EU Legislators Agree Deal Requiring Tax Transparency from Multinational Companies

Earlier this month, the legislative institutions of the European Union (the European Parliament and Council) struck a deal to compel large multinational companies to publicly declare the amount of tax they pay in each EU Member State and in tax havens included on the EU’s “black” and “grey” lists (see: the Press Release of the European Parliament). This new law – the so-called “country-by-country reporting Directive” - represents the EU’s latest efforts to enhance transparency and eradicate tax evasion and avoidance - a goal of increasing prominence given the importance of tax income to the EU’s “green transition” and its recovery from the COVID-19 pandemic. 

The tax transparency obligations mandated by the country-by-country reporting Directive will apply to multinational companies and their subsidiaries that achieve annual revenue of greater than EUR 750 million in two consecutive years, and which are active in more than one country. Subsidiaries that do not meet the revenue thresholds will not escape the clutches of the legislation if they are found to only exist to facilitate the parent company being able to avoid having to comply with the reporting requirements. 

Hong Kong traders should be aware that companies falling within the thresholds of the new legislation will be obliged to make publicly available (including via the internet, using a standardised and machine-readable format) the amount of their profit or loss before income tax, the amount of accumulated and paid income tax, and accumulated earnings, not only in each EU Member State, but also in countries included on the “EU list of non-cooperative jurisdictions for tax purposes” (as published in the EU’s Official Journal on 26 February 2021). Companies falling within the thresholds will also need to provide information concerning the nature of their activities and number of full-time employees. Reporting must be carried out within 12 months from the date of the balance sheet of the relevant financial year. 

The new law contains provisions enabling multinationals to benefit from certain temporary exemptions from the requirement to report (including, in some circumstances, the ability to defer disclosure of certain elements for up to five years), however these exemptions are strongly circumscribed. Significantly, the requirement to provide a detailed country-by-country tax breakdown does not apply to tax from the multinationals concerned being paid in countries outside the EU and that are not included on the list of non-cooperative jurisdictions. For these countries, data need only be provided in aggregated form rather than as a detailed by-country breakdown. 

The fact that multinationals are not mandated to be wholly transparent with respect to their global activities has led the new law to come in for criticism from some corners, including prominent NGOs such as Transparency International. It is also understood that MEPs had pushed for stronger mechanisms to prevent companies shifting their profits to non-EU tax havens but had been thwarted in these attempts by certain EU governments in the Council.  Whilst the European Parliament would have preferred to conclude a more far-reaching and comprehensive deal, it will be somewhat satisfied to have successfully pushed this deal over the line given that its fight to pass this legislation had been ongoing for over five years. 

Despite the law’s apparent limitations, the country-by-country reporting Directive will nevertheless go some way to achieving better tax transparency among multinational corporations. This is particularly the case, given that six of the twenty largest tax havens are EU Member States (see: resolution of the European Parliament (January 2021)) and that approximately 80% of profits shifted in the EU are shifted to EU tax havens (see: study by the Director of the EU Tax Observatory). 

In terms of what comes next, the text of the new law now needs to be endorsed by the European Parliament’s Committees on Economic and Monetary Affairs and Legal Affairs, the Parliament as a whole, as well as by the Council. The vote in plenary is expected to take place once the Parliament returns from its summer break in September 2021. 

With the EU spotlight continuing to be placed on the need to eradicate tax evasion and avoidance, companies will appreciate that the introduction of the country-by-country reporting Directive is likely to be just one milestone in the EU’s continuing efforts to further enhance tax transparency.