How will country-by-country reporting affect Irish-based multinationals?

This article was first published in the September Ireland edition of Accounting and Business magazine.

With a large number of multinational companies having their European HQs in Ireland, concern is growing about the impact of the new EU directive on country-by-country (CBC) tax reporting for large corporations.

The EU Council of Ministers recently approved the new directive, which will require companies with a total consolidated group revenue of at least €750m to report CBC information on revenues, profits, taxes paid, capital, earnings, tangible assets and the number of employees. The information must be reported from the 2016 fiscal year onwards, although businesses with parent companies outside the EU will have the option of disclosing information through ‘secondary reporting’ via their EU subsidiaries from 2016, with the rule becoming mandatory from 2017.

Tax authorities across the EU will then exchange these reports automatically so that tax avoidance risks related to transfer pricing can be assessed.

The Council of Ministers also agreed to the establishment of an EU list of non-cooperative jurisdictions. Work on the list will start in September 2016.

Dáil debate

The legislation sparked an acrimonious debate in the Dáil. Seán Fleming, a Fianna Fáil TD, expressed worries about which jurisdictions the European Commission will decide to list as tax havens and hence subject to special controls. ‘They do not specify who decides who should be on this list, whether the list can change from country to country, or whether one will be on it next year if one is on it this year,’ he pointed out.

Last year the commission published a list of 30 ‘non-cooperative tax jurisdictions’ that included Panama and the British Virgin Islands. The list was subsequently withdrawn following criticism from some member states.

But others in the Dáil believe the measures don’t go far enough. Pearse Doherty, a Sinn Féin TD, pointed to the ‘hypocrisy’ of the Irish political establishment, which has been calling for international action and cooperation on fighting tax evasion for some time, but pops up with a ‘subsidiarity’ argument when such cooperation appears in the EU proposals, arguing that such matters should be left to national governments. This, said Doherty, was ‘rubbish’.

Greater tax transparency

Although the European Commission’s move is raising some concerns in the political sphere, it appears to be viewed with rather less apprehension by the Irish financial sector.
Some of the largest accounting and auditing firms in Dublin seem relatively relaxed about the EU proposals. They may well have seen the writing as being on the wall when the Organisation for Economic Cooperation and Development (OECD) released its own tax base erosion and profit shifting (BEPS) initiative in September 2015. The OECD’s BEPS move inspired the EU’s proposals, unveiled in January, which have been described as gold-plated measures. Nonetheless, Ronan Finn, tax partner at PwC in Dublin, says: ‘It’s all part of a drive for greater transparency.’

The Irish government has already fully endorsed the OECD’s proposed BEPS action 13 (which calls for more information sharing on transfer pricing). Indeed, it was an early adopter, enacting action 13 in its latest annual budget, according to Finn, who adds: ‘The information required under the European Commission proposals is similar.’

But what is new are the commission’s April 2016 proposals that major companies make their country-by-country earnings public – a move that has yet to be agreed by EU ministers. Governments will express concern in Brussels on this point, Finn believes. He points to similar concerns expressed by the German finance minister on the basis that the headline data reported could be misinterpreted by media. ‘Likewise, companies are concerned about disclosure of information that could be used by competitors to gain advantage.’

Given that the EU’s country-by-country rules will apply to multinational companies that are based or have a subsidiary or branch in the EU as long as they have a consolidated turnover of €750m or more, there is clearly something for Ireland to be concerned about. With its low corporate tax rate of 12.5% Ireland has become the EU hub for large multinational corporations such as Google, Intel and Pfizer. Somewhere between 47 and 95 companies with Irish-based parent organisations will fall within the scope of the proposal, according to an Irish parliamentary committee surveying the EU proposals. That is out of an EU-wide total of 6,000 affected companies.

Multinationals account for a big chunk of Ireland’s tax take, although Irish domestic corporations pay more in total. For instance, Medtronic, a global manufacturer of medical devices, paid €712m in Irish corporation tax on profits of €3bn in 2015, while Allied Irish Banks paid €534m, CRH paid €304m and Bank of Ireland paid €285m. The fifth in the list of top Irish corporation taxpayers, Ingersoll Rand, paid €277m on a profit of €1.13bn.

A listing of the top 1,000 Irish companies ranked by revenue, which was compiled by the Irish Times, shows that 55% are indigenous Irish, while 22% are originally from the US and 9.2% from the UK. Companies originating in China and Russia each account for 0.2% of the total.

As for the potential impact on PwC’s workload and headcount in Ireland, Finn says: ‘I don’t see it changing hugely. A lot of our conversations with clients are about gathering information into the form that they are looking for. The conversations are about how to pull the data together.’

He does not foresee a jump in headcount at PwC to handle a great deal of extra work. ‘Country-by-country reporting is another process which will become more natural as we go on. It’s another compliance issue.’

Onshoring intellectual property

CBC is widely viewed as an international trend, which is happening partly as a response to public concerns about the tax arrangements of multinational corporations. ‘It’s seen as the way of the future,’ says Paschal Comerford, tax director at Grant Thornton in Dublin. He explains how briefings from Revenue for accountants ‘suggest that the EU proposals are an extension of what Revenue was going to bring in, apart from the public disclosure part’. Australia has already brought in a system similar to what the EU has proposed, he notes.

The OECD-initiated BEPS move has already forced corporations to rethink the strategy of keeping intellectual property (IP) in offshore locations with low tax rates, Comerford explains. ‘Much of that IP is now coming to locations like Ireland where companies already have substantial operations. You can’t get away with a Bermuda IP company any more.’

Comerford believes Ireland is in a better position to hold onto its multinationals since it has also worked on non-tax advantages such as its skills base and ease of doing business. It has reached critical mass in several key industries such as IT, finance and pharma, which makes the tax advantages less critical.

The new initiative will not be sufficient to push multinationals out of EU headquarters locations, says Finn. ‘There is a trend of multinationals looking to onshore IP in Ireland, which is an attractive location to put assets onshore. Companies still need an efficient business model. Most of the multinationals in Ireland have a substantial presence here if you look at how corporations align income with substance.’

And as multinational operations in Ireland get more sophisticated, so demand for transfer pricing specialists will continue to rise, Comerford says. He adds that demand for auditing services will remain strong, and rise for risk management advice – as a result of US companies locating major operations in Ireland.

Mark Godfrey, journalist