In April the European Commission adopted the proposal for a directive amending the accounting directive - 2013/34/EC - on the disclosure of income tax information by certain undertakings and branches. The European Council’s working party on company law has since met twice to discuss it. The emphasis so far at the meetings has been on seeking clarifications and gaining an understanding of the detail. Issues aired include whether this is more appropriately a matter for tax law than company law; the consequences for clarity, consistency and compliance of placing this requirement in the accounting directive, given that accounting and tax provisions can use different terms and concepts; and the application of the proposal to undertakings based outside the European Union.
The Dutch Presidency plans to hold a third meeting next month. We do not yet know of the Slovakian Presidency's ambitions but as of this morning, it seems it intends to hold a meeting once a month from now on during the term of its Presidency, for the next five months, excluding August. At the same time as we in the Council are considering the matter, the European Parliament has assigned lead responsibility to the legal affairs committee but, again, as of this morning, I understand this may change to the economic affairs committee. This negotiation is really at a very early stage and we in the Department have not yet taken a position on the proposal. We are still assessing its extent and impact and examining the results of the public consultation which closed just a little over two weeks ago.
As the proposal very clearly covers tax matters, we are also in consultation with the Department of Finance. Nevertheless, we have already identified some technical concerns, mainly relating to the approach that has been taken of inserting tax provisions into an accounting law measure and also with the obligations it purports to place on subsidiaries and branches of non-EU enterprises. I will give members an idea of where the Commission is coming from - after all it is its proposal. It views this proposal as part of its work to tackle corporate tax avoidance in Europe. It supplements the recently adopted directive on administrative co-operation. Members may know that is a tax directive which obliges large multinationals to report corporation taxes paid on a country-by-country basis. The report is made to the relevant tax authorities. The directive also provides for those authorities to share that information with each other. That is the EU implementation of the OECD's new rules on tax avoidance.
The information under the directive on administrative co-operation will remain confidential to the tax authorities so the Commission now considers that information prepared by companies under that directive should also be made public. The main objective in today's proposal is to increase corporate tax transparency. Related to that objective, the Commission hopes that public scrutiny of corporate tax arrangements will make those companies more accountable and encourage them to pay taxes where they make their profits. It also views this proposal as addressing tax competition; it argues that multinational corporations can pay up to a third less tax than companies operating in just one country. Finally, it expects the proposal to foster corporate responsibility to contribute to welfare through taxes.
I will turn now to the main features and content of the proposal. The Commission's proposal will apply to multinational companies, regardless of whether they are European, that are based in or have a subsidiary or branch in the European Union. They must also have a consolidated net turnover exceeding €750 million. That threshold has been taken from the directive on administrative co-operation so it is to match its scope. The companies that must make reports to the tax authorities under that directive will have to produce public reports under this proposal.
Looking only at companies located in Ireland, the Revenue Commissioners have assessed that approximately 47 companies would come within the scope here. They have not broken down that figure into indigenous and other enterprises, as the committee had hoped to hear. The committee has also asked me to address the likelihood of the threshold of €750 million being amended in future. Clearly we are just at the start of the negotiations so it is difficult to tell the direction things may take but we know from recent events that the European Parliament put forward a similar proposal last year in the negotiations on a directive on shareholder rights. The scope at that stage suggested by the Parliament was to cover undertakings with more than 500 employees and either a balance sheet total of more than €86 million or a net turnover of more than €100 million. Some stakeholders have already said the Commission's threshold of €750 million is too high.
The content of the proposal moves on to put an obligation on these companies to disclose tax information. The key obligation is to prepare a report that sets out the corporation tax that the multinational pays in each member state where it has operations, known as country-by-country reporting. The same information must be provided for each non-co-operative tax jurisdiction or tax haven the multinational is active in. For the rest of the world, the multinational need only give an aggregated figure for all corporation tax paid. It has a breakdown for each of the 28 member states in which it operates and then there is a single figure for the rest of the world.
The exception of the single figure is if any of the countries outside the EU is a tax haven, that has to be broken down as well. The report then has to be posted on the company's website and filed with a state register of companies. In Ireland, that is the Companies Registration Office.
The committee in its advance questions raised the question of currency conversion. The proposal permits the companies to produce the report in the same currency as they produce their financial statements. There is no obligation to convert to euro if their financial statements are prepared in, say, dollars or yen.
I refer to the impact on subsidiaries and branches. The Commission’s intention is that multinationals headquartered outside the EU but conducting business in the EU will disclose the same corporation tax information as EU undertakings. The idea is to level the playing field between EU and non-EU undertakings. The proposal gives effect to that objective by placing obligations on the subsidiaries and branches of those companies that are located in the EU where the parent company is located outside the EU. The proposal provides that any subsidiary that meets the size requirements for a medium-sized or large undertaking and has a parent outside the EU with a net consolidated turnover of €750 million will have to make public corporation tax reports. These will be consolidated at the level of the ultimate parent. Where a non-EU company does not have a medium-sized or large subsidiary in the EU but has one or more medium or large branches, the obligation falls on the branch. It remains the obligation of the parent to put the report together. The Department is concerned that a subsidiary or branch could be legally obliged to publish information that it does not have access to, as the information is within the ken only of the parent. We have raised this issue and will see whether it can be accommodated in any final text.
There is also a proposal concerning non-co-operative tax jurisdictions. The general rule is that any tax paid outside the EU is just disclosed on a single aggregated basis. However, there is an exception if the multinational pays taxes in a country referred to in the proposal as a non-co-operative tax jurisdiction. In the case of taxes paid in those places, the multinational must break down those taxes on a country-by-country basis, in the same way as it does for each member state. To identify those non-co-operative tax jurisdictions, the proposals provide that the Commission will prepare a list of those countries. This will be done by delegated act. It will, therefore, be done by the Commission but in consultation with Parliament and member states. This element of the proposal was developed by the Commission at a late stage and, therefore, it does not feature in the impact assessment. It has drawn criticism for a number of reasons. Those who call for more comprehensive country-by-country reporting see no reason for a list because they just want a breakdown for every country a company has an operation in. If the list remains, there is a concern that the list would be subject to change. This year, a company has to report its tax paid in country X where next year it will not. It makes it difficult to compare from one year to another. How a company gets on and off the list is also seen as arbitrary. Our view is that any assessment of the tax status of countries is one for tax authorities and Finance Ministers based on tax principles. At last month's ECOFIN meeting, Ministers agreed to prepare a similar list for tax purposes and, therefore, we have questioned whether there is any need for a second separate list at all.
The committee then asked about the public consultation we ran in the Department, which closed in late May. We received seven submissions, although we understand that there may be one or two more on the way. It is our intention to post all of them on the Department’s website in the coming week or so and we will let the committee know when that happens.
The results can be summarised as follows. Five of the respondents welcomed the proposal. They considered the objective of enhanced transparency of profits and taxes, broken down on a country-by-country basis to be an important one. For some, the information would be important for developing countries as well as just for public interest, as those countries may not have access to this information through the OECD's exchange of tax information.
However, most of those in favour considered that the proposal fell short in some respects. In particular, they called for full country-by-country reporting not just for the EU. In other words they want tax payments broken down for every country where a multinational has operations. Related to this was a lack of support for the list of the non-co-operative tax jurisdictions, as it could be said this would be arbitrary, subject to change and would be likely to exclude large and important jurisdictions. Another criticism was that the threshold was too high.
The other two submissions could be broadly said to be not supportive. They argued that it could lead to a release of commercially sensitive information and that the data could be misinterpreted, which in turn could give rise to reputational damage for companies. There was also the view that the proposal is a hasty response to developments such as the Panama papers; that it would be better to wait for an assessment of the OECD exchange of tax information first; and that a more effective approach might be to revise international accounting standards which, of course, would cover all companies not just those with operations in the EU.
We are currently assessing all the submissions and we are likely to go back to some of the organisations for further information or clarity. All the views will be considered in refining our position and in discussing it with the Minister in the coming weeks.
I hope that I have addressed the questions the committee raised in its letter. If not or if committee members have any other questions, Mr. John Moynihan and I are available now or if anything arises as the negotiations progress in the coming months.