The emphasis is increasingly on improving transparency and confidence in tax matters. These topics are increasingly integrated into general ESG reporting and the OECD and the EU are considering further measures in this area involving increased reporting obligations for taxpayers. There are also initiatives to improve confidence in the tax system, with an upcoming ‘shell companies’ legislative proposal aimed at strengthening substantive requirements, which has given new political momentum following recent revelations from Pandora newspapers. . What do industrial customers need to know?
The tax world is changing rapidly, with major developments around the taxation of multinationals, and a growing number of initiatives around topical issues such as transparency and the environment.
In this second blog in our industry-oriented series, we take a look at another continuing trend in international taxation, which increasingly emphasizes improving transparency and trust.
Although recent proposals at EU and OECD level to increase transparency and exchange of taxpayer information do not specifically target industrial customers, they could nonetheless apply to them.
The most important current initiatives aim either to make more tax information available to the public (such as the public country-by-country declaration and the upcoming EU initiative on the publication of effective tax rates) or to make more information available to tax administrations, who may in turn share this information with other tax authorities within the EU or globally. Some of these initiatives are still in their infancy, but their scope and potential implications for industrial customers are worth watching. Below are some of the key metrics to watch out for.
Public country-by-country reports
This EU initiative will require large multinational companies (MNEs) with a turnover of more than 750 million euros to declare to their local register within the European Union and to make available on their website information including: number of employees, business activities, amount of profit, income tax paid or payable, turnover, including intra-group turnover, and will require them to report information on their activities in non-cooperative tax jurisdictions. MNEs falling within the scope of this proposal will have to report this information for all their subsidiaries located in EU Member States on a country-by-country basis and, for the rest of the world, at an aggregate level. The first reports under this measure are expected to take place in 2024-2025.
Publication of effective tax rates
Closely linked to the OECD Pillar 2 initiative (see our recent blog here), the EU plans to take some of the progress that has been made at the OECD level and use it to improve transparency. In addition to a directive implementing Pillar 2, the EU plans to publish a proposal in early 2022 that will require large multinationals to publish their effective tax rates. The Commission recently indicated that the calculation of effective tax rates would use the methodology agreed for Pillar 2 purposes. The rationale for this proposal is to ensure that companies pay at least 15 percent corporate tax and help monitor whether the Pillar 2 agreement is producing the desired effect.
Further extension of the administrative company directive
Under the Administrative Companies Directive (DAC), taxpayers have various obligations to report information to EU tax authorities, which is then subject to automatic exchange across the EU. Many are familiar with the 6th iteration of the DAC (DAC 6) which requires intermediaries, including lawyers and other advisers, to disclose information about tax structuring to tax authorities. There will be two new extensions to these rules. First, DAC 7, which is due to come into force in 2023, aims to oblige digital platform operators to provide information to tax authorities about sellers operating on their platform. This is in line with the equivalent OECD proposals in this area (the OECD Model Reporting Rules). Second, DAC 8 will require those who trade crypto assets to disclose information about those trading activities to tax authorities. The Commission is of the opinion that, although digitization in this area has the potential to be an opportunity to fight tax evasion, to date it has mainly been used by tax evaders to avoid scrutiny by tax authorities. The proposal on this is expected next year.
Fight against the use of shell companies
“UNSHELL” is an upcoming legislative proposal aimed at curbing the use of abusive and aggressive tax structures. The aim is to ensure that legal entities and legal structures of the European Union which have “no or little substantial presence and no or little real economic activity” do not benefit from tax advantages at the to come up. The European Commission’s proposal is expected to be unveiled on December 22 and will then be negotiated throughout the first half of 2022 by all Council member states. France will be in the lead by taking over the presidency of the Council in January. It appears that the French representatives wish to move the negotiations forward because of the renewed political momentum around the use of shell companies since the revelations of the Pandora Papers. Few details are available so far on the substance of these proposals, but it is likely that this is a real substance test. Entities considered to be a mere shell would potentially lose their residence certificate, which could therefore be a real obstacle to the use of such entities.
Impact on the industrial sector
What does all this mean for those who operate in the industrial sector? All of these initiatives result in an increased compliance burden for taxpayers under the various proposals. It will be important in the future for taxpayers to maintain consistency between all these different reports. Many multinationals already have to prepare reports on financial information and, in some cases, ESG information. It will be necessary to add the public declaration country by country and the publication of the tax rates. Consistency between these reports will be crucial as they will be more widely used in tax audits, not only of the taxpayers in question, but potentially also in relation to other taxpayers. Inconsistencies could potentially lead to litigation and disputes from the tax authorities. With more information on MNEs in the public domain, as well as increased scrutiny by tax authorities, activists and the press may well gain more attention. Internal group restructurings and preparations for M&A transactions may need to be disclosed indirectly through public country-by-country reports if, for example, they affect a company’s business activities or the number of employees in a company. Specific Member State. Going forward, the burden of tax compliance and reporting may even increase, especially if tax strategies become a more integral part of mandatory ESG reporting and the specifics of such reporting are better aligned. It will therefore be essential to prepare for these increased reporting obligations.
What else is on the horizon from a trust and transparency standpoint?
The EU is increasingly concerned with linking ESG reporting to tax transparency. It is currently preparing its very first EU-wide sustainability reporting standards (the Corporate Sustainability Reporting Directive), which is currently being agreed and under negotiation. This is expected to include some sort of tax criteria, potentially a cross-reference to public country-by-country reports, which should also be disclosed under the Corporate Sustainability Reporting Directive. The European Commission also wants to develop a social taxonomy to inform investors about the social impact of their investments, which would make it possible to measure whether an economic activity positively supports workers, consumers and communities. One of the criteria by which to assess whether a taxpayer has a positive impact on communities would potentially be whether he is engaged in transparent and non-aggressive tax planning. This area is definitely one to watch in the future.
To find out more about the EU Business Taxation for the 21st Century (BT 21) package, see our dedicated web pages here.
A first step for a fairer tax system is greater public transparency on taxes paid by major economic players. Citizens and civil society organizations are increasingly calling for both greater transparency and fairness in corporate taxation, in particular the taxation of corporate income. (Extract from the Communication from the European Commission on Business Taxation in the 21st Century.)