Documents considered by the Committee on 14 December 2016 Contents
11Income tax: disclosure of information
Cleared from scrutiny; further information requested
Proposed Directive amending Directive 2013/34/EU about disclosure of income tax information
Article 50(1) TFEU, ordinary legislative procedure, QMV
(37663), 7949/16 + ADDs 1–2, COM(16) 198
Summary and Committee’s conclusions
11.1In the context of the OECD/G20 Base Erosion and Profit Shifting tax avoidance action plan we reported in May 2016 a proposed Directive, based on the OECD model Action 13, to require all large EU headquartered multinational enterprises (MNEs) and non-EU headquartered MNEs operating in the EU with a total consolidated group revenue above €750 million (£676 million) to publish a country-by-country report. We saw no problem with the proposal, but asked to be informed about Council consideration of the matter.
11.2The Government tells us that there have been sensible technical improvements to the text and that it is minded to support the Presidency compromise in the Council.
11.3We are grateful to the Government for its account of where matters stand on the proposal and are now content to clear the document from scrutiny. However, we wish to be kept informed of developments in trilogue consideration of the proposed Directive.
Full details of the documents
Proposed Directive amending Directive 2013/34/EU as regards disclosure of income tax information by certain undertakings and branches: (37663), 7949/16 + ADDs 1–2, COM(16) 198.
11.4The Organisation for Economic Co-operation and Development (OECD) defines base erosion and profit shifting (BEPS) as tax planning strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations where there is little or no economic activity, resulting in little or no overall corporate tax being paid. In October 2015 the OECD published a report setting out an Action Plan with 15 measures to address the BEPS problem. This package of measures was endorsed by the G20 in November 2015. Action 13 is entitled “Transfer Pricing Documentation and Country-by-Country Reporting” and contains a model for country-by-country (CbC) reporting by multinational enterprises (MNEs).
11.5At present only the banking sector, under the Capital Requirements Directive, Directive 2013/36/EU, (known as CRD IV), and the extractive and logging industries, under the Accounting Directive, Directive 2013/34/EU, and the Extractive Industries Transparency Initiative, are already subject to public CbC reporting requirements.
11.6In April 2016 the Commission presented a proposal for a Directive to amend the Accounting Directive to introduce wider public CbC reporting of tax information. Based on the OECD model, the proposal would require all large EU headquartered MNEs and non-EU headquartered MNEs operating in the EU that have a total consolidated group revenue above €750 million (£676 million) to publish a CbC report. This is the OECD threshold in its CbC model and it estimates that this would cover MNEs controlling around 90% of corporate revenues, whilst excluding 85–90% of MNEs from the requirements.
11.7This proposal would not modify CbC reporting rules already in place for the banking sector and extractive and logging industries.
11.8When we considered this proposal, in May 2016, we heard from the Government that the OECD reporting model had recently been implemented in the UK, which it expected to have a significant beneficial effect for its revenues. It told us that it:
- supported the Commission’s proposal as a step in the right direction towards new international rules for greater tax transparency; but
- believed that there was a case to go further than the current proposal, particularly in relation to blacklisting non-compliant jurisdictions, with work on what more might be appropriate being carried forward separately.
11.9While the Government did not alert us to any particular problems with this proposed Directive, we wished to hear about any issues that might emerge during Council working group consideration of the matter, particularly any which might affect eventual agreement on the proposal. Meanwhile the document remained under scrutiny.
The Minister’s letter of 6 December 2016
11.10The Financial Secretary to the Treasury (Jane Ellison) tells us now that:
- there have been a number of technical level working groups since the proposed Directive was published;
- these discussions have resulted in considerable progress on the proposal; and
- a compromise text that makes sensible amendments to the Commission’s original proposal has been issued.
11.11The Minister elaborates that:
- as with the original proposal, the compromise text would require all large EU and non-EU headquartered MNEs operating in the EU to publish a public CbC report;
- the compromise text makes provision for the public CbC reporting requirements to only apply to multinational groups—groups that only operate within one Member State and in no other tax jurisdiction would be exempt;
- the threshold remains the same, but the timing has been extended so that a MNE would have to comply where its consolidated group revenue exceeds €750 million (£676 million) for two consecutive years;
- the compromise text now also recognises the practical and legal constraints in placing obligations on third country headquartered MNEs, and now requires EU-based subsidiaries of such MNEs to disclose information to the extent that information was available to them;
- MNEs would be required to publish the report in a business register and on their website (available online for at least five years);
- there is a requirement for an independent audit check to ensure the report has been published and made accessible online;
- the information required remains the same as before, with the addition of MNEs being required to specify the name of the ultimate parent company, financial year concerned and currency used in a report;
- in order to reduce administrative burdens, the compromise text would allow companies to use either the reporting specifications set out in the Accounting Directive or the 4th Directive on Administrative Cooperation, Council Directive 2011/16/EU;
- taking into account concerns about the disclosure of commercially sensitive information, Member States would be able to allow information to be omitted from the report if it were considered seriously prejudicial to the commercial position of the company—Member States would have discretion not to adopt this safeguard clause;
- as with the original proposal, MNEs would be required to disclose and disaggregate information on a CbC basis for each Member State in which they operate, as well as for certain jurisdictions that do not comply with good governance standards in taxation;
- information for the rest of the world (that is jurisdictions that are not in the EU and not on the blacklist of non-cooperative tax jurisdictions) would be aggregated into a single figure;
- the Government has consistently pushed for the report to present the information on a CbC globally, but this has not gained sufficient support from other Member States;
- the compromise text clarifies that the list of non-cooperative tax jurisdictions is to be identical to the list drawn up by the Council’s Code of Conduct Group;
- agreed criteria for this EU blacklist were set out in Council Conclusions on 8 November 2016—these comprise adherence to global transparency standards, fair taxation and commitment to implement minimum standards from the G20/OECD BEPS project;
- the Government was clear throughout negotiations that jurisdictions should not be listed solely on the basis of tax rates;
- following a screening process, the final EU blacklist will be agreed by the Council by the end of 2017; and
- the compromise text would give Members States two years to transpose the Directive into domestic legislation.
11.12The Minister noting that the legal basis of the proposed Directive is Article 50 TFEU, adds that, although this has been questioned, the Commission have maintained that article is the correct legal basis as the proposal concerns necessary safeguards required of companies or firms for the protection of the interests of others.
11.13The Minister comments further that:
- the provisions set out in the compromise now present a set of rules that would on balance be acceptable to the Government;
- indications are that most other Member States are also generally receptive of the terms of the compromise;
- so it seems that there may be an agreement on the way forward for this proposal at a forthcoming Council meeting;
- the Presidency is looking to engage in informal trilogues with the European Parliament soon to prepare the draft text for consideration and possible adoption by Ministers;
- provided that the text is not significantly altered as a result of trilogues, the Government will be minded to support the outcome—she would keep us informed of developments before a text was put to the Council for agreement; and
- although the Presidency has yet to set out the exact time line, it is possible that Ministers will be asked if they support the compromise agreement in the New Year.
Previous Committee Reports
Thirty-third Report HC 342-xxxii (2015–16), chapter 11 (11 May 2016).