Monday, 27 June 2016

EU CbC reporting directive in effect

The EU Council’s directive on country-by-country (CbC) reporting of information by multinationals to tax authorities entered into force on 3 June 2016. The directive must be implemented into the domestic law of the EU member states by 4 June 2017, although that law is required to have
effect for accounting periods starting on or after 1 January 2016.
The CbC reporting directive follows the recommendations of the OECD in the final report issued on action 13 of the BEPS project (Transfer Pricing Documentation and Country-by-Country Reporting), and includes the common template agreed to by the countries involved in the project.
This directive relates to requirements for filing, and the sharing of, CbC information with tax authorities only.
Separately, the European Commission has proposed requirements for public reporting of some CbC tax information by multinationals operating in the EU.

CbC information to be submitted
Under the directive, parent companies of groups with members resident for tax purposes in more than one EU member state are required to report CbC information to the tax authorities of the member state in which they are resident for tax purposes. The reporting requirements apply to multinational groups with consolidated group revenue exceeding EUR 750 million, matching the recommendations in the BEPS action 13 report.
The filing requirement applies to tax years beginning on or after 1 January 2016, and multinationals must file reports within 12 months of the end of each accounting period. The tax authorities of the member states are required to automatically share CbC reports they receive with other member states in which the multinational group has operations within 15 months of the end of the period to which the report relates (18 months for the first period).
Where the parent of the multinational group is not resident in a jurisdiction that requires it to report CbC information to the tax authorities, the group may designate one EU-resident entity to file the information on behalf of the group, or elect another group entity that is required to file a CbC report to the tax authorities of its country of residence as a surrogate for the parent, provided the surrogate entity is resident in a jurisdiction that has an agreement for the sharing of information (under a tax treaty, tax information agreement or other agreed sharing mechanism).
The directive allows member states to defer CbC reporting obligations for non-EU headed groups by one year, to allow non-EU countries’ legislation (in particular, that of the US) to catch up. However, several member states already have adopted CbC legislation as part of the minimum standard set by the OECD, including some form of local filing requirement.

Information to be reported
The information to be reported is listed in the common template prepared by the OECD, including, by country:

  • Revenue, split between related party and unrelated party revenue;
  • Profit/(loss) before income tax;
  • Income tax paid (on a cash basis);
  • Income tax accrued (current year);
  • Stated capital;
  • Accumulated earnings;
  • Number of employees;
  • Tangible assets other than cash and cash equivalents; and
  • Details of all group entities by tax residence, and their country of incorporation (if different), along with the main business activity(ies) of each entity.

The directive provides that CbC reports are to be filed electronically, presumably following the xml schema developed by the OECD (although this has not yet been adopted).

As is the case with other EU directives, the CbC reporting directive does not contain a specific penalty regime. Member states are required to set their own penalties, which should be “effective, proportionate and dissuasive.”

The CbC reporting directive amends the 2011 directive on administrative cooperation and makes use of the existing “common communication network” for the exchange of information by EU member states, although the directive acknowledges that this will need to be updated.
The directive has had only minimal changes since the draft version was published at the end of January 2016; most notably, there has been an extension to the period of time member states have to share the contents of CbC reports with other member states for the first reporting period – this period has been extended from 15 months to 18 months, in line with the OECD recommendation.
It is clear that the EU intends to follow the internationally agreed recommendations of the OECD BEPS project on CbC reporting to tax authorities. The directive requires member states, in transposing the directive into domestic law, to refer to the OECD action 13 report for interpretation. The EU will continue to take account of future developments at the OECD level, presumably including the OECD review of the CbC template scheduled for 2020.
As recommended by the G20/OECD, member states should use the information contained within a CbC report to assess high-level transfer pricing risks and other risks related to BEPS, and also can use the information as a basis for making further inquiries in the course of a tax audit. Transfer pricing adjustments should not be made based only on the CbC information provided. However, the CbC reporting directive does not go as far as the OECD recommendations in stating that, should such an adjustment be made solely on the basis of the CbC report, it should be conceded by the tax authorities promptly in mutual agreement proceedings.

Source: Deloitte