Global Tax Alert | 11 March 2013

Tax transparency reporting: The developing European Union banking agenda

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On 5 March 2013, the European Council announced its broad endorsement of the recently announced EU proposals for greater financial transparency specifically aimed at the banking sector, although the proposals appear to extend to some investment firms.

This announcement was part of a package of regulatory reform measures, including a cap on bankers' bonuses, aimed at increasing financial transparency and strengthening the regulatory regime for financial institutions. These proposed requirements are a last minute extension of the EU's well publicized Capital Requirements Directive IV (CRD IV), which seeks to implement the requirements of Basel III into EU law.

What has been announced?

Under the proposals, from 1 January 2014 all financial institutions regulated under CRD IV will be required to publish, for each group entity, their:

  • Number of employees
  • “Net banking income”

In addition, and at the same time, European banks (Global Systematically Important Financial institutions (G-SIIs) and Other Systematically Important Financial Institutions (O-SIIs)) will be required to provide the following disclosures, on a country by country basis, to the European Commission (Commission):

  • Pre-tax profit or loss
  • Taxes paid
  • Subsidies received

During 2014, the Commission will review the above-mentioned disclosures provided by the banks and assess whether, after giving due regard to any adverse consequences, they should be made public from 2015. Specifically, the Commission points out that it will consider adverse implications of public disclosure on the following areas prior to publication:

  • Competitiveness
  • Levels of investment
  • Availability of credit
  • Economic impact
  • Broader financial stability implications

Sunset clause

Following consideration of the submissions received, the Commission will report to the Council and the European Parliament its recommendations for the ongoing general publication of this information. It is important to note, however, that unless specific changes to the Directive are enacted following their review, the Directive will require public disclosure of the above information starting in 2015 for all G-SIIs and O-SIIs, and potentially (subject to clarification) for all institutions regulated under CRD IV.

Timetable for introduction of the disclosure requirements

The proposed introduction of these country-by-country disclosure requirements from 1 January 2014 coincides with the expected implementation date of the wider CRD IV package. However, given the EU legislative process is not yet complete, there is speculation that the commencement date could be delayed by up to six months.

Significant uncertainty over scope and application

The details of the proposed requirements released so far have been very brief and we anticipate there will be many areas where the EU will need to provide further clarity. In addition, while the capital, liquidity and other requirements within CRD IV are directly effective, it is not clear to what extent local interpretation of the rules will be permitted to deal with particular complexities of domestic tax systems.

Some initial observations are set out below.

Institutions in scope

Clarification is required on the scope of the rules relating to employee and net banking income disclosures. Will they apply to all regulated investment firms within CRD IV (this appears to be the case) or just to banks? In addition, after 2014 will the wider disclosure requirements above apply just to G-SII's and O-SII's or to all Firms regulated under CRD IV?

Furthermore, how will EU inbound institutions, non-financial groups which own a regulated entity, or insurance subsidiaries of banking groups, be treated within the rules?

Format and frequency of reporting

Both for the information which is to be made public and for the information to be provided to the Commission, the frequency of disclosures, the timeline and format will need clarification. It appears at this stage, that disclosure may be required in the Annual/Consolidated Accounts.

This option may be attractive to the legislator, but many investors and analysts have argued that Annual Reports are already too long, complex and infrequent to be useful for forming investment decisions. For this reason, publication as a separate report, or as part of the Group's sustainability or CSR report, may be preferable. Whichever format is chosen, institutions will need to ensure that the data provided publically and to the Commission under these proposals reconciles to other regulatory filings and published reports.

Interpretation issues

The published proposals remain very high level. Considerable effort will need to be made to develop implementation guidance to ensure the data the Commission receives from different institutions is comparable. Perhaps the most important issue to consider is whether disclosures will simply be in the form of “raw data” or whether more context based narrative will be required or permitted in order to ensure that data reported is not misunderstood.

Other open questions include:

  • How are profits defined and at which level? For example, will movements through Other Comprehensive Income be included?
  • How will Net Banking Income be defined? Which GAAPs will be permitted for these disclosures?
  • While at this stage we expect the provisions to exclude indirect taxes, there is still a level of uncertainty as to which taxes, levies and duties will ultimately require reporting.
  • How would intra-group trading be treated under these rules?
  • How will complex entities like branches, partnerships, joint venture and investment vehicles be reported on, since it appears that these entities may be included?
  • It is currently unclear whether de minimis / “materiality” levels will be provided to balances. This would cut down the amount of information a bank is required to report.
  • Clarity would be required in respect of how the number of employees is determined, e.g., a bank is likely to have contractors, mobile employees, shared service centers, dual contractors, etc. These are just a small selection of technical issues that require further clarification.

Verification of information

We expect the Commission may recommend that information provided by institutions should be subject to appropriate external oversight and governance. No indication has been given as to the parties that might be involved in any such process. These may include the statutory auditors, European Commission, European Banking Authority, local country regulators, or an appointed designate.

Previous experience of country-by-country reporting in other sectors

Country-by-country disclosure proposals are not a new concept. More specifically, there has been a country-by-country reporting transparency framework for the extractive industries sector, the Extractive Industries Transparency Initiative (EITI), since 2003. The EITI provides guidance for reporting but is not mandatory. Information such as company payments (e.g., material tax payments) and government receipts are disclosed, however, individual countries determine what material tax payments comprise (and taxes such as VAT and employee taxes are excluded from the framework). The Commission may decide to draw on the experience of frameworks such as the EITI when formulating the final text and related guidance.

Next steps

On 5 March 2013, the Ecofin Council broadly endorsed the agreement and mandated the Committee of Permanent Representatives (COREPER) to finalize negotiations with the Parliament on outstanding technical issues, with the aim of reaching a final deal in the second half of March.

It is envisaged that the deal will be ratified in the European Parliament Plenary in its session on 15–18 April 2013 and Ecofin will adopt the deal at its next meeting. Ernst & Young is monitoring developments closely and will issue a further update once more details become available.

For additional information with respect to this Alert, please contact the following:

Ernst & Young GmbH Wirtschaftsprüfungsgesellschaft, Munich
  • Dr. Klaus von Brocke
    +49 89 14331 12287
EY Belastingadviseurs LLP, Rotterdam
  • Ben Kiekebeld
    +31 88 407 84 57
Ernst & Young LLP (United Kingdom), London
  • David Evans
    +44 20 7951 4246

EYG no. CM3258