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European Parliament Adopts Country-By-Country Tax Reporting Directive
At the November 11 plenary, European Parliament MEPs approved new rules and published the legislative document obliging big multinational enterprises to publicly declare the taxes they pay in each EU state. It is one of the most prominent recent steps towards combating taxation abuse and achieving better tax transparency at the international level. The upcoming corresponding Directive has been in development for over five years.
It is a significant challenge to track down and define effects of tax erosion, which results in difficulties for countries to properly assess and implement international transactions, perform audit and carry out transfer pricing for multinational companies (MNCs).
To resolve this, Action 13 “Country-by-Country Reporting”, part of the OECD’s 15-Action Plan to address Base Erosion and Profit Shifting (BEPS), sets in place regulations for annual tax information exchange. These instructions boil down to the introduction of a standardized document, Country-by-Country (CbC) Report. CbC reports are based both on the BEPS Action 13 model legislation and competent authority agreements. The latter include the Multilateral Convention on Administrative Assistance in Tax Matters, bilateral tax conventions, and tax information exchange agreements.
Who Should Disclose Tax Information?
Multinational companies and their subsidiaries with annual revenues over €750 million (operating in more than one EU country) are now obliged to disclose their tax results and declare the amounts of tax they pay in each member state. This information is to be published online with the use of a unified text template.
What Information Will be Disclosed?
Data provided by MNCs will be separated into several obligatory sections: company’s activities, number of full-time employees, profit or loss before income tax, amount of accumulated and paid income tax and accumulated earnings.
Subsidiaries or branches will be required to publish their tax information even if their revenue threshold is below mentioned €750 million, but it will take place in case it is established a subsidiary or branch has been created to help the parent company to conceal its actual earnings.
What About Non-Member States?
The tax transparency disclosure procedure will also cover the EU list of non-cooperative jurisdictions for tax purposes outside the EU (countries on the EU “black” and “grey” lists), since the tendency of shifting tax revenue to tax havens is still in place. Furthermore, in January 2021, Parliament informed that 6 of the 20 largest tax havens are EU countries. According to the conclusions of the EU Tax Observatory, about 80% of the profits shifted in the EU are transferred to EU tax havens.
What Is Next?
The Directive will enter into force 20 days after publication in the Official Journal of the EU. Member states will be given 18 months to incorporate new regulations into their national legislations. As such, it is expected MNCs should start complying with the Directive by mid-2024.
The legislative document provides for a review option, with the possibility to revisit its provisions in four years, reevaluate and extend them in case of necessity.
Earlier this year, 132 members of the OECD/G20 Inclusive Framework on BEPS, which provided information about their implementation of CbC reporting and/or worked on the development of such inner legislation, were reviewed in order to establish how well they were following tax reporting obligations. Among them, over 100 jurisdictions are successful, having presented compliant legal frameworks. Ukraine is also on the way towards forming its regulations, but it is recommended that it collaborate on this issue with other states more actively.
OECD Reviews Latest Developments on Realization of Tax Information Exchange in over 100 Jurisdictions https://kac.com.ua/en/novosti/oesr-predostavila-obzor-poslednih-izmenenij-v-realizatsii-obmena-nalogovoj-informatsiej-v-bolee-chem-100-yurisdiktsiyah/
EU List of Non-Cooperative Jurisdictions Updated https://kac.com.ua/en/novosti/obnovlyon-spisok-yurisdiktsij-ne-sotrudnichayushhih-s-es-v-nalogovyh-tselyah/