Companies must gear up for Europe’s new tax reporting requirements
As the EU prepares for country-by-country tax reporting requirements, businesses would do well to understand the minutiae of the upcoming regulations
October 2015 was a busy month for announcements regarding base erosion profit shifting (BEPS) and country-by-country reporting. The OECD issued the last of the guidelines on BEPS, the various drafts covering a multitude of proposed changes to tax law regarding permanent establishments, including: the use of agents; CFCs; the use of hybrid entities and instruments to gain tax advantages internationally; the tax challenges of the digital economy; intangibles; and country-by-country reporting, to name but a few areas. The country-by-country reporting requirements will significantly increase the burden of tax compliance for multinational enterprises (MNEs), as they will have to disclose details of revenue, profit, taxes and other measures of economic activity for each tax jurisdiction in which they do business. This information will then be shared between the various tax authorities, such that each will have up-to-date information on MNEs’ tax planning and where profits are generated, particularly concerning low tax jurisdictions.
A British lead
The UK tax authority (HMRC) has been keen to be seen as the leader in this field. In October, HMRC also issued a consultation document on country-by-country reporting, in respect of accounting periods commencing on or after January 1 2016. The stage had already been set in the UK by inclusion the in the Finance Act 2015 of primary legislation which enabled regulations to be made at a later date once the OECD had completed their further work on this aspect of BEPS. The consultation document is the second stage of the process, with final legislation to be introduced in the 2016 Finance Bill. Companies which fall within the scope of country-by-country reporting (the HMRC consultative document refers to groups with total revenue of £586m) will have to provide to HMRC within 12 months of their year-end the following details for each tax jurisdiction in which they do business: the amount of revenue; profit before tax; tax paid and accrued; total employment; total capital; and total retained earnings and tangible assets.
They will also be required to identify each entity within the group doing business in a particular tax jurisdiction, and to provide an indication of business activities within a selection of broad areas in which each entity is engaged. HMRC will share this information with every tax authority with which it has an information exchange arrangement. Such arrangements are likely to increase as BEPS is legislated in each jurisdiction.
Voluntary benefits
HMRC has even offered a ‘carrot’ to foreign-based MNEs with UK subsidiaries, where the parent is resident in a country that either does not have an information-sharing arrangement with UK, or the parent is resident in a jurisdiction which has persistently failed to exchange information with UK despite the existence of an agreement, or where it has suspended the automatic exchange of information. In such cases, the UK-based subsidiary will be able to voluntarily file a report on behalf of the group.
HMRC believes that this will be of benefit to foreign-based MNEs, as it will enable them to potentially reduce the number of individual information requests they receive from other countries. However, this raises the question as to why a UK subsidiary would want to volunteer this information, given that a penalty regime will exist if the information is not reported on time without a reasonable excuse for the failure, or it knowingly supplies incorrect information. This also imposes the UK requirements on foreign-based parent companies in jurisdictions that may have a different reporting deadline when enacting the OECD guidelines. The OECD guidelines are only guidelines after all, and each jurisdiction has to legislate for the changes individually.
