Brussels signals new disclosure requirements

October 3, 2013

Following its May 22 meeting, the European Council issued a set of conclusions on taxation. Among the conclusions was a statement that “the proposal amending the Directives on disclosure of non-financial and diversity information by large companies and groups will be examined notably, with a view to ensuring country-by-country reporting by large companies and groups.”

In a speech a few days later, the European Commissioner for internal market and services, Michel Barnier, said that the EU would expand the reporting obligations already adopted for banks (commonly known as Capital Requirements Directive, or “CRD” IV) to apply them to all large companies and groups.

He is reported as saying that this will be put in place “as quickly as possible.” However, this concept of expanded requirements for public disclosure of tax information had not been discussed at the May 22 meeting, as Member State officials have clarified.

The CRD IV proposals provide that, from 1 January 2014, European banks and other institutions regulated under CRD IV should disclose publically the following information as an annex to their financial statements, on a country by country basis:

  • Names, nature of activities and geographical location
  • Turnover
  • Number of employees

In addition, from the same date, CRD IV regulated institutions must disclose the following country by country information to the European Commission:

  • Pre-tax profit or loss
  • Taxes paid
  • Subsidies received

During 2014, the Commission will review these three additional disclosures provided by the banks and assess whether public disclosure of such information should be required from 2015. Specifically, the Commission will consider any adverse implications of public disclosure on the areas of competitiveness, levels of investment, availability of credit, economic impact and broader financial stability.

It is not at all clear that Commissioner Barnier’s comments regarding expansion of public disclosure by all large companies and groups to comply with rules based on the CRD IV provisions will be advanced formally by the Commission or, indeed, would attract sufficient support to be enacted. There is understood to be opposition to the idea in some Member States.

However, the European Council conclusions regarding public disclosure of non-financial and diversity information set a political direction at the level of EU Heads of State and Government and the ongoing discussions at European level will likely mean that the issues of country-by-country reporting — including with respect to tax information — remain in the public eye.

What other developments may be expected?

A number of non-governmental organizations have been campaigning for country-by-county reporting, and many have prepared reports on the level of reporting currently undertaken by certain corporations in some jurisdictions.

Discussions at the EU level are separate from the OECD Base Erosion and Profit Shifting (BEPS) project. The tax transparency issues being discussed as part of the BEPS project are focused on enhanced reporting to tax authorities, including the concept of reporting on a company’s full supply chain to the tax authorities in a simplified manner. The objective of such reporting would be to provide tax authorities with a better understanding of the company’s activities in other countries for purposes of risk assessment.

It is noted that the Australian government tabled a measure on public disclosure of certain tax-related information on 29 May.

How can companies prepare?

Greater tax transparency — in the form of expanded reporting to tax authorities and, potentially, public disclosure of some tax-related information — will continue to be the subject of discussion in the European Commission, the OECD and elsewhere. As a result, tax and finance executives may wish to consider the following actions:

  • Close monitoring of legislative and regulatory developments in this area to understand the likelihood of new requirements being implemented.
  • Regular monitoring of the level of public interest in their company’s tax profile, based on their industry, the importance of public perception to brand value, and social advocacy related to enhanced tax transparency.
  • Communication and discussion of these trends at the management level to ensure a common strategic view of issues related to tax transparency.
  • Assessment of the readiness of their company’s systems and processes to support reporting of taxes paid.
  • Establishment of a closer relationship between tax and accounting functions — especially related to finance transformation initiatives and ERP-related projects — to ensure that changes to systems and processes take current and potential future tax reporting needs into account.

The full version of this article is published in EY´s Global Tax Policy and Controversy Briefing, issue 12 (PDF, 7.39 MB)

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