On 11 November 2021, the European Parliament adopted the Public Country-by-Country Reporting Directive (PCbCR). The adoption of this Directive concludes the procedure on the introduction of specific European transparency rules and requires certain European or non-European multinational groups or independent companies to publicly disclose certain financial data broken down by country or territory. In this article, we explain what this new financial reporting obligation consists of and its differences with the current country-by-country reporting regime for tax purposes.

What is the "Public" Country-by-Country Report (PCbCr)?

Country-by-country reporting differs from ordinary financial reporting (annual accounts or financial statements) in that companies have to publish information for each country in which they operate rather than providing a single set of information globally.

To date, the specific rules of the Accounting Directive and the Transparency Directive require only that mining and forestry companies use this system to report on the taxes, royalties, and subsidies they pay worldwide.

With this new directive, large multinational companies will have to publish country-by-country information on where they make their profits and where they pay taxes. Companies will also have to disclose how much tax they pay on the business they conduct outside the EU. For tax jurisdictions that do not comply with the rules of good tax governance (so-called tax havens), this information should be disclosed in a disaggregated manner.

What will the "Public" CbC Reports go for?

The directive builds on the Commission's work to tackle corporate tax avoidance in Europe, which costs EU countries between €50 billion and €700 billion a year. It will help to examine the tax behavior of multinationals. This in turn will push companies to pay taxes where they make a profit, given that this information will be public and will be available not only to tax administrations but to other stakeholders such as unions, clients, consumers, ...

Who is obliged to publish the PCbCr?

The obligation to publish the Public Country-by-Country reporting shall apply to any multinational company, European or not, which:

·         Is currently active in the EU single market

·         has a permanent presence in the EU

·         has an overall revenue of more than 750  million euros in the last two consecutive years

In principle, reporting should be done by the ultimate parent entity (UPE). However, in the case of groups carrying out activities within the EU only through subsidiaries or branches, the responsibility for publishing the information and making it accessible lies with these subsidiaries and branches. If the information is not available or the UPE does not provide all the required information, subsidiaries and branches must publish the information available to them, accompanied by a statement that their UPE has not made the necessary information available.

When should PCbCr be submitted?

CbC reports should be published within the 12 months of the closing date of the parent entity's financial year.

Where should PCbCr be published?    

According to the Directive, country-by-country financial information must be made public through:

·         the website of the Ultimate Parent Entity (UPE)

·         the website of subsidiaries or affiliates

·         the website of the branch or

·         the website of the company that opened the branch or, under certain conditions, on the website of an affiliated company

What content should be published in the PCbCr?

The information to be disclosed under the PCbCr Directive includes the following:

·         the name of the ultimate or independent parent undertaking (UPE), the financial year concerned and the currency used and, where applicable, a list of all subsidiary undertakings;

·         a brief description of the nature of the activities;

·         the number of full-time equivalent employees;

·         income including:

o   the sum of net turnover, other operating income, income from holdings, excluding dividends received from related companies, income from other investments and loans forming part of fixed assets, any other interest receivable and similar income; or

o   income as defined in the financial reporting framework or in the sense of which the financial statements are drawn up, excluding value adjustments and dividends received from related companies;

·         the amount of the profits before tax;

·         the amount of income tax due during the financial year concerned, which is the current tax expense recognized on taxable profits or losses for the year by undertakings and branches of the relevant tax jurisdiction;

·         the amount of income tax paid in cash, which is the amount of income tax paid (including withholding tax paid by other companies) during the relevant financial year by companies and branches in the relevant tax jurisdiction; and

·         the amount of retained profits at the end of the financial year concerned.

In order to reduce the administrative burden, the Directive provides that Member States should allow information elaborated under the OECD’s CbCR to be accepted under the PCbCr.

Should PCbCr be audited?

When auditing the financial accounts, they shall contain a statement of the statutory auditor for the financial year preceding the financial year for which the audited statements were drawn up, as to whether a PCbCR should have been drawn up. The PCbCR itself does not need to be audited.

What are the differences between the PCbCr and the tax CbCr?

There are substantial differences between the public country-by-country information (PCbCr) approved by the European Parliament and the “tax” country-by-country reporting in force since 2016 for tax purposes.

The most obvious difference is that the PCbCr will be public information that will be available on the websites of companies available for the scrutiny of the general public (unions, employees, customers, press, ...). However, “tax” country-by-country tax reporting in force since 2016 is a tax obligation and information provided by companies to the tax administration (and shared only with other tax administrations) is subject to strict confidentiality rules.

The second difference lies in the consequences of non-compliance. The current tax CbCr (in Spain, form 231) is a tax obligation, the non-compliance of which constitutes tax infractions and is subject to tax penalties imposed by the tax administration. However, the new European Directive does not provide for penalties for non-compliance with approved transparency obligations, including the obligation for the country-by-country breakdown of accounting information to be reviewed by the group's auditors.

The third difference is the territorial scope of each report. Public country-by-country reporting relates to multinational groups operating in the European single market only. “Tax” country-by-country reporting standards have now been implemented in more than 100 countries worldwide and are expected to be extended to all those participating in the BEPS Inclusive Framework.

The last and most important is the content of the Country-by-Country reporting. The “tax” CbCr is really a breakdown by country of the activity of the multinational group, with indication not only of the economic parameters but of the activity carried out in each country. However, PCbCr will not provide a true breakdown by country, as the European standard provides for very generous aggregation rules.

The Directive provides for a combination of aggregation and disaggregation of information. Information should be disclosed in a disaggregated manner, i.e. country by country to:

·         each Member State;

·         the countries mentioned in Annex 1 of the Council conclusions on the revised EU list of non-cooperative jurisdictions for tax purposes as of its meeting on 5 October 2021 (these blacklisted countries are currently: American Samoa, Fiji, Guam, Palau, Panama, Samoa, Trinidad and Tobago, United States Virgin Islands, Vanuatu);

·         the countries mentioned in Annex 2 of the Council conclusions, if the country is listed for two consecutive years (currently: Botswana, Jordan, Thailand, and Turkey).

Information relating to other countries may be disclosed in aggregate form. For example, European multinationals will be able to publish aggregated revenues in Argentina, the United States and China.

When will PCbCr have to start being published?

Once the Directive is published in the Official Journal of the European Union (scheduled for when it is published), it will enter into force 20 days after its publication. The directive is expected to be published in December 2021.

The EU Member States will have 18 months to implement and transpose the Directive into national law. After this, the rules of PCbCr will be effective.

Assuming the Directive is published in December 2021, the deadline for transposition by the EU Member States would be 30 June 2023, and the rules would be applicable from June 2024 (i.e. they would apply in respect of financial years starting from June 2024).