Review of the European Commission tax reporting system for multinational enterprises
In 2016, the European Commission announced a new tax reporting system for multinational enterprises selling in the European Union. This includes listing income and employees separately in each EU Member State. We look back at the provisions of this reporting requirement in light of recent tax initiatives.
Brussels, Belgium: 03 June 2021
In 2016, the European Commission led by Jean-Claude Juncker requested every multinational enterprise to report their income and employees in each EU country, separately. The Commission estimated at the time that EU Member States lose € 50-70 billion each year from corporate tax avoidance.
The EU Member States are responsible for collecting taxes and combating tax fraud and evasion. In order to handle cross-border tax, the EU provides a framework and offers instruments to achieve that goal. The Commission’s overall objective is to ensure that the country in which a company generates profits is also the country where relevant taxation is applied.
Any multinational company that is currently active in the EU’s Single Market with a permanent presence in the Union and that has sales more than € 750 million would have to comply with these additional reporting requirements.
The information to be disclosed on a country-by-country basis would include:
The nature of the activities;
The number of employees;
The total net turnover made;
The profit made before tax;
The amount of income tax due in the country as a reason of the profits made in the current year in that country;
The amount of tax actually paid during that year;
The accumulated earnings.
Judging from recent efforts, the campaign to cut down on multinational profit shifting has failed, especially for digital multinationals. The G7 have recently announced plans for a digital services tax as well as a potential minimum corporate income tax.
During the last decades, the fight against corporate tax avoidance has become a priority for the European and global agenda. In addition, the EU is actively engaging internationally for tax transparency and reporting.
The Panama Papers, which became known from the recent press investigations, confirmed once again the important of this agenda.
The European Commission's Communication on External Strategy for Effective Taxation, presented in January 2016, established its long-term strategy for taxation:
Transparency and exchange of information, including information exchange on request and Automatic Exchange of Information (AEoI) of financial account information;
Fair tax competition;
Standards set up by the G20 and/or the OECD; and
Other relevant standards, including international standards set up by the Financial Action Task Force.
Medium-sized or large subsidiaries of non-EU headquartered groups would be subject to the reporting obligation on behalf of their ultimate parent. If a non-EU headquartered company does not have subsidiaries, but only branches, these branches would face similar obligations.
As an alternative for non-EU headquartered firms, a simpler option is offered: all reporting obligations on subsidiaries or branches would be lifted if the non-EU headquarters publishes its country-by-country report on its website and entrusts one of its EU subsidiaries to file the report on their behalf with an official business register inside the EU. A subsidiary is a company incorporated in each country with legal status. Companies established in the EU are already required to disclose certain information in their individual financial statements.
The reports on income tax information will be made available to the public on the company’s website. Businesses will also be required to file those reports in the relevant national business registers which are also accessible to the public. By doing this, they will be able to:
Enable a comparison of the tax paid by similar companies in similar situations or the tax contributions made to national governments by different companies;
Identify potential weaknesses in national tax systems;
Identify loopholes in national tax systems;
Companies with activities in the EU, pay their fair share of tax.
The proposal requires companies to disclose, for all the information categories, an aggregate figure for all taxes paid outside the EU.
The 4th Anti-Money-Laundering Directive already sets standards to bring about more transparency and accountability for companies and banks, making sure that competent authorities have access to relevant information through central registers. The Directive has introduced a special obligation for Member States to introduce public registers on beneficial ownership.
As fiscal conditions in the OECD and EU deteriorate as a result of COVID and also due to structural factors, we fully anticipate further efforts to reduce tax optimisation and develop a common international taxation system.
European Commission. 12 April 2016
Navigator Consulting. 2 June 2021
Navigator Consulting. 17 November 2020
Navigator Consulting. 6 November 2020
Navigator Consulting. 6 August 2020