Recent developments, such as the acceleration of the public Country-by-Country Reporting (“CbCR”) obligations by Romania, as well the newly published guidance regarding Pillar II safe harbour rules, have put increasing pressure and scrutiny on Multinational Enterprises’ (“MNEs”) CbCR obligations and will directly affect companies’ tax compliance obligations.
Romania implements obligatory public CbCR as of 1 January 2023
Background
On 21 December 2021, the EU adopted a Directive on “Public Country-by-Country Reporting (“Directive (EU) 2021/2101”), requiring MNEs to disclose certain tax and no-tax information on a jurisdictional basis.
Said Directive is applicable to both EU-headquartered MNEs and non-EU-headquartered MNEs doing business in the European Union through a subsidiary or branch in Romania, with a total consolidated revenue of more than EUR 750 million in each of the last two consecutive financial years.
Implementation by Romania
Romania is the first EU Member State to implement the public CbCR into national law. As a consequence, for financial years starting on 1 January 2023, MNEs that are domiciled in Romania or have a taxable presence there through a subsidiary or branch, are required to publish details about their tax position on their website (alternatively on the website of the relevant chamber of commerce when free of charge).
The information to be disclosed is largely in line with the EU Directive and covers the following:
- Brief description of the nature of their activities;
- Number of employees on a full-time basis.
- Net revenues;
- Gross profit or loss;
- Income tax paid on a cash basis and income tax accrued;
- The amount of gains accrued
The above should be disclosed for each EU Member State separately, as well for each jurisdiction that is either mentioned in Annex I (the so-called “blacklist”) or Annex II (the so-called “grey list”) of the EU list of non-cooperative jurisdictions. For all other jurisdictions, the information should be reported jointly on an aggregated basis.
Furthermore, the information should be filed within 12 months of the financial year end-date, i.e. at the latest on 31st December 2024 for companies with a financial year starting 1 January 2023, and should remain accessible for at least 5 consecutive years.
Transitional CbCR Safe Harbour rule under the GloBE rules
On 20 December 2021, the OECD published its initial Safe Harbour framework on Pillar II.
In this respect, a Transitional CbCR Safe Harbour rule has been introduced, providing relief to MNEs in respect of their GloBE compliance obligations for the years covered by the transition period (i.e. Fiscal Years beginning on or before 31/12/2026 but not including a Fiscal Year that ends after 30/6/2028).
More specifically, if a MNE can demonstrate, based on its qualifying CbCR and financial accounting data, that a jurisdiction has
- revenue and income below the de minimis threshold (the de minimis test), or
- an ETR that equals or exceeds a rate of 15%, 16% or 17% in 2024, 2025 and 2026 respectively (the ETR test), or
- profits before income tax that does not exceed the substance-based income exclusion amount as calculated under GloBE rules (the routine profits test), that MNE is relieved from the obligation to perform detailed GloBE calculations in respect of that jurisdiction.
The Transitional CbCR Safe Harbour applies only where the MNE Group prepares its CbC Report using Qualified Financial Statements, meaning based on
- the accounts used to prepare the Consolidated Financial Statements of the Ultimate Parent entity; or
- separate financial statements that are prepared in line with an Acceptable or Authorised Financial Accounting Standard; or
- when an entity is not included in the consolidated financial statements due to size or materiality grounds, the financial accounts for an entity that are used for the preparation of the CbCR
The measure of taxes the Inclusive Framework has chosen for the purposes of the Safe Harbour is income tax expense as recorded in a Constituent Entity’s financial accounts, provided that such Constituent Entity’s income is included in the CbC Report but does not include taxes that are not Covered Taxes as described in Article 4.2.2. Income tax expense includes all below-the-line tax expenses (e.g., the zakat).
Using income tax expense for the Simplified ETR calculation means including deferred taxes in the ETR numerator. The GloBE Rules require making certain adjustments to deferred tax expense (i.e., the net movement of deferred tax liabilities and deferred tax assets), which can give rise to additional complexity in the determination of the GloBE ETR. However, for the transitional period, it is recognised that such adjustments can be disregarded except for uncertain tax positions, which in any case have to be excluded.
Once a jurisdiction falls outside the scope of the CbCR Safe Harbour rule, the MNE cannot apply, with respect to that jurisdiction, for a transition safe harbour in a subsequent year.
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Based on the above developments, it is beyond any doubt that going forward, Groups’ CbCR will be subject to a higher level of scrutiny, requiring MNEs to perform a more comprehensive analysis of their CbCR, as well review their broader tax reporting strategy.
If you would like to discuss more on this topic, please do reach out to our key contacts below.
Key contacts
Daniel Stutzmann
Partner, Global Minimum Tax
Martin Krivinskas
Partner, Transfer Pricing
Miroslav Cerovic
Director – Transfer Pricing and Value Chain Alignment
Freya Younes
Senior Manager –Transfer Pricing
