive requires Multinational Enterprise Groups (MNE Groups) which operate in the EU and which have a consolidated group revenue of at least €750 million, to provide information on revenues, profits, income tax paid, income tax accrued, capital, earnings, tangible assets and the number of employees on a country-by-country basis. Each constituent entity of the MNE Group together with its jurisdiction of tax residence and main business activities must also be reported. The information, which shall be presented in the same format as that required by the OECD, shall be aggregated on a per country basis and must be provided in respect of the MNE Group’s worldwide operations.

If the ultimate parent company of an MNE Group is resident in the EU, that parent company should submit the CBCR. If the ultimate parent company of the MNE Group is however resident outside the EU, it should either appoint a surrogate parent entity or an affiliate tax resident within the EU in order to fulfil this requirement. Qualified MNE Groups shall report the information for the fiscal year starting on or after 1 January 2016 to the tax authorities of the Member State where the reporting entity is tax resident. The tax administration of a Member State that receives a CBCR from an MNE Group shall automatically communicate that CBCR to the tax administration of any other Member State in which one or more constituent entities of the MNE Group is resident for tax purposes or is subject to tax with respect to business carried on through a permanent establishment.

A qualified MNE Group will have to submit an EU CBCR within 12 months from the end of its fiscal year. The CBCR shall be automatically exchanged among Member States within 15 months from the end of that fiscal year, except for the first communication for which 18 months is allowed.

While many EU Member States are OECD members and have already adopted or announced the intention to adopt the OECD CBCR requirements, the EU CBCR aims to level the playing field within the EU and require all Member States to adhere to the same standard of tax transparency requirements. Accessing the necessary information and presenting it in the required format will be a challenge for many MNE Groups. MNE Groups with businesses operated in the EU to which the EU CBCR shall apply should consider these requirements in the context of their global transfer pricing strategies and business models and should understand how revenue authorities will interpret the information that shall be submitted to them.