4Public country-by-country tax reporting of multinationals in the EU38
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This EU document is politically important because:
Action
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Overview
4.1One of the measures39 being considered within the European Union to tackle aggressive tax avoidance by large multinational companies is to make them subject to mandatory public “country-by-country” (CbC) reporting, which would show in which tax jurisdictions they are recording their profits and in which ones they are paying tax (and how much). The—untested—logic is that increased public scrutiny of their tax affairs will put pressure on such companies to reduce their reliance on tax avoidance arrangements.
4.2The European Commission tabled draft legislation in early 2016 to introduce public CbC requirements under the EU’s Accounting Directive for the largest companies with operations in the EU. However, some countries have warned that forcing companies headquartered in the EU to make such disclosures, which their competitors elsewhere in the world would not be subject to (or only in relation to their branches and subsidiaries within the EU), could affect their competitiveness.40 These concerns have led several countries—notably Ireland—to object to the legal basis chosen by the Commission for its proposal. They argue that the new Directive is a tax measure rather than accounting policy, which would mean every EU Member State could veto the draft legislation.41 However, several EU countries that were initially opposed have changed their position, and in early 2021 a “clear majority” of Member States provisionally endorsed the proposal despite these concerns. The European Parliament—which must also give its approval to the legislation—is also supportive.
4.3Negotiations on the final text of the Directive are still on-going, so it is unclear when the new CbC reporting requirement may take effect within the EU, or what its precise substance will be. Concerns over the appropriate legal base for the legislation could also render the future legislation vulnerable to legal challenge before the EU Court of Justice.
4.4The Government was supportive of the proposal while the UK was a Member State, but its views on the merits of the Directive now that the UK has left the EU are unclear. In particular, although Ministers have said repeatedly they would be willing to introduce public CbC reporting under UK law as part of a multilateral effort (to avoid harming competitiveness by doing so unilaterally), they have not indicated whether the introduction of such disclosures in all 27 EU countries simultaneously would allow the UK to follow suit.
4.5In the remainder of this chapter we have further explored the draft EU Directive on public country-by-country reporting and its possible implications for UK policy in this area.
Public country-by-country tax reporting
4.6In the field of tax policy, a key concern of policy-makers is that large multinational enterprises (MNEs) are able to exploit the gaps and mismatches between the tax rules of different countries. They can use these differences to artificially eliminate their profits, or shift them to low or no-tax jurisdictions where there is little or no economic activity, resulting in little or no overall corporate tax being paid. To address problems associated with “base erosion and profit shifting” (BEPS)—in particular the impact on tax revenues and hence the ability of governments to spend—the Organisation for Economic Co-operation and Development (OECD) published an Action Plan in 2015. One of the many proposed measures concerned so-called country-by-country (CbC) reporting by MNEs, to provide tax authorities with more information on where such companies pay their tax.
4.7In the EU (and, at the time, the UK) this was implemented by means of a 2016 Directive that sets out the types of country-by-country tax information that all Member States must collect from companies operating in their territory, and how this data is shared with the tax authorities of other EU countries. However, the information required under that piece of legislation—in line with the recommendations made by the OECD—is solely provided to tax authorities, and treated confidentially. Data on where companies pay corporation tax is not generally required to be made available for public scrutiny, although the EU’s banking, extractive and logging industries42 are already subject to a sector-specific requirement to disclose publicly where they pay tax.
4.8In April 2016, in the aftermath of the Panama Papers tax evasion scandal, the European Commission tabled further draft EU legislation that would require large MNEs to make their CbC tax information public. The logic behind requiring disclosure of such information by these companies is that the increased scrutiny of whether they are paying tax where they earn their profits would put pressure on them to reduce their reliance on convoluted tax arrangements. As a new approach, the effectiveness of public country-by-country reporting in that respect is not proven.
4.9The substance of the Commission proposal, and the current state of play in the negotiations on its adoption, are discussed further below.
The draft EU Directive on disclosure of country-by-country tax reports
4.10The draft legislation tabled by the European Commission in spring 2016 would amend the EU Accounting Directive—which governs corporate reporting—to impose a public country-by-country reporting requirement on all large EU headquartered MNEs and non-EU headquartered MNEs operating in the EU, where they have a total consolidated annual group revenue above €750 million (£648 million).43
4.11More specifically, this CbC Reporting Directive would require such multinational companies to publish annual tax reports on their website describing, among other things, their net turnover; profits or losses before tax; and the amount of corporation tax due and already paid. Underlining the ultimate purpose of the Directive, this information would need to be broken down for each EU Member State in which the company operates, and similarly for each non-EU jurisdiction deemed “not comply with good governance standards in taxation” (a euphemism for non-EU tax havens). The European Commission had suggested that it should have the power to establish a list of such tax havens by means of a Delegated Act, a type of EU Statutory Instrument (which would, confusingly, be separate from the existing EU list of “non-cooperative tax jurisdictions“ that is agreed biannually by EU Finance Ministers).44 For all other jurisdictions, namely non-EU countries considered to have adequate tax governance standards, the country-by-country data would need to be reported only on an aggregated basis.
4.12One of the key issues is how the new reporting requirements would apply to companies headquartered outside the EU. While MNEs based within the European Union would be fully subject to the new rules, those incorporated elsewhere would be beyond the direct force of European law except for any branches or subsidiaries within the EU. The discrepancy in the information that the two categories of multinationals could be forced to disclose publicly could create a competitive imbalance between large companies based within the EU, and those headquartered elsewhere.
4.13As an amendment to the Accounting Directive, the Commission proposal is based on Article 50 of the Treaty on the Functioning of the EU (TFEU) on company law, rather than Article 115 TFEU, which covers corporation tax policy. This is important, because the procedures that govern the adoption of new EU legislation under these respective Articles are different. New rules under Article 115 TFEU would require unanimity in the EU’s Council of Ministers—giving each Member State a veto—and limits the European Parliament to a consultative role only. By contrast, Article 50 TFEU only requires a Qualified Majority in the Council and gives the Parliament full co-legislative powers, meaning the Member States and MEPs jointly need to agree on the text of the legislation.
The European Parliament’s position
4.14The European Parliament agreed its position on the draft Directive in July 2017. MEPs supported the general objective of the Commission proposal, but put forward several amendments for discussion with the Member States.
4.15In particular, the Parliament called for a full, global, country-by-country breakdown of tax payments by large companies within the scope of the new disclosure requirement (rather than permitting an aggregated view for non-EU countries not listed by the EU as tax havens). MEPs also voted in favour of the inclusion of other types of data in the reports, including on fixed assets, subsidies received (including preferential tax treatment), and political donations made. However, MNEs would be able to request an exemption from individual EU Member States to be allowed to omit any information otherwise due to be published, where this would be prejudicial to their commercial interests.
The Council of Ministers’ position
4.16Compared to the European Parliament, negotiations on the legal text of the Directive in the Council of Ministers have been protracted, because of opposition from a number of Member States. The choice of legal basis has been particularly controversial, with a number of countries—Ireland and Luxembourg in particular—having argued that the draft Directive in effect constitutes a tax measure, and should therefore be based on Article 115 TFEU (giving each country a veto). Germany also opposed the proposal, the sole large Member State to do so.
4.17The question of the appropriate legal base is also likely to reflect underlying concerns about the substance of the Directive. The disclosure requirement could show that certain Member States account for a disproportional slice of the tax payments of certain multinational companies within the EU compared to the size of their economy and domestic market.45 Some countries have also warned that a unilateral EU approach could put European companies at a disadvantage compared to their competitors headquartered in non-EU jurisdictions. For these, the public reporting requirement would not apply to their global activities, and they may refuse to comply with any disclosure requirements other than for their operations within the EU (and not, for example, in relation to their use of non-EU tax havens). In a similar vein, EU-based companies may also be forced to publish commercially sensitive information that their non-EU competitors do not.
4.18Even under the Qualified Majority voting rules applicable to draft EU legislation under Article 50 TFEU, a minority of Member States can still block the adoption of news laws. By late 2019, it was reported that at least 13 EU countries still opposed the proposal, sufficient to block its progress within the Council of Ministers. However, shifts in the political situation in a number of these countries have meant that this blocking minority no longer exists. At a meeting of EU Business Ministers on 25 February 2021, a number of Member States that had previously opposed the draft Directive confirmed they had changed their position. As a result, a “clear majority” of EU countries provisionally approved a revised version of the CbC Reporting Directive on 3 March 2021, allowing for negotiations with the European Parliament on the final text of the legislation to begin. Eight EU countries, including Ireland and Sweden, still publicly opposed the proposal on the grounds that it should be treated as tax legislation under the Treaties.46
4.19To deal with the concerns expressed about the legal base, the revised draft Directive endorsed by a majority of EU countries emphasises that the legislation “aims to enhance corporate transparency” (rather than ultimately reducing tax avoidance) “for the protection of the interests of [shareholders] and others”, where “others” is interpreted to include the company’s competitors as well as the “general public”. There are also substantive amendments: the Member States want to dispense with the power for the Commission to adopt a list of non-EU tax havens for which MNEs would have to publish their tax affairs. However, they have not followed the Parliament’s suggestion that the CbC disclosure requirement should be broken down for each tax jurisdiction globally in which the company operates. Instead, they want to maintain public CbC reporting only for EU countries and for jurisdictions listed on the EU’s existing list of non-cooperative tax jurisdictions, which is agreed twice a year by the Member States acting unanimously (giving each EU country a veto over changes to the list). For all other countries, the report would—as in the Commission’s original proposal—have disclosed the company’s tax payments and other information in aggregate.
Further negotiations
4.20As noted, the support given by a majority of EU countries to a revised version of the Directive in February 2021 means that negotiations with the European Parliament on the final text of the CbC legislation have now begun. Agreement between these two institutions is a prerequisite for the new country-by-country tax reporting requirement to take effect as a matter of EU law.
4.21However, given the different positions taken by the Parliament and Council, for example in relation to the information to be included in the tax report and whether the country-by-country breakdown should be global or limited, it is unclear when they may reach agreement. The Austrian and German Governments are also still reported to be sceptical about the Directive, although they did not publicly oppose at the meeting of EU Business Ministers in February 2021. Moreover, even if the legislation is adopted on the basis of Article 50 TFEU, any Member State that feels its legal prerogatives have been infringed—because it believes the Directive should have been adopted by unanimity under Article 115 TFEU—could lodge a legal challenge before the EU Court of Justice to seek annulment of the law.
Implications of the draft EU CbC Directive for the UK
4.22The UK of course left the European Union on 31 January 2020, and therefore any new EU legislation on country-by-country reporting of a company’s tax affairs would not apply in or to the UK. However, the Government has been supportive of international efforts to introduce public country-by-country reporting for multinationals.
4.23When the European Commission first published the draft CbC Reporting Directive in 2016, the Government told Parliament that the proposed EU approach was “appropriate and proportionate” to address aggressive tax planning by MNEs because “the nature of globally mobile firms and capital, a coordinated multilateral approach is necessary to effectively deal with the issue”. It also specifically noted that an EU-wide approach would allow the UK to introduce country-by-country reporting, because “EU agreement reduces the impact on the UK’s competitiveness because the requirements for public CbC reporting would be introduced across all Member States”.47 Indeed, the then-Government believed that there was a “case to go further than the current proposal and require MNEs to publish breakdowns of both their EU and non-EU operations”—as now proposed by the European Parliament—to “allow the public to see the tax paid and profits made for each country in which a MNE operates”.
4.24Now that the UK has exited the EU, the Government has maintained existing public country-by-country requirements for banks and the extractive industries that were initially introduced under EU law.48 It has also maintained the requirement for companies to submit information to HM Revenue & Customs (HMRC) on their tax affairs in different jurisdictions on a confidential basis. The UK also continues to exchange this information with the tax authorities of certain other countries that apply OECD standards on confidentiality of taxpayers’ information, including all 27 EU Member States.49
4.25The Finance Act 201650 already allows the Treasury, by regulations, to require a company’s group public tax strategy to include a CbC report with the information that it is already required to submit confidentially to HMRC.51 However, the Government has to date ruled out the unilateral introduction of public country-by-country reporting by all large multinationals operating in the UK using these powers. Then-Financial Secretary Rt Hon. Mel Stride MP said in November 2017 that a move to country-by-country reporting unilaterally “would certainly make the UK less competitive than other tax jurisdictions”,52 although he added that the Government would “continue to work towards bringing in […] public country-by-country reporting”.53 More recently, in December 2020, Treasury Minister John Glen MP told the House that “only a multilateral approach would be effective in achieving transparency objectives, and avoiding disproportionate impacts on the UK’s competitors or distortions regarding group structures”.54
4.26As noted, one of the key issues that has held up the talks in Brussels were concerns about the impact of the CbC Reporting Directive on the competitiveness of EU companies. EU law, by definition, will not have legal force in non-Member States. That means that under the proposed Directive, only EU-headquartered MNEs would be subject to the full CbC reporting obligation for all their activities worldwide. Large companies based overseas—for example in the US or the UK—could refuse to disclose the information except in relation to their specific activities within the EU. Fears about the impact that might have on competitiveness is also why the UK Government has to date ruled out introducing public CbC disclosures unilaterally. Therefore, if the UK were to introduce country-by-country reporting as well, this would be beneficial from the EU’s perspective because it would extend the full CbC disclosure requirement to UK-headquartered multinationals and to the UK activities of non-EU, non-UK MNEs, which the EU Directive could not fully capture. The same would of course also apply vice versa for the UK.
4.27The new UK/EU Trade & Cooperation Agreement (TCA) reiterates both sides’ support the OECD’s 2015 BEPS Action Plan, on which the draft EU CbC Reporting Directive builds, but does not specify any particular legal commitments or actions to be undertaken by the UK and EU jointly in this area.55 The Government does not appear to have commented publicly on the decision by the EU Member States in February 2021 to proceed with the introduction of general public CbC reporting for multinational enterprises under EU law, although negotiations on the substance of the Directive are of course on-going. Consequently, it is unclear if the UK would be willing to discuss cooperating with the European Union in this area if new rules are agreed at EU-level, with a view to also introducing new tax disclosure rules for multinationals in the UK under the Finance Act 2016 as part of a wider international effort. Any prospect of UK-EU cooperation in this area will of course also be influenced by the wider state of the bilateral relationship, which is currently characterised by tensions and disputes (not least over the Northern Ireland Protocol).
Conclusions and action
4.28After nearly five years of negotiations, a majority of the remaining 27 Member States of the EU now support the introduction of public country-by-country reporting of the tax affairs of large multinationals with operations within the European Union. However, potentially difficult negotiations still lie ahead before the new CbC Reporting Directive can take effect, as the positions of the European Parliament and the Member States need to be reconciled, in particular on the granularity of the country-by-country reports. It is therefore unclear when any new tax disclosure requirements for multinationals may become law within the EU.
4.29The Government was broadly supportive of the draft Directive when the UK was still a Member State and indeed had taken the position that the legislation should go further, mandating a full, global, country-by-country breakdown of the tax paid by multinationals active in the EU (rather than only for individual EU countries and ‘blacklisted’ tax jurisdictions). Ministers have repeatedly confirmed their commitment to public CbC reporting as part of a multilateral approach, to avoid any disproportionate effect on the competitiveness of UK companies and to increase the effectiveness of such disclosures.
4.30To our knowledge however, the Government has not publicly commented on the latest developments in the EU’s Council of Ministers that may, in the medium term, result in the first multilateral commitment to public country-by-country reporting for MNEs. We have therefore written to the Financial Secretary to the Treasury to clarify the Government’s current views on the merits of the draft EU Directive on public country-by-country reporting, and whether it is considering possible cooperation with the EU if the latter adopts legislation to that effect to enable CbC reporting to be introduced in the UK as part of a multilateral effort.
4.31The proposed introduction of public CbC reporting requirements for multinationals is only one of various measures being pursued at EU-level (and internationally) to address tax avoidance and evasion. For example, separate discussions are on-going about the taxation of the digital economy, where base erosion and profit shifting is especially pronounced, and the EU recently announced that it would try to establish a joint approach with the United States on this issue. The European Commission is also due to publish an “Action Plan” on EU corporate taxation policy later in 2021. Given its economic proximity to the Single Market, the UK could still be affected by changes in the EU’s approach to international tax issues. We will continue to consider the implications of other EU policy measures in this field for the UK separately, where appropriate.
4.32In the interim, in anticipation of the Minister’s reply to our questions about public CbC reporting, we draw these developments to the attention of the Business, Energy and Industrial Strategy Committee, the Public Accounts Committee and the Treasury Committee.
Letter from the Chair to the Financial Secretary to the Treasury (Rt Hon. Jesse Norman MP)
You will be aware that the EU’s Council of Ministers on 25 February gave its political endorsement to a draft Directive to introduce public country-by-country (CbC) reporting of the tax affairs of the largest multinationals with operations within the European Union.56 We understand talks are now underway with the European Parliament on the final text of the legislation.
The UK has consistently underlined the merits of public CbC reporting as part of a toolbox against aggressive tax avoidance by large companies. While the Treasury already has the power to introduce such disclosure requirements under the Finance Act 2016, the Government has been clear that it is not persuaded of the merit of the UK doing so unilaterally, not least because of the impact on the UK’s international competitiveness. Your predecessor told us in 2016—obviously in a very different political and legal context –that an agreement at EU-level would reduce “the impact on the UK’s competitiveness” of new requirements for public CbC reporting, because they would be introduced by a large group of countries simultaneously. Your colleague, the Economic Secretary, also reiterated as recently as December 2020 that the Government was still pursuing a “multilateral approach” in this area.
While there is of course no suggestion that the UK would be required to implement any new EU Directive on public CbC reporting, it is still open to the Government to engage with the EU to seek to influence the substance of the envisaged CbC reporting disclosures with a view to a joint approach, or indeed to introduce such an obligation unilaterally once the EU adopted its own legislation to that effect. We recognise that the scope for any such cooperation will also be influenced by the state of the wider UK/EU relationship, but focus here on the substantive merits of the policy the EU is pursuing in this area.
In light of this, we would ask you to clarify the Government’s current view on the EU’s efforts to introduce public CbC reporting for multinationals and the recent developments in the Council of Ministers. In particular, we would welcome information on:
- whether or not the future introduction of mandatory CbC reporting throughout the EU could allow for the UK to also introduce such a requirement (since it would take effect in a significant number of jurisdictions at the same time and therefore have less of an impact on the UK’s competitiveness), and the Government’s basis for that assessment;
- whether the Government has recently engaged, or is planning to engage, with the EU on the substance of its Directive, as a key international initiative on public CbC reporting; and
- if there are other international initiatives on public CbC reporting on-going which the Government believes would be preferable as the basis for the introduction of such disclosures under UK law, and if so, which.
We look forward to your response by 9 April 2021.
38 Proposal for a DIRECTIVE amending Directive 2013/34/EU as regards disclosure of income tax information by certain undertakings and branches; Council number 7949/16, COM(16) 198; Legal base: Article 50(1); ordinary legislative procedure; QMV; Department: HM Treasury; Devolved Administrations: Not consulted; ESC number: 37663.
39 The proposed introduction of public CbC reporting requirements for multinationals is only one of various measures being pursued at EU-level (and internationally) to address tax avoidance and evasion. For example, separate discussions are on-going about the taxation of the digital economy, where base erosion and profit shifting is especially pronounced, and the EU recently announced that it would try to establish a joint approach with the United States on this issue. The European Commission is also due to publish an “Action Plan” on EU corporate taxation policy later in 2021.
40 The fact that the envisaged disclosures might also show certain EU countries accounting for a share of corporation tax paid by Multinational Enterprises disproportionate to the size of their domestic market is also likely to cause concern.
41 The draft Directive as tabled is based on Article 50 TFEU, which allows the EU to set company law, rather than Article 115 TFEU, which covers EU tax policy such as corporate tax. The crucial difference is that new rules under Article 50 only needs the support of a Qualified Majority of Member States in the EU’s Council of Ministers, whereas Article 50 legislation requires unanimity, giving each country a veto.
42 Article 89 of the Capital Requirements Directive (Directive 2013/36/EU) and Article 44 of the Accounting Directive (Directive 2013/34/EU).
43 This is the OECD threshold in its CbC model, which it estimates—if rolled out globally—would cover MNEs controlling around 90% of corporate revenues, whilst excluding 85–90% of MNEs from the requirements.
44 Under the proposed Directive, non-EU countries could be blacklisted for example in relation to their refusal to exchange information on taxpayers or their alleged unfair tax practices.
45 The Council of Minister’s own Legal Service (CLS), in Council document 14384/16, in November 2016 also questioned the validity of the Article 50 TFEU legal base, arguing that the Commission proposal was intended to “deter tax avoidance by exposing the companies concerned to public scrutiny of their relevant choices and policies”, to be achieved by making “mandatory the disclosure of information dealing either with the payment of taxes”. As such, by proposing it as a company law measure, the Commission had “mixe[d] aims and means”. Instead, “since both the aim and the content of the proposal relate to [tax] and since the proposal directly affects the establishment and the functioning of the internal market, the proposal must be based on Article 115 TFEU”. Member States and the legal service also questioned the empowerment for the Commission to adopt a Delegated Act listing tax havens.
46 The eight EU countries still publicly opposing the CbC Reporting Directive in its current form are Croatia, Cyprus, the Czech Republic, Hungary, Ireland, Malta and Sweden.
47 The Minister told us that the Commission’s proposal was “in line with the Government’s objective of further enhancing tax transparency by introducing public CbC reporting on a multilateral basis. In 2016, then Chancellor (George Osborne) pressed his EU and international counterparts at the ECOFIN Council and G20 meetings to push for the details of tax paid by MNEs to be made publicly available on a CbC basis.
48 See the Capital Requirements (Country-by-Country Reporting) Regulations 2013 and the Reports on Payments to Governments Regulations 2014.
49 The UK CbC regime is set out in s122 of the Finance Act 2015 and SI 2016/237, based on model legislation published by the OECD, as part of the BEPS project in Transfer Pricing Documentation and Country-by-Country Reporting, Action 13 (5 October 2015). HMRC reviewed the financial implications of implementing the OECD CbC reporting model in the UK for the Autumn Statement 2014—the measure was estimated to yield £45 million over the five-year period, 2015–16 to 2019–20.
50 Paragraph 17(6) of schedule 19 to the Finance Act 2016.
51 During the report stage of the Finance Bill in September 2016, the Government accepted a proposed amendment from Caroline Flint to, in her words, “enshrine in law support for the principle of public country-by-country reporting with the power for the Government to introduce when the time is most appropriate.” (HC Deb 5 September 2016 c136).
52 In particular, the Minister argued the UK would not be able to “get public disclosure if a UK company had associated non-UK companies in other jurisdictions and not under that company’s control” and ”the big advantage of going multilaterally is the standardisation of the standards that we set and the rules and regulations around each particular step”.
53 The Minister made the comments in a Westminster Hall debate in November 2017 on country by country reporting: HC Deb 22/11/2017 c462WH.
54 The Minister made his remarks in a debate on the Financial Services Bill, in relation to a clause proposed by the Opposition which would have required the Treasury to produce an annual report on “its progress in pursuit of international action on public country-by-country reporting”. He argued that “it would not be appropriate for the Treasury to provide a detailed report each year assessing the status and evaluating the progress of fast-moving, complex discussions that typically take place between countries on a confidential basis”.
55 Article LPFS.5.2 TCA on taxation standards.
56 EU Document COM(2016), 7949/16 (37663).
Published: 23 March 2021 Site information Accessibility statement