EU Council publishes updated Draft Directive on implementation of country-by-country reporting

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1 23 March 2016 Global Tax Alert News from EU Tax Services EU Council publishes updated Draft Directive on implementation of country-by-country reporting EY Global Tax Alert Library Access both online and pdf versions of all EY Global Tax Alerts. Copy into your web browser: Executive summary Following the 8 March 2016 meeting of the EU Finance Ministers, the Council of the European Union published the latest version of the draft directive that would implement in the European Union (EU) the Organisation for Economic Co-operation and Development (OECD) recommendations on country-by-country (CbC) reporting (the Draft Directive). The published version dated 15 March 2016 reflects the changes agreed by the EU Finance Ministers at the 8 March 2016 meeting of the Economic and Financial Affairs Council (ECOFIN). Under the Draft Directive, Member States would require CbC reports from EU and non-eu multinational groups with operations in EU Member States and consolidated group revenue of at least 750 million for financial years starting on or after 1 January Member States may delay reporting for EU based subsidiaries of non-eu groups where the CbC report has not been provided to the Member State by either the ultimate parent or another appointed reporting entity (surrogate parent) so called secondary reporting - for one year, to cover financial years starting on or after 1 January The Member States that prefer to require secondary reporting for financial years starting on or after 1 January 2016 will have the option to do so.

2 2 Global Tax Alert EU Tax Services Detailed discussion Background A first draft Directive was first released on 28 January 2016 as part of the EU Anti-Tax Avoidance Package. This would amend the existing Directive on exchange of tax-related information within the EU. 1 Its aim is to ensure harmonized implementation within the EU of the OECD recommendations on CbC reporting, including within the seven Member States that are not members of the OECD. The updated Draft Directive is closely aligned with the OECD guidance on CbC reporting, 2 but also has certain specifics. Reporting obligation EU and non-eu multinational groups with operations in EU Member States and consolidated group revenue of at least 750 million (qualifying groups) would be required to file CbC reports for financial years starting on or after 1 January As a general rule, the reporting entity would be the ultimate parent entity of a qualifying group (primary reporting). The report would be delivered to EU Member States directly, if the ultimate parent entity is resident in the EU or if it is not, through exchange of information. Secondary reporting obligation If the group s non-eu ultimate parent entity of the MNE Group is not obligated to file a CbC report in its jurisdiction of tax residence or the report is filed but not shared with an EU Member State under exchange of information, the reporting obligation would shift to the EU based subsidiary or permanent establishment. The mechanism of shifting the obligation to a local subsidiary (commonly referred to as a secondary reporting mechanism) is implemented in the Draft Directive. The Draft Directive includes both types of secondary reporting mechanisms proposed in the OECD Guidance: Local filing, i.e., an EU based subsidiary or permanent establishment would be required to file the CbC report for the entire group in the jurisdiction where it is resident. Or Surrogate parent entity filing, i.e., Member States would accept filing from another subsidiary or permanent establishment of the group, designated to file the CbC report instead of the ultimate parent entity. Filing by the surrogate parent entity would relieve the obligation for local filing as long as the jurisdiction of the subsidiary where local filing is required is able to obtain the report filed by the surrogate parent entity. As mentioned above, and in contrast with the OECD guidance, the Draft Directive would give Member States the option to defer the secondary filing obligation to financial years starting on or after 1 January In addition, the Draft Directive allows for an EU surrogate parent filing, giving taxpayers with subsidiaries in more than one EU Member State the right to designate a constituent entity to file the CbC report in one Member State that would then have the obligation to communicate the report with other relevant EU Member States. Timing of filing and exchange of the CbC reports In compliance with the OECD guidance, CbC reports would be filed within 12 months from the end of the fiscal year to which they relate. Each Member State would be obliged to exchange the CbC report received with any other Member State where the group has a subsidiary or a permanent establishment. The CbC report obtained under the Draft Directive would only be exchanged with the tax authorities of the relevant Member States and would not be made publically available. Content of the CbC reports The content of the CbC report required under the Draft Directive is aligned with the OECD guidance and includes: Aggregate information relating to the amount of revenue, profit (loss) before income tax, income tax paid and accrued, number of employees, stated capital, accumulated earnings and tangible assets other than cash or cash equivalents in each jurisdiction in which the group operates. Identification of each constituent entity within the group, including the entity s jurisdiction of tax residence (and the jurisdiction under which the entity is organized, if different from its jurisdiction of tax residence), and the nature of the entity s main business activity or activities. Certain Member States had expressed concerns that they may not be in position under their legal systems to require the full information of a given group from a subsidiary that cannot obtain or acquire all the information required

3 Global Tax Alert EU Tax Services 3 for fulfilling the reporting requirement. To accommodate those concerns, the Draft Directive proposes to regulate the potential consequences if an EU subsidiary of a qualifying group is required to file the CbC report with information on the entire group (local filing), but does not have in its possession and is not able to obtain the necessary information. The proposed consequences are as follows: The subsidiary should be required to file a report containing all the information it has available (incomplete report). Member States are still allowed to apply a penalty in that case (but are not obliged to do so). The Member State that received the incomplete report should inform other Member States of this fact. The subsidiary that filed the incomplete report will not be eligible to be appointed as surrogate parent entity. Member States could consider the filing of an incomplete report as an indication for the need to assess high-level transfer pricing risks and other base erosion and profit shifting risks related to this multinational group. Member States should provide a list to the European Commission of jurisdictions where Ultimate Parent Entities of EU-based Constituent Entities are resident, but full reports have not been filed or exchanged. Language of the CbC report Member States are free to request the CbC report in their official language. However, the European Commission would be required to adopt linguistic arrangements for the exchange of the reports by the end of Implications Entry into force The ECOFIN is expected to adopt the Draft Directive in its current version in the coming months, pending a consultation with the European Parliament (which is more of a formality and should not affect the text to be adopted). Once adopted, the Directive would enter into force on the day it is published in the Official Journal of the European Union. Member States would be asked to implement the Directive within 12 months from the entry into force of the directive. This means that all EU Member States will likely update their legislation in the first half of Deferred secondary reporting A number of Member States (Denmark, Finland, France, Ireland, Italy, the Netherlands, Poland, Portugal, Spain and the UK) have already implemented or are in the process of implementing CbC legislation. Since most of those countries followed the OECD guidance, they would require filing (including secondary reporting) for financial years starting on or after Some of them (e.g., the Netherlands) have already indicated that they will not be changing their legislation to make use of the option for delayed secondary reporting provided in the Draft Directive and will continue to require secondary reporting for Qualifying groups with ultimate parent entities outside the EU should carefully monitor the implementation of the CbC reporting rules in all Member States taking into account that the deferral of secondary reporting is just an option and not an obligation. Public disclosure of CbC reports The European Commission has made it clear that CbC reports collected under the Draft Directive would only be exchanged between tax authorities and would not be made public. However, a separate proposal for disclosure of certain information on a country-by-country basis for multinational groups with revenue of at least 750 Million is expected to be published by the European Commission in April The content of the information reported likely will be different from the contents of the CbC reports under the Draft Directive, but both reports would likely have to be aligned. Endnotes 1. See EY Global Tax Alert, European Commission releases anti-tax avoidance package designed to provide uniform implementation of BEPS measures and minimum standards across Member States, dated 28 January

4 4 Global Tax Alert EU Tax Services For additional information with respect to this Alert, please contact the following: Ernst & Young GmbH Wirtschaftsprüfungsgesellschaft, Munich Dr. Klaus von Brocke Andreas Wohlhöfler Ernst & Young Belastingadviseurs LLP, Transfer Pricing, Rotterdam Ronald van den Brekel Ernst & Young LLP, Global Tax Desk Network, New York Jose Bustos Joana Dermendjieva

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