Country by Country Reporting & Tax Footprint Jarno Siivola Vice President, Tax Metso Corporation

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1 Country by Country Reporting & Tax Footprint Jarno Siivola Vice President, Tax Metso Corporation

2 Metso in brief

3 Metso a focused industrial company We are dedicated to delivering solutions: Processing equipment, systems and services for mining, aggregates and recycling 12,000 committed employees worldwide Industrial valves, controls and services for process industries such as oil, gas, pulp and paper Net sales EUR 2.9 billion in 2015 MINING AGGREGATES PROCESS INDUSTRIES 63% of revenue from service business 3

4 Metso solutions are used in processing materials for the infrastructure and consumables In quarries to produce aggregates In petrochemical plants to control flow of materials and fluids In mines to process minerals In pulp and paper mills to control flow of pulp and other liquid media c In scrap yards, metal production and industrial plants to process metal scrap Kuvat tulossa In recycling facilities to handle all kind of different waste applications 4

5 Our extensive global presence enables quick customer service 51 Countries with Metso operations 192 Locations 6,400 Service experts >80 Service centers Operating locations Developed markets Emerging markets z Net sales by market area Europe 23% North America 22% South and Central America 20% Asia-Pacific 16% China 7% Africa and Middle East 12% 5 *All data based on Annual Report 2015

6 Metso operates through three business areas Minerals Capital, Minerals Services and Flow Control Minerals Capital Net sales in 2015 EUR 832 million Customers Mining industry Aggregates industry (quarries and contractors) Scrap yards, automotive industry, waste handling companies Minerals Services Net sales in 2015 EUR 1,366 million Customers Mining industry Aggregates industry (quarries and contractors) Flow Control Net sales in 2015 EUR 723 million Customers Oil and gas Process industries Chemical and petrochemical industry Mining industry Pulp and paper industry Power generation industry Other selected process industries 6

7 Metso Corporate Tax Management Global Tax Management Team in Finland responsible for global tax strategy implementation and all cross border tax matters Regional Teams and controller network handle local compliance and other daily tax matters VP, Tax (Finland) Tax Manager (Finland) Tax Manager (Finland) VP Tax NA (USA) Accounting Manager (Brazil) Tax Manager (USA) Tax Accountant (USA) Tax Personnel in Accounting Team (Brazil) 7

8 Country by Country Reporting in Accordance with OECD BEPS Action 13

9 BEPS will change the global tax landscape significantly BEPS= OECD Action plan addressing base erosion and profit shifting (BEPS) made on request of G20 countries Proposes 15 actions that will change the international tax landscape significantly Proposals impacting transfer pricing documentation, including a requirement for country by country reporting are included in Action 13 9

10 Action 13: Re-examine transfer pricing documentation Action 13 aims to develop rules regarding transfer pricing documentation to enhance transparency for tax administration, taking into consideration the compliance costs for business. Target is to require MNE s to provide all countries full visibility to country based information about allocation of income, economic activity and taxes paid. In practise OECD has proposed a new three tier standard for transfer pricing documentation: - country-by-country reporting - master file - local files 10

11 Who must file CbC report Multinational groups with turnover above EUR 750 million in their countries of residence starting in Turnover based on year preceeding each reporting year Turnover threshold will be re-evaluated by OECD in 2020 at the same time when the content of CbC report is reevaluated The ultimate parent of the group shall be responsible for preparing and filing the CbC report with the local tax administration - If ultimate parent is not required to file CbC report, report must be filed locally or the secondary parent must file the CbC report 11

12 A model template for the CbC report PEs should be reported under tax jurisdiction of PE Incl royalties, interest, premiums and any other amounts, but not dividends. Sum of all entities in tax jurisdiction, no consolidation Cash tax actually paid, including also wht:s Income tax accrued for current year, not potential deferred taxes or provisions Sum of capital of all entities resident in jurisdiction. PE not reported separately Sum of accumulated earnings of resident LEs. PE not reported separately On a full - time equivalent (FTE) basis. Year end, AVG or other consistent way can be used Net book values of tangible assets. PE assets reported under PE jurisdiction 12

13 A model template for the CbC report 13

14 How will we collect data, what are the challenges with data? Will be handled centrally to ensure consistency and to avoid duplicate work Most data will be extracted from group consolidation tool (HFM). Some manual work or system / process changes will be needed to get full data (netted items) Obtaining PE data in time may be a challenge - Typically not available until the PE tax return is filed - Allocation of assets between PE / Parent not always clear In some countries there is always a mismatch between IFRS revenue recognition and tax revenue recognition - Tax revenue recognition may be partly or wholly cash based, for POC contracts local Gaap or tax may apply completed contract - Countries like Chile, Germany, Peru etc. As country based data is summed up from legal entity data with no consolidation, sum of country by country revenues and profits will exceed group total - Especially in countries with large domestic intercompany transactions 14

15 Example of CbC report Revenues from unrelated parties Revenues from related parties Total revenues Profit Before Tax and Minority Interests Current tax advances paid Accrued taxes for the fiscal year Total restricted equity Retained earnings Number of employees Y1 Country % Y0 Country % Tangible assets ETR Y1 Country % Y0 Country % Y1 Country % Y0 Country % Y1 Country % Y0 Country Current taxes may deviate significantly from the tax cost recognized in group books and statutory tax rate since DTA / DTL change is not reported in CbC report 15

16 European Commission proposal for amending Accounting Directive as regards disclosure of income tax information

17 European Commission proposal 12 April 2016 The Commission adopted a proposal for a Directive which imposes on EU and non-eu multinational groups the publication of a yearly report on the profit and tax paid and other information (country by country report CBCR) The proposal is now submitted to the European Parliament and Council for their consideration and final adoption by qualified majority of the Council Once adopted, the new Directive would have to be transposed into national legislation by all EU Member States, within one year after its entry in force Only MNE Groups with a total consolidated group revenue exceeding EUR 750 million will be required to prepare the CBCR - same threshold as that set out in the OECD/BEPS For any MNE headquartered in a third country, the obligation will fall on its subsidiaries or branches in the EU unless the non-eu MNE makes the CBCR group report publicly accessible and indicates which subsidiary or branch in the EU is responsible for the publication of the CBCR on behalf of the "parent" company. 17

18 European Commission Proposal Targets EC is concerned that: - Businesses operating across international borders exploit certain provisions of, and differences between, countries tax systems to pay less tax than they otherwise would; or - These businesses do not report their tax affairs in a way that allows for proper public scrutiny EC seeks to: - align taxation of corporate income with actual economic activity and to foster corporate responsibility to contribute to welfare through taxation - promote fairer tax competition in the EU by facilitating a debate on how to remedy market and regulatory shortcomings According to the EC, the competitiveness of EU enterprises will not be significantly affected by the proposal, while the risk of generating further tax conflicts and double taxation will be limited as more efficient dispute resolution mechanisms are already in place in Member States 18

19 European Commission Proposal 19

20 European Commission proposal Disclosure obligation Reporting should also include explanations on discrepancies between the amounts of income tax actually paid and income tax accrued (utilization of losses etc.) Country by country reporting information would be made available in a stand-alone report accessible to the public for at least 5 years on the company s website. Companies would also have to file the report with a business register in the EU. Companies subject to the publication requirement would have to submit the report to their external statutory auditors who would check that the report has been presented in accordance with the Directive, and made accessible on a website. 20

21 Will the General Public be educated enough to make reliable evaluation? A Oyj B Oy C Oy D Oy Total Group Revenue * 3438* Income before tax Taxes 0** 0** 0** Tax losses utilized ETR % based on Taxes ETR % on Group Reports *Sum of entity revenues exceeds Group revenues since in Group reporting intercompany sales are eliminated in consolidation **After deducting previous years tax losses taxable income and taxes are zero How to explain the differences in Revenue on entity by entity level vs. group revenue and the low taxes paid due to use of tax losses to general public so that John Doe understands it? 21

22 Tax Footprint

23 Tax Footprint Currently there is no single international or domestic standard or requirement for reporting tax footprint - In EU CRD IV includes a requirement for country by country tax reporting for certain financial institutions - In Finland Valtioneuvoston Omistajaohjausyksikkö has required state majority owned companies to report all taxes payable on a country by country starting for year The exact format of the report is however left for the companies to decide Companies that have decided to report their tax footprint have generated their own format for the report Typically the taxes reported include: - Direct taxes - Indirect taxes - Payroll taxes - Production taxes 23

24 What does it require to generate Tax Footprint? Case XX Oyj - a Finnish based MNE operating in 15 mainly European countries, implemented Tax Footprint in Resources and time needed to implement Tax Footprint: 791 days / external cost 145 keur (time needed in local units not included) Identifying all reported taxes and defining how to collect information: 40 days (20 persons), external cost 30 keur System changes required: 640 days (20p), external cost 115 keur Implementing consistent accounting treatment: 53 days (19p) Defining terms, indicators etc: 45 days (8p) Defining roles and responsibilities: 13 days (62p) - Yearly resources needed to prepare and maintain tax footprint yearly: 431 days / external cost 80 keur Preparing report and explanations: 135 days / year, external cost 80 keur / year Analyzing data: 14 days (8p) / quarter Year end reporting: 40 days (15p) Reporting in companies/ divisions 150 days / quarter (49p / 90 companies) 24

25 What are the challenges in preparing Tax Footprint? Understanding different taxes in different countries is important and requires lot of work - Corporate income taxes and other direct taxes are easily managed and understood but especially indirect taxes vary significantly in different countries The importance of other taxes than corporate income taxes will increase when reporting Tax Footprint and they will require much more attention Standardizing and automating reporting in different countries requires a lot of work - Because of different systems and different types of taxes Differences between local bookkeeping, tax and reporting requirements and IFRS creates a lot of challenges Getting information about paid taxes is very difficult or even impossible - Especially with indirect taxes. In addition Tax Account, which is used for example in Finland, will make it difficult to define taxes paid during the year because of the offset mechanism built in it Preparing Tax Footprint will require a lot of additional work, but does it add value? - Comparing different companies will be difficult since the Tax Footprint varies a lot depending on the industry and countries in which companies operate - Reporting will add a lot more details, but will it at the same time hide the overall result? - IAS 12 based tax reporting with tax reconciliation does already give a lot of details about company s tax position 25

26 company/metso metsoworld metsogroup metsoworld metsogroup