Global Tax Alert | 6 June 2013
European Council calls for expanded disclosure requirements for non-financial and diversity information
Following its 22 May meeting, the European Council on 23 May issued a set of Conclusions1 on taxation which included a call for “rapid progress” on a number of issues including a statement that “…the proposal amending the Directives on disclosure of non-financial and diversity information by large companies and groups will be examined notably with a view to ensuring country-by-country reporting by large companies and groups.”
In a speech the following day, the European Commissioner for internal market and services, Michel Barnier, said that the EU would expand the reporting obligations already adopted for banks (commonly known as Capital Requirements Directive, or “CRD” IV) to apply them to all large companies and groups. He is reported as saying that this will be put in place “as quickly as possible.” However, we understand that this concept of expanded requirements for public disclosure of tax information had not been discussed at the 22 May meeting.
The CRD IV proposals1 provide that from 1 January 2014, European banks and other institutions regulated under CRD IV should publically disclose the following information as an annex to their financial statements, on a country by country basis:
- • Entity names, nature of activities and geographical location
- • Turnover
- • Number of employees
In addition, from the same date, CRD IV regulated Institutions must disclose the following country by country information to the European Commission:
- • Pre-tax profit or loss
- • Taxes paid
- • Subsidies received
During 2014, the Commission will review these additional three disclosures provided by the banks and assess whether such information should be required to be publicly disclosed from 2015. Specifically, the Commission will consider any adverse implications of public disclosure on the areas of competitiveness, levels of investment, availability of credit, economic impact and broader financial stability.
It is not at all clear that Commissioner Barnier's comments regarding expansion of public disclosure by all large companies and groups to comply with rules based on the CRD IV provisions will be formally advanced by the Commission or would attract sufficient support to be enacted, as there is understood to be opposition to the idea in some Member States. However, the European Council conclusions regarding public disclosure of non-financial and diversity information set a political direction at the level of EU Heads of State and Government and the ongoing discussions at European level will likely mean that the issues of country-by-country reporting – including with respect to tax information – remain in the public eye.
What other developments may be expected?
A number of non-governmental organizations have been campaigning for country-by-country reporting, and many have prepared reports on the level of reporting currently undertaken by certain corporations in some jurisdictions.
The discussions at the EU level are separate from the OECD Base Erosion and Profit Shifting (BEPS) project. The tax transparency issues being discussed as part of the BEPS project are focused on enhanced reporting to tax authorities, including the concept of reporting on a company's full supply chain to the tax authorities in a simplified manner. The objective of such reporting would be to provide tax authorities with a better understanding of the company's activities in other countries for purposes of risk assessment.
On 29 May 2013, the Australian government introduced a tax bill into parliament to require the Australian Taxation Office to publicly report, in relation to companies with annual income of AUD100 million or more, their gross income, taxable income and tax payable, commencing with details from the 2013-2014 income year.3
How can companies be prepared?
Greater tax transparency – in the form of expanded reporting to tax authorities and potentially public disclosure of some tax-related
information – will continue to be the subject of discussion in the European Commission, the OECD, and elsewhere. As a result, tax and finance executives may wish to consider the following actions:
- • Close monitoring of legislative and regulatory developments in this area to understand the likelihood of increased tax reporting or disclosure requirements.
- • Regular monitoring of the level of public interest in their company's tax profile, based on their industry, importance of public perception to brand value, and social advocacy related to enhanced tax transparency.
- • Communication and discussion of these trends at the management level to ensure a common strategic view of issues related to tax transparency and existence of internal policies and codes of conduct to ensure proper governance and control.
- • Assessing the readiness of their company's systems and processes to support reporting of taxes paid.
- • Establishing a closer relationship between tax and accounting functions – especially related to finance transformation initiatives and ERP-related projects – to ensure changes to systems and processes take current and potential future tax reporting needs into account.
For additional information with respect to this Alert, please contact the following:
Ernst & Young LLP (United Kingdom), London
- • Chris Sanger
+44 20 7951 0150
Ernst & Young LLP, Washington, DC
- • Barbara Angus
+1 202 327 5824
Ernst & Young GmbH Wirtschaftsprüfungsgesellschaft, Munich
- • Dr. Klaus von Brocke
+49 89 14331 12287
EY AG, Zurich
- • Andrew Lee
+41 58 286 3358
EYG no. CM3510