Public Country-by-Country Reporting

On 21 December 2021, a new EU Directive (“Directive (EU) 2021/2101”) entered into force, amending the EU Accounting Directive. Under the Directive, companies are required to publish a so-called “report on income tax information” (also referred to here as “Public CbCR”). The goal of Public CbCR is to introduce an instrument for increasing transparency and enhancing public scrutiny in tax affairs.

From the OECD CbC Report to Public CbCR

The OECD CbC Report, introduced under BEPS Action Point 13 and included in the OECD Transfer Pricing Guidelines 2017, is primarily intended to facilitate risk assessment by tax authorities. The information contained in the CbC Report should therefore by treated confidentially.

While the OECD CbC Report aimed to improve the quality and quantity of information provided to tax authorities, and thus to prevent tax avoidance, the goal of Public CbCR is to provide additional information to the general public, including investors, NGOs and consumers. This increased transparency is intended to restore public trust in the tax system.

Public CbCR in detail

Personal scope of application

Multinational enterprise groups (“MNE groups”) with tax residence in an EU Member State, have to prepare and publish Public CbCR if they have consolidated revenues in two consecutive financial years of more than EUR 750m. Generally speaking, the ultimate parent company is responsible for preparing Public CbCR. However, if this company is not tax resident in an EU Member State, the mandatory disclosure obligation may affect subsidiaries or branches within the EU. For reasons of proportionality, the obligation to disclose and publish Public CbCR is, however, limited to medium-sized and large subsidiaries that are established in the EU and branches of comparable size that are established in the EU. Moreover, standalone undertakings, which exceed a certain size and operate in multiple tax jurisdictions, are required to prepare and publish Public CbCR.

Credit institutions and investment firms are exempt from the requirement, as since 2015 these have been required to publish an annual CbC Report as an annex to the financial statements.

Factual scope of application

Public CbCR should include the name of the ultimate parent, the relevant financial year, the reporting currency, a list of all subsidiaries, as well as a list of activities. It should also include the number of employees (FTE), the revenues generated, the profit or loss before tax, the taxes paid, as well as the retained earnings – all separated according to jurisdiction. In addition to differences in their objectives, the following differences between the OECD CbC Report and the new Public CbCR can be observed:

- While the OECD CbC Report only refers to MNE groups, the scope of the new Public CbCR also expressly covers standalone undertakings.
- To assess whether the threshold of EUR 750m was exceeded, the OECD CbC Report refers to the previous financial year, while for Public CbCR the two preceding financial years are relevant, although the report on income tax information should be prepared on the basis of the latter of these two last financial years.
- In the context of Public CbCR, only aggregated data needs to be reported for activities in non-EU countries, which are not listed in the EU list of non-cooperative jurisdictions for tax purposes. The OECD CbC Report does not envisage aggregation.
- Under Directive 2021/2101, there are two options for representation of revenues:
  - - the sum of the net turnover, other operating income, income from participating interests, excluding dividends received from affiliated undertakings, income from other investments and loans forming part of the fixed assets, other interest receivable and similar income, or
    - the income as defined by the financial reporting framework on the basis of which the financial statements are prepared, excluding value adjustments and dividends received from affiliated undertakings.
- Additionally, in Public CbCR, the income from related and unrelated parties should be combined, while in the OECD CbC Report such income should be recorded as two separate items.
- In Annex 1 of the OECD CbC Report, the stated capital and the tangible assets (without cash and cash equivalents) should be disclosed for each country. This is not required for Public CbCR.
- In the context of Public CbCR, a brief description of the nature of activities should be provided, while in the OECD CbC Report it is normally only necessary to select certain pre-defined activities (specific functions).
- While the OECD CbC Report requires a separate item in the event that the jurisdiction of organisation or incorporation differs from the jurisdiction of tax residence, this is not explicitly mentioned for Public CbCR.

Under Directive 2021/2101, the reporting obligation can alternatively be fulfilled by publication of the OECD CbCR. The report on income tax information must state which option was chosen.

If a subsidiary or branch does not have all the necessary information and is also unable to obtain this information, it must make a corresponding declaration and, as a minimum, publish any relevant data that is available.

Temporal scope of application

Directive 2021/2101 entered into force on 21 December 2021. Member States have 18 months from this date to transpose the Directive into domestic law. Directive 2021/2101 stipulates that reporting must be carried out for financial years beginning on or after 22 June 2024 at the latest. As publication has to take place no later than one year after the end of the financial year, the first Public CbCR will be published by mid-2026 at the latest.

Mandatory disclosure obligations

Public CbCR must be published within twelve months of the balance sheet date. Prompt disclosure of data could, in certain cases, seriously damage a company’s market position. Member States therefore have the option to allow companies to defer disclosure of certain information for a maximum of five years. To be permitted to defer, the company must disclose the use of a deferral and the reason for this in Public CbCR.

Publication must be made in an official EU language and must be available free of charge on the group’s website for at least five years. Alternatively, the information may be made accessible to the public in an electronic reporting format which is machine-readable, on the website of a national register. In this case, the company’s website must contain a link to the website of the relevant register.

Depending on who is required to publish Public CbCR, responsibility for the preparation and publication of the report on income tax information lies with the members of the administrative, management and supervisory bodies of the ultimate parent undertaking, the standalone undertakings, or the subsidiary undertakings, or branches.

Role of the auditor

The auditor is now required to state in the audit report whether the company was required to publish a report on income tax information for the previous financial year and, if so, whether reporting was carried out properly. Directive 2021/2101 therefore only envisages a formal check regarding the publication of information, but not for any verification of the content by the auditor.

Penalties

Aside from reputational damage, failure to comply with reporting requirements may result in financial penalties. However, no uniform penalties are provided for. Instead, each Member State is required to provide for penalties that are effective, proportionate, and dissuasive.

Conclusion and outlook

The age of tax transparency has dawned. While the OECD CbC Report is intended to enable risk assessment for tax authorities, Public CbCR makes tax information accessible to the general public.

Although the need for increasing tax transparency is understandable from various angles, the Public CbCR initiative also has several shortcomings. For example, the formal implementation of a fiscal measure by means of an amendment to the EU Accounting Directive, and not an amendment to the Administrative Cooperation Directive, may be questioned in light of the differing requirements for decision-making. This not least because the decision by EU Member States was not unanimous. Disclosure of the data may seriously impair the economic position of a company. In addition, the risk of reputational damage will particularly affect company groups which are of greater public interest due to their high profile. Such reputational damage would be judged more critically if it was caused by reporting via Public CbCR on the basis of insufficient data and knowledge of the overall facts and circumstances.

Companies should in any case prepare themselves accordingly. In this context, companies should consider including an explanation of their tax strategy in Public CbCR. There is already a noticeable trend towards voluntary publication of information that goes beyond legal requirements.

Author: Anja Anglmayer

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TagsBEPS CbC Reporting Country by Country Reporting Directive (EU) 2021/2101 EU Accounting Directive MNE groups public CbCR tax transparency threshold unrelated parties