When I say latest version, I mean the ‘compromise text’ of 22 June that Malta has submitted to the other 27 Member States governments, as it comes to the end of its ‘Presidency’ of the Council of the EU. This should not be confused with the report that emerged just a few days before from the European Parliament – although there are some overlaps. Both are essentially revisions of the originally proposed Directive that was published by the European Commission back in April last year, and neither one necessarily represents a final position of the respective institution. Fully understanding the legislative process and the technical content of this initiative can present some challenges. Below I will do my best to bring a little clarity into the picture.
The long and winding (legislative) road
To start with, referring to it as a compromise text is a bit misleading as it doesn’t mean that there is actually an agreement. For a start this only reflects the current state of play of the Member State delegates in the working party discussing the proposal. That may or may not fully reflect the position of their respective governments. Furthermore, in some cases (e.g. France, Sweden and the UK) national parliaments will also have a say. And then of course there is the European Parliament. Their recent report only represents the Committee stage of the process and it still has to be agreed by the full Parliament (vote scheduled for July 4).
The next question is what constitutes agreement anyway. Normally, when dealing with tax related initiatives, all 28 Member State governments have to agree. What the European Parliament does or doesn’t think in such cases is, at least theoretically, irrelevant as they only have a consultative role. But for this proposal it’s different since, while it may look tax related, it’s following the non-tax legislative path (albeit this procedural choice is hotly disputed). For the time being at any rate that means only 16 Member States need to be in favour (although it’s a bit more complicated than that) as well as a majority of the European Parliament. But that’s not the end of the matter. Simply adopting their respective versions of the Directive will of course not solve anything since the two must somehow be reconciled. To cut a long story short, this is done by way of a complex procedure whereby the two institutions (possibly with the involvement of the European Commission) attempt to come up with a common, agreed position. If you see the term ‘trialogue’ coming up, that’s a part of this negotiation process.
In terms of content perhaps the most remarkable thing is how little has changed since the last version appeared some six months ago. That suggests either that progress is going slowly or, more optimistically, that there wasn’t much left that still had to be agreed. It also indicates that a lot of the criticism that had been voiced on the previous text has not been taken on board, including a number of the amendments put forward in the European Parliament’s Committee report.
Can you keep a secret?
One heavily criticised aspect was the carve-out introduced in the earlier compromise text that would allow information to be omitted from the report if it would be ‘seriously prejudicial’ to the commercial position of the companies concerned. A similar provision ended up in the European Parliament’s Committee report. This is vaguely reminiscent of the provision on commercial secrets in the 2015 EU rules on exchange of information on tax rulings. What constitutes seriously prejudicial is not further explained but would seem to cover things like disclosure of transaction margins: the assumption seems to be that these would be less easy to isolate where information for a particular jurisdiction is aggregated - as it would be under the proposal - but that would not help where a group only has a single subsidiary in a particular jurisdiction. The latter example is specifically mentioned in the provision. The European Parliament’s Committee report had rather helpfully suggested that the Commission draw up guidelines to clarify this ‘seriously prejudicial’ point. In response to the criticism, Malta has added a sweetener that requires any omission to be authorised by the administration or judiciary of the Member State concerned and to be explained in the report. Whether this will be enough to satisfy the critics remains to be seen.
Comply or explain!
Another somewhat controversial element is the ‘comply or explain’ provision. This addresses the situation where secondary (local EU) reporting is required and the reporting entity is reliant on its non-EU parent to get the relevant information. The earlier version of this provision required the EU entity to request the missing information and, if it didn’t get it, explain why in the report. There is a similar provision in the EU’s non-public CBCR rules. These provisions reflect the fact that there are limits to the capacity of the EU to extending its legal jurisdiction beyond its own borders. As such they should obviously not apply to EU parented groups - and they don’t. What is of more concern is that the most recent changes made to this provision suggest that if just some of the information for the whole group is missing, no report needs to be filed at all. That is not only inconsistent with the non-public reporting rules but also internally inconsistent with the wording of the provision itself which requires reporting ‘to the extent [the required information] is available’. The EU needs to get its act together on this one.
There has also been some criticism that the most recent changes mean that only multinationals that are actually ‘operating’ in the EU would be covered. So letterbox companies set up in the EU but carrying on activities elsewhere, would not. The concern seems to be that a non-EU based multinational would not have to (locally) report if it’s only EU presence consisted of a legal entity set up under the laws of an EU Member State, but carrying on business operations outside the EU. Leaving aside the question whether this is a real or imagined danger, it is not obvious that the latest changes actually would have this effect. There is certainly some new language in the recitals that refers to ‘operating’ subsidiaries and branches, but this is not repeated in the substantive part of the proposals, save for a reference to branches that should have been opened and ‘still be operated’ in the Member State in question. In any event, it is clear that, where a report is required, whether it be from an EU parent or under secondary EU local reporting, group entities, whether they are letterbox companies with or without activities elsewhere, would have to be included, so long as they had a taxable presence somewhere.
I had planned to cover more aspects of the provisions as they now stand, but as this is a blog and I’m already testing my readers’ patience, I will leave it here for now, except to mention one interesting but somewhat puzzling addition to the recitals which reads as follows:
To ensure the full functioning of the internal market and a level playing field between the European Union and third-country multinational enterprises, the Commission should consider issuing recommendations on how to ensure that global dis-aggregation may be achieved particularly in international fora.
If anyone thinks they know exactly what they are trying to say, I’d be interested to hear…….