United States

EU to tighten threshold on country-by-country reporting directive

TAX BLOG


In a recent move showcasing the European Union’s (EU) agenda to ensure fair taxation, the European Parliament’s Committee on Economic and Monetary Affairs (ECON) proposed several potentially far-reaching amendments to the public country-by-country reporting (CbCR) directive. Aimed at casting the net over a broader range of multinational enterprises (MNEs), these proposed amendments both substantially lower the turnover threshold requirements and expand the scope of activities to be reported by MNEs. If these rules are finalized, CbCR could apply to smaller companies that never expected to be subject to these potential onerous reporting requirements.

Released in April 2016, the proposed EU CbCR directive is designed to impose stricter reporting requirements rules on certain MNEs. As originally proposed, the directive would apply to companies with a presence in an EU member state with total consolidated group turnover in excess of €750 million, regardless of headquarter location. Reporting requirements for companies headquartered outside the EU would fall on their subsidiaries or branches present in the EU. Any MNE groups exceeding the €750 million threshold but with no presence in any EU member states would not be subject to reporting requirements.

MNEs meeting the thresholds of the CbCR directive would be required to publicly disclose, on a country-by-country basis, detailed information regarding their operations including:

  • Nature of activities
  • Number of employees
  • Total annual net turnover
  • Profit before taxes
  • Amount of income tax due
  • Amount of income tax paid

In addition to publishing information regarding the amount of income tax paid on a country-by-country basis within the EU, MNEs would also be required to disclose the aggregate amount of income tax paid outside of the EU.

Recently ECON proposed several amendments to the original April 2016 CbCR directive that would drastically lower the reporting thresholds for MNEs. Most notably, the suggested amendments reduce the original reporting thresholds from consolidated groups with turnover in excess of €750 million to:

  • Either €40 million in turnover, or greater than €20 million gross balance sheet and 250 employees for EU headquartered groups
  • Greater than €40 million or over in turnover in the case of subsidiaries controlled by a non EU headquartered parent

These suggested amendments also mandate that MNEs provide the required information on their worldwide activities in all tax jurisdictions, not just activities within EU member states. 

As originally conceived, the EU public CbCR accounting directive was expected to encompass approximately 6,000 MNEs, making up 90 percent of EU corporate revenue.  These suggested amendments have the potential to significantly increase the scope of this directive, however, requiring a much larger number of MNEs to comply with CbCR reporting requirements than originally anticipated. 

This directive initially sought to target only the largest and most complex MNEs and is viewed by the EU as a cost effective means to both increase global tax transparency and hold governments and MNEs accountable. As originally drafted it appears to achieve the EU’s goal, but with such a substantial change in scope it seems the EU has departed from this initial view. These suggested amendments now seek to spread the increased CbCR compliance burden across a much wider range of taxpayers, to the detriment of many less sophisticated entities. 

This development certainly emphasizes a much stricter position on tax avoidance and evasion by the EU. Multinational taxpayers should keep a close watch as these events unfold, as they represent a significant change to the original scope of the public CbCR directive, and if implemented will likely impact a very broad range of multinational enterprises.


Kyle Brown

Manager

Kyle provides tax consulting and compliance services to middle market firms. Contact Kyle at kyle.brown@rsmus.com

Areas of focus: Federal Tax ConsultingTax Planning