The European Agenda
There are two proposals currently working their way through European institutions: Public Country by Country Reporting (CbCR) and Cross Border Mandatory Disclosure Regime (MDR). At the time of writing these initiatives are in proposal mode but require your attention.
In April 2016 the European Commission proposed a directive that would require public disclosure of certain tax information by certain undertakings and branches. This goes beyond the current Country by Country Reporting (CbCR) in our tax law.
It would require additional financial reporting for multinational entities (MNEs) with consolidated worldwide turnover of €750 million or more, requiring disclosure of tax information on an annual basis in a common template in each tax jurisdiction in which they operate. This data would be made publicly accessible on the website of the entity.
Broadly speaking, for MNEs having their headquarters in the EU, the obligation to provide this information would lie with the ultimate parent enterprise in the EU. When the ultimate parent is not governed by the law of an EU Member State, the reporting falls on EU subsidiaries or branches. Companies established only in the territory of a single Member State and in no other tax jurisdiction will be exempt from these rules.
Since the proposal was first published, Ireland submitted a reasoned opinion to the European Parliament arguing that the proposal breaches the EU law concept of subsidiarity, in particular because ‘the objectives of the proposal fall generally within the area of tax policy rather than accounting and thus impinges on a national competency’. Contributions were also formally submitted by the Swedish, German, Portuguese, Romanian and Italian Parliaments.
Currently, the tax information that will be publically disclosed by tax jurisdiction include:
- the name of the ultimate parent and, where applicable, the list of all its subsidiaries,
- a brief description of the nature of their activities and their respective geographical location
- Information such as employees, assets, turnover, profits, tax accrued and paid, political donations and whether entities benefit from preferential tax treatment due to patent box or equivalent regimes.
This is substantial information, and the latter area in particular includes significant information that may not have been in the public domain previously (which could cause concern for business in areas such competitive position, information disclosed to competition and suppliers, privacy and personal protection concerns for privately held businesses and its shareholders).
This is not, so far at least, a tax directive which means that it can be voted in on a majority basis. There is little doubt that a number of EU Member States in the Council will oppose the Commission’s public CbCR proposal.
Moving on to Cross Border MDR. The EU Commission has recently outlined a proposal for an EU Mandatory Disclosure Regime (MDR) which will be discussed at the ECOFIN later this year. Unlike public CbCR, this is a tax directive and therefore requires unanimity across Member States for it to be accepted. However, Ireland already has its own MDR focused on situations where an Irish tax advantage may be at issue and fall within the reporting regime under certain criteria.
However, for the EU proposal, a disclosable transaction is referred to in the directive as a “reportable cross-border arrangement” which means any “cross border arrangements or series of arrangements that satisfy at least one of the hallmarks set out in…” the directive. The proposed list of hallmarks are extensive and go beyond what exists in the Irish MDR. In particular, the EU version goes further including arrangements involving deductible crossborder payments made between two or more related parties where certain criteria apply, including situations where the income/payment received is taxed at a statutory corporate tax rate lower than half of the average statutory corporate tax rate in the Union and various other conditions. The last example is known as “effective rate taxation” and is something that Ireland opposed at ECOFIN’s discussions regarding the Anti-Tax Avoidance Directive earlier this year.
Other hallmark examples include where the same asset is subject to depreciation in more than one jurisdiction or more than one taxpayer can claim relief from double taxation in respect of the same item of income in different jurisdictions. There are hallmarks which comprise circumventing EU legislation or agreements on the automatic exchange of information, including agreements with third countries. There are also specific hallmarks concerning transfer pricing, including arrangements which do not conform to the arm’s length principle or with OECD transfer pricing guidelines.
The EU version goes far beyond the Irish legislation. Some of the hallmarks are “mechanical” without the need for a “main purpose” test and so if the directive was to be implemented in its current form then it would be a substantial move away from the approach taken in Irish law, not to mention the level of compliance obligations that would arise in identifying whether genuine transactions might have any of the hallmarks currently outlined.
The issue of Public Country by Country Reporting is a sensitive one. The level of confidential information that would be available publicly means the recommendations go far beyond the BEPS proposals. The former Finance Minister Noonan said that Ireland “could not serve two masters” in the EU or BEPS and chose adhering more closely with the latter. This is something that should continue. A similar approach should be taken for the EU Mandatory disclosure regime.
We live in a world of increased transparency and it is clear that versions of these proposals may come about, particularly the Mandatory disclosure reporting.