Corporate groups face more public reporting into the future as well as tax restricted cost of finance

We’re nearly there in connection with changes that will come our way in Budget 2022. We’ll know next week what Ministers Donohoe and McGrath will have in mind for the future financial health of the country and all those that sail with it. The Budget has often been described as Oscar Night for accountants but the legislative detail behind that will come with the Finance Bill coming later with our President usually signing that into law in and around Christmas time.

From a corporate tax perspective, we know some of what’s coming in this year’s Finance Bill. There will be an interest limitation rule, there will be the sci-fi sounding reverse hybrids rule and no doubt there will be other changes included there.

The interest and reverse hybrid rules stem from the European Anti-Tax Avoidance Directive (ATAD) that we have to bring into our law. The directive requires EU Member States to bring about a fixed ratio rule that restricts a company’s net interest deductions (the amount of deductible interest expenses over and above taxable interest income; or put another way, interest out less interest in). In numbers terms, this seeks to limit the maximum interest deduction to be taken in computing taxable profits to 30% of earnings before tax and before deductions for net interest expense, depreciation and amortisation (EBITDA).

The hybrids legislation was enacted in 2020 and seeks “to neutralise tax advantages, or mismatch outcomes, that arise due to arrangements that exploit differences in the tax treatment of an instrument or entity arising from the way in which that instrument or entity is characterised under the tax laws of two or more territories”. In other words, one country looks at an entity one way e.g. as though it was a partnership and another country looks at the same entity another way e.g. as though it was a company. Both countries would then treat the entity differently for tax purposes. This year we’ll see the law change for reverse hybrid mismatches to deal with aspects of the ATAD rule which have to be implemented in our law by 1 January 2022.

As we know, these aren’t the only changes that are coming this way and much has been written on the OECD developments. Some additional forthcoming changes won’t impose a tax charge but will rather impose certain reporting activities i.e. increased administration, but also increased visibility of corporate information. Since my last column the Council of the EU outlined its position on the adoption of the public Country by Country reporting directive on the disclosure of certain tax information by certain undertakings and branches. This is often referred to as the public country-by-country reporting (CBCR) directive.

Last June I wrote in these pages that it was then announced that political agreement had then been reached on the proposed public country-by-country reporting initiative at EU level. Tax matters in the EU generally require unanimity of agreement between member states, but this was treated as an accounting matter and that merely required a qualified majority rather than an “all for one and one for all” type approach. Cyprus, the Czech Republic, Hungary, Ireland, Luxembourg, Malta, and Sweden questioned the legal basis, considering that adoption of the proposed public CBCR directive should require unanimity. Now the EU Council has brought this one step further.

According to the EU Council’s press release “The CBCR directive aims to enhance the corporate transparency of big multinational companies”. It goes on to say that the directive will require certain multinational undertakings with revenue of more than €750 million to disclose publicly in a specific report the income tax they pay. It continues that for the first time, non-European multinationals doing business in the EU through subsidiaries and branches will also have to comply with the same reporting obligations as EU multinational undertakings.

The reporting will take place within 12 months of the date of the balance sheet for the financial year in question. The directive sets out the conditions under which a company may defer the disclosure of certain information for a maximum of five years. The proposed directive also stipulates who bears responsibility for ensuring compliance with the reporting obligation. As the press release states, “the proposed directive, first tabled in April 2016, is part of the European Commission action plan for a fairer corporate tax system”.

The European Parliament adopted its position in March 2019. Negotiations between the co-legislators started in March 2021 and resulted in a provisional agreement on 1 June 2021, with points such as the transition period and the safeguard clause being finalised. The next step before the directive can enter into force is the formal approval by the European Parliament of the June 2021 provisional agreement, which is expected to be scheduled for one of the Parliament’s plenary sessions in November and some regard this as a formality. The directive will enter into force on the 20th day following its publication in the Official Journal of the European Union. Member states will have 18 months from the entry into force of the directive to transpose it into national law.

Domestic provisions governing existing CBCR have been in place in Irish law for some time, but this will be the first time for many groups that reporting will be made publicly available. The key focus for multinational groups that will be affected by this new-fangled reporting will be managing the transparency of the group’s tax affairs. Groups should consider the impact of the imminent public reporting sooner rather than later; while implementation may look far off based on the transposition deadline, Member States have the option of implementing public reporting early.

The future introduction of public reporting brings about the question for business leaders to consider further engagement with tax technologies, and to make better use of tax data analytics to assist in future decision making. All in all, this will be a new dawn of reporting when it comes about and that’s before we get near other tax changes. See you after Oscar Night!

Please note this article first featured in the Business Post on Sunday, 10 October 2021 and was re-published kindly with their permission on our website.