EU CRD IV Country by country reporting - Ernst & …

1 EU CRD IV Country by Country reporting Insights and challenges August 2013 Confidential all rights reserved EY 2013 Contents 01 Introduction 3 02 Summary of the CBCR rules 7 03 Determining the scope of the rules 10 Institutions in scope 11 Consolidated basis 14 Establishment 19 Financial Year 21 Name(s), nature of activities and geographical location 22 Turnover 23 Number of employees on a full-time equivalent basis 27 Profit or loss before tax 28 Tax on profit or loss 29 Public subsidies received 33 Format of disclosures 34 04 Appendix.

2 List of abbreviations 36 Confidential all rights reserved EY 2013 01 Introduction Confidential all rights reserved EY 2013 Overview of Capital Requirements Directive IV (CRD IV) The Country by Country reporting (CBCR) requirements are a key component of CRD IV and the Capital Requirements Regulation (CRR) reform measures. The purpose of CRD IV is to implement the requirements of Basel III into EU law and it has three key strands of regulatory measures: Capital and liquidity requirements and buffers Cap on bankers bonuses CBCR requirements The CBCR requirements were a last minute extension of CRD IV and link into the wider tax transparency debate taking place across governmental organizations, regulatory bodies and the commercial sector.

3 There has been a sharp focus recently on the taxes paid by multinational companies and a desire from stakeholders, including senior political figures, for increased tax transparency. Although there are a wide range of tax transparency developments that impact the financial services sector, this document focuses on the CRD IV CBCR requirements and some of the practical implications for affected institutions. It should be noted the precise form of the rules will be determined by the law which is enacted by each of the Member States. The subject of tax transparency reporting is also a rapidly evolving area which has a natural overlap with other topical developments, such as the Action Plan on Base Erosion and Profit Shifting (19 July 2013) report published by the OECD and the possibility of an expanded EU Accounting Directive.

4 All of these developments will need to be monitored over the coming months which will add an extra layer of challenges for financial institutions trying to prepare for this brand new financial reporting regime. Purpose of this document The CBCR rules are intended to enhance the level of transparency related to the tax affairs of EU regulated institutions. Whilst the policy intent of the rules is clear, it is widely recognized that the rules as drafted contain little detail, being less than two pages in length. Multiple potential interpretations of those rules may therefore be possible. A cornerstone of a transparency regime which applies industry wide must be to ensure that disclosures are understood by stakeholders and, in addition, that there is comparability between institutions.

5 This is desirable both to help stakeholders to make appropriate judgments regarding the disclosures of an institution and to ensure that institutions are not competitively advantaged or disadvantaged, by their disclosures. Whilst we recognize that the complex and differing operating models of financial services groups means that one set of interpretations may not be the most representative, and therefore transparent, in all circumstances, this document aims to provide a framework of key definitions. We also highlight the various potential interpretations of the rules and assess the practical application of those interpretations as a first step to providing a set of rules and guidance that could be applied. Introduction 3 EU CRD IV Country by Country reporting 01 Confidential all rights reserved EY 2013 Interaction of CBCR with other elements of the CRD IV package , such as FINREP Whilst the CBCR provisions are, to a large extent, stand alone from the rest of CRD IV and CRR, in areas where overlaps do potentially exist, reporting institutions will need to understand how the different provisions interrelate in order to ensure that their approach to applying the CRD IV package as a whole is consistent.

6 In addition, taking a holistic view should allow institutions to identify synergies and efficiencies that may be achieved from common aspects of the different reporting frameworks. FINREP, a standardized EU-wide framework for reporting financial (accounting) data, is a key part of CRR. Under this harmonized reporting regime, institutions will be required to submit a large suite of new returns to national supervisory authorities on a quarterly basis, with granular data requirements related to the composition of the balance sheet, income statement and off balance sheet exposures. FINREP is expected to initially apply to listed credit institutions and investment firms (consolidated groups) applying IFRS from 1 July 2014. As the CBCR rules could apply to 2013 data, then these rules are actually on a more advanced timetable than FINREP.

7 Transposition of CRD IV into EU Member State law Like other EU directives, CRD IV is binding in its entirety on the Member States. In contrast to EU regulations, which are automatically applicable in a Member State s domestic law immediately after entry in force, EU directives must first be transposed into domestic law by the Member States. The deadline for transposing CRD IV into the Member State domestic law is 31 December 2013. It is important to note that although the directive obliges Member States to achieve the result stipulated by the directive, there is some flexibility in how the directive is adopted which leaves open the possibility of differing interpretations at a Member State level. 4 EU CRD IV Country by Country reporting Confidential all rights reserved EY 2013 5 EU CRD IV Country by Country reporting Note regarding Member State interpretations It should be noted that the CRD IV CBCR requirements must be implemented into local EU Member State law before 31 December 2013.

8 During the course of implementation, the Member States may elaborate on the requirements, expand their scope, or define their own interpretations of key terms. Those interpretations may not be consistent with those used in this document and therefore care should be taken to refer to rules of the applicable Member State when preparing CBCR disclosures. Confidential all rights reserved EY 2013 02 Summary of the CBCR rules Confidential all rights reserved EY 2013 Disclosure requirements This section summarizes the CBCR rules, which are contained in Article 89 of CRD IV. The rules require each credit institution and investment firm, as defined within the directive, which are regulated under CRD IV to disclose annually, specifying by Member State and by third Country in which it has an establishment, the following information on a consolidated basis for the financial year: We understand the additional data requirements (items (d), (e) and (f)) in the first year of reporting in 2014 only apply to EU G-SIIs, and this data is required to be submitted to the European Commission, on a confidential basis in 2014.

9 The Commission will review this data, consider the potential negative economic consequences of publication of such information, and report to the European Parliament and the Council on the findings of its review by 31 December 2014. Unless specific changes to the directive are enacted following the Commission s review, then all affected institutions will need to publicly disclose all items listed in the rules on a Country -by- Country basis from 1 January 2015. Timetable of provisions The CBCR rules were published in the Official Journal of the European Union (OJEU) on 27 June 2013. Therefore, assuming no Member State challenges the rules or their timing before the ECJ over the coming months, the rules will be effective from 1 January 2014 onwards.

10 The first deadline for reporting purposes will be six months after the date of application, , 1 July 2014. This applies both to the publication of items a) to c) and, for relevant G-SIIs, to the submission of items d) to f) to the Commission. For 2015 and beyond no publication deadlines are specified in the directive. Summary of CBCR rules 7 EU CRD IV Country by Country reporting 02 CRD IV CBCR disclosure requirements 2014 requirements 2015 onward requirements (a) Name(s), nature of activities and geographical location All institutions required to publish the data requirements in (a) to (c) Full public disclosure, items (a) to (f) will apply to all institutions from 1 January 2015 (b) Turnover (c) Number of employees on a full time equivalent basis (d) Profit or loss before tax In addition, Global Systematically Important Institutions ('G-SIIs'), authorized within the European Union, provide the data required in (d) to (f) confidentially to the European Commission (e) Tax on profit or loss (f)