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    Greater tax transparency for large MNEs?

    Greater tax transparency for large MNEs?

    Greater tax transparency for large MNEs?
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    By CNBCTV18.com Contributor  IST (Published)

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    On 28 September 2021, the Council of the EU (i.e. the 27 EU Member States) took a big leap forward towards tax transparency movement when it formally agreed upon the Directive on Public Country-by-Country Reporting (CbCR).

    While the 2007/08 financial crisis kindled the debate around maintaining the transparency of business affairs of companies, today several jurisdictions have regulations that legally require businesses to adhere to tax transparency rules. Examples of such measures include the EU’s DAC6 tax disclosure rules, Australia’s tax transparency code defining principles for businesses on public disclosure of tax information, the UK’s requirement to publish an annual tax strategy etc.).
    On 28 September 2021, the Council of the EU (i.e. the 27 EU Member States) took a big leap forward towards the tax transparency movement when it formally agreed upon the Directive on Public Country-by-Country Reporting (CbCR). Broadly speaking, CbCR is a report that contains information about the jurisdictional allocation of profits, revenues, employees and assets (basis recommendations from Action 13 of BEPS project).
    Until now, these reports were primarily used for risk assessment purposes by tax administrations to discern instances of profit shifting by Multi-National Enterprises (MNEs). With this new development requiring public disclosure of CbCR, a wide array of stakeholders will have access to CbCR reports who would be able to analyse the data disclosed therein. As per the Directive, the CbCR report should be made accessible on the public registry of the relevant EU Member State and on the company website (with some exceptions) free of charge for a minimum of five consecutive years. Resultantly, these reports would now be available to the public at large.
    In scope, companies include both EU-based MNEs and non-EU based MNEs doing business in the EU through a branch or subsidiary with total consolidated revenue of more than €750 million in each of the last two consecutive financial years. Accordingly, Indian companies meeting the turnover criteria and having an EU business footprint through subsidiary or Branch will need to comply with the requirements of public CbCR.
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    For covered groups, CbCR information (on a country-by-country basis) needs to be made available for all 27 EU Member States and all jurisdictions included in Annex I and Annex II of the EU list of non-cooperative jurisdictions for tax purposes (so-called EU black list and grey list). For all other jurisdictions, aggregated data may be disclosed. The Directive requires reporting within 12 months after the balance sheet date and provides for penalties in case of non-compliance (member states are free to decide the type and quantum of such penalties under domestic law).
    Subsequent to the Council’s adoption of the Directive, approval from the European Parliament's plenary is required. Once adopted by Parliament, the Directive will be published in the official journal of the EU and enter into force 20 days after this publication. Member States will then have 18 months to incorporate the directive into national law. While the Directive states that first reporting will take place for fiscal years beginning on or after 2.5 years after entry into force of the directive, Member States have the flexibility to implement on shorter timelines. Accordingly, in terms of timeline, the first filings may see the light of the day by 2024.
    Once adopted, in scope businesses would need to consider how to instil public CbCR into the overall tax transparency strategy of the group. While ensuring that the information published is aligned with the data already being reported to governments, businesses may need to revisit data collection and other internal processes to ensure the quality of reporting and the time needed to implement tweaks, if required. Additionally, CbCR data would need to be in sync with other public tax transparency initiatives already being implemented by businesses.
    Public CbCR will disclose a lot of qualitative information to stakeholders and will reveal how and where a company pays taxes. This will require covered businesses to strategize its impact and update their broader tax transparency plan at an early stage, ahead of the deadline to disclose information publicly. It may be prudent to undertake stress tests and detailed impact assessments to identify the risks that the Directive may subject businesses to. Companies should closely monitor the progress on the adoption process and substantially re-consider their public tax reporting and stakeholder communication strategy.
    -- The author Raju Kumar is Tax Partner at EY India. Views expressed are personal.
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