Guidance

Capital Requirements (country-by-country reporting) Regulations 2013: guidance

Published 10 December 2013

1. Introduction

1.1 Aim of this guidance

This guidance is published with two main objectives:

• the first is to give, in layperson’s language, a broad summary of the Capital Requirements (Country-by-Country Reporting) Regulations 2013 (hereinafter “the regulations”)
• the second is to be an aid to the interpretation and application of the regulations (in this context it is important to note that this is not a legally binding document; therefore, a court may, but is not required, to take it into account)

This guidance will be kept under review by HM Treasury and it will be updated when necessary. When the guidance is amended, the date of the amended guidance will be clearly noted. Each edition of the guidance will be accessible as a link on the HM Treasury website to facilitate reference to the particular edition of the guidance which is current at the time when an arrangement is entered into.

1.2 The regulations

The regulations implement Article 89 i.e. the country-by-country reporting (CBCR) requirements of the Capital Requirements Directive 4 (CRD4)*. Broadly speaking, they impose reporting obligations on institutions in the United Kingdom within scope of CRD4.

*Directive 2013/36/EU

Specifically, the regulations require each institution to publish annually on a consolidated basis, by country where they have an establishment:

(a) their name, nature of activities and geographical location

(b) number of employees

(c) their turnover

(d) pre-tax profit or loss

(e) corporation tax paid

(f) public subsidies received

This information must first be published on or before 1 July 2014. The second publication must be by 31 December 2015 and annually thereafter.

In accordance with Article 89 for the first publication on or before 1 July 2014 institutions only need to publish items (a) to (c) of the above list.

Institutions which are global systemically important institutions (G-SIIs) are required by 1 July 2014 to report to the European Commission and HM Revenue and Customs on a confidential basis items (d) to (f) of the above list. Following this, the Commission will conduct an assessment of the potential negative economic consequences of the public disclosure of such information, and report to the European Council and Parliament by 31 December 2014. As a result of this assessment the Commission may choose to bring forward a legislative proposal to alter the disclosure obligations under Article 89 of CRD4. If that were to occur the regulations will be amended accordingly.

The Regulation does not prevent institutions from providing a narrative around any information provided or providing additional information that might be considered helpful to readers.

The Regulation will be enforced by the Prudential Regulation Authority (PRA) for PRA-regulated institutions and by the Financial Conduct Authority (FCA) for all other institutions.

1.3 Structure of this guidance

The introduction above describes the aim of this guidance as well as providing a broad overview of the regulations. The remainder of this document follows the structure of the regulations and is therefore set out as follows:

1. Chapter 2 explains the ongoing reporting obligation and therefore provides guidance on how to interpret the key terms
2. Chapter 3 describes the interim reporting obligation
3. Chapter 4 describes the provision relating to prior disclosure

2. Ongoing reporting obligation

2.1 Institutions

Regulation 2(1) states that “Institutions shall publish information in accordance with paragraphs (2) to (7) on or before 31st December 2015 and on or before 31st December each year thereafter.” Regulation 1(2) states that ““institution” means an institution as defined in Article 4(1)(3) of the capital requirements regulation”.

This means that from 1 January 2015 institutions must disclose on an annual basis the information listed in Regulation 2(4).

The term “institution” is defined by Article 4(1)(3) of the Credit Requirements Regulation (CRR)* as a “credit institution” or “investment firm”, and each of these terms is further defined in Article 4(1) and (2). Holding companies are not considered “institutions” under CRD4. Therefore, the government would expect an institution’s first step to be determining whether it is in scope of the reporting obligation.

*Regulation (EU) No 575/2013

Branches of institutions established in a third country are not considered “institutions” under CRD4 and the government does not consider them to be in the scope of the regulations. However, branches of institutions established in the EEA will be in scope of the regulations.

2.2 Consolidated basis

Regulation 2(2) states that “The information shall be published in accordance with accepted accounting standards on a consolidated basis for each country in which the institution has a subsidiary or branch, or both.” Regulation 1(2) then defines “accepted accounting standards”.

In practice this will require institutions to use an accounting approach to consolidation either in accordance with International Financial Reporting Standards (IFRS) or UK Generally Accepted Accounting Practice (UK GAAP). The institution that is in scope of the regulations will be required to report on a consolidated basis (in accordance with either of the acceptable accounting standards) for each country in which the institution has a subsidiary or branch, or both. Where a group contains more than one institution which is in scope of the Regulation, but contains entities which are not in scope, the group may, in addition to the publication of the information required under Regulation 2(4) for each institution, aggregate the separate sets of information required for disclosure within the group to form one disclosure for the whole group (on a country-by-country basis). The government would in many cases expect this aggregation could be a simple summation of the information required to be disclosed.

Regulation 4 contains provisions which institutions within wider groups may use to meet their publication obligation. Regulation 4(1) states “Where an institution is a member of a group whose members include entities which are not subject to the obligations in regulations 2(1) or 3(1) it shall be treated as having met those obligations if the parent undertaking has published the information required by regulations 2(1) or 3(1) in accordance with accepted accounting standards on a consolidated basis for each country in which an undertaking which is a member of the group is situated, in respect of all the undertakings which are members of the group.“ Regulation 4(2) then defines “group” and “parent undertaking”.

In practice this will allow a parent company (which may or may not be the top parent company of a group) to publish the information on a consolidated basis for the relevant group as long as all institutions in scope of the regulations are covered in the group disclosure.

If the parent company publishes on that basis, it will relieve the obligation on each institution within the group provided that those institutions have published in their annual report how they have, or how they will comply with the Regulation (i.e. Regulation 2(8)). Although, as the wording of the regulations indicates, the institution will only relieve its obligations once “the parent undertaking has published the information”. Hence, if the institution publishes its annual report prior to the publishing of the group disclosure, the government would expect the institution to issue a public statement (for example on their website) once the group disclosure has been published pointing to where the disclosure can be found.

The government would expect the basis of preparation of such reports to be made clear in the group publication.

2.3 Reportable information (Regulation 2(4))

“The name, nature of activities and geographical location of the institution and any subsidiaries and branches”: This means the names of the legal entities included in the consolidated information. Institutions may choose to disclose trading names if they believe it is relevant. The nature of activities should be described at the country level. In determining geographical location, the government would expect factors such as the country of incorporation of the legal entity or for branches the jurisdiction of residence, its tax residence, the location of its management team or where the majority of its employees are based to be considered.

“Turnover”: The government would expect the definition of turnover used by an institution to be consistent with that in the institution’s financial statements. For example, for banks/credit institutions we would expect turnover to consist of total income before impairment and operating expenses, but after net interest, net commissions/fees income, investment and trading income and net insurance premiums.

“The average number of employees on a full time equivalent basis”: Institutions are required to calculate this figure based on the approach used for the purposes of section 411 of the Companies Act. Institutions are not required to report information on workers who are not employees. As mentioned above, institutions are free to add any narrative they consider helpful to explain unusual situations.

“Profit or loss before tax”: As with turnover, the government would expect the definition of profit or loss before tax used by an institution to be consistent with that in the institution’s financial statements.

“Corporation tax paid”: The governments expects institutions to disclose corporation tax on the basis of the cash amount of corporation tax paid and therefore uses the term “corporation tax paid”. Regulation 1 defines corporation tax as the tax charged on profits by section 2(1) of the Corporation Tax Act 2009 and any similar tax charged on profits in jurisdictions outside of the United Kingdom. Institutions may choose to voluntarily disclose additional information such as current tax and deferred tax as well as other taxes paid beyond corporation tax, or provide any narrative they might wish to, in order to help clarify their tax position.

“Public subsidies received”: In the context of CBCR, this should be interpreted as direct support by the government. This should not include any central bank operations that are designed for financial stability purposes or operations that aim to facilitate the functioning of the monetary policy transmission mechanism. Moreover, schemes in line with the European Commission’s guidance on State Aid would not be considered public subsidies in the context of CBCR; therefore the government would not consider the Help to Buy scheme a public subsidy in the context of CBCR. Furthermore, general tax incentives (including the R&D tax credit regime available for large companies) that apply across the board would not fall within the definition of public subsidy for the purposes of CBCR.

2.4 Publication and audit requirements

Regulation 2(7) states that “the information shall be audited in accordance with the standards required by Directive 2006/43/EC.” The government expects institutions to use the International Framework for Assurance Engagements in deciding which assurance engagement is appropriate. This Framework defines and describes the elements and objectives of an assurance engagement, and identifies engagements to which International Standards on Auditing (ISAs), International Standards on Review Engagements (ISREs) and International Standards on Assurance Engagements (ISAEs) apply.

Therefore, depending on individual circumstances, the publication could be included in the statutory audit or require an external assurance. Where an institution decides that including the CBCR requirements in the statutory audit is not appropriate, the government would expect the chosen assurance engagement to provide a similar level of comfort as a statutory audit, therefore an assurance engagement using the ISREs would not be applicable.

Materiality is a concept used by preparers of financial statements and auditors in their assessment of the significance of an item or transaction in the context of a set of financial statements. Information is considered material if its omission or misstatement could influence the decision of users. The government would expect materiality to be applied in line with the relevant assurance engagement and in the context of country-by-country reporting.

Regulation 2(8) states that “An institution shall publish in its annual report how it has complied, or how it will comply, with this regulation.” Institutions must publish the information in a way that ensures the information is easily and freely accessible and state in their annual reports where the publication can be found. Therefore, institutions may meet their CBCR publication obligation within their annual reports itself or make the publication on an easily and freely accessible website. However, as required in Regulation 2(8), where an institution chooses to publish on a website that must be made plain in the annual report. In such circumstances, the government expects institutions to provide a link to that website within their annual report.

In relation to the timing of the publication, Regulation 2(3) states that “The information shall relate to the institution’s period of account ending immediately prior to the date of publication.” Regulation 2(1) allows institutions to publish the relevant information on or before 31st December of each year. This will allow institutions to align the publication of their CBCR disclosures with that of their annual report if they wish to do so. For example consider an institution that has a period of account ending 30 November and it produces its annual report in February. In the first year of the ongoing reporting obligation, that institution will be required to publish the CBCR disclosure on or before 31st December 2015. The institution may choose to publish its disclosure in February 2015 (relating to the period of account ending November 2014) and would therefore meet its obligation to publish on or before 31st December 2015.

3. Interim reporting obligation

Article 89 of CRD4 imposes a more limited reporting obligation on institutions for the first disclosure of information (1 July 2014), which is reflected in Regulation 3. For all subsequent publications after 1 January 2015 the ongoing reporting obligation applies, which requires publication of all of the information listed in Regulation 2. Article 89 also imposes a one off confidential reporting obligation for global systemically important institutions (G-SIIs).

Regulation 3(1) states that “Institutions shall publish information in accordance with regulation 2(2) to (6) on or before 1st July 2014 with the exception of the information in regulation 2(4)(d) to (f).” This means that all institutions within scope of the Regulation will be required to publish “the name, nature of activities and location of the institution and any subsidiaries and branches”, “turnover” and “the average number of employees on a full time equivalent basis” by 1 July 2014. During the interim period, no institution is required to publish “profit or loss before tax”, “corporation tax paid” and “public subsidies received” (i.e. items in regulation 2(4)(d) to (f)).

Regulation 3(2) states that “Global systemically important institutions incorporated in the United Kingdom shall submit the information specified in regulation 2(4)(d) to (f) to the European Commission and to Her Majesty’s Revenue and Customs on or before 1st July 2014.” Therefore, during the interim period, only G-SIIs headquartered in the UK will be required to disclose, on a confidential basis, the information in regulation 2(4)(d) to (f) to the European Commission and HM Revenue and Customs (HMRC) by 1 July 2014. In terms of the latter, the disclosure submitted to the European Commission should be shared by the G-SIIs with their Customer Relationship Manager at HMRC.

In relation to “global systemically important institutions” Regulation 2 states that “a group identified as a global systemically important bank by the Financial Stability Board in the Annex to the “2013 update of group of global systemically important banks” published by the Financial Stability Board on 11 November 2013.”

The “2013 update of group of global systemically important banks” published by the Financial Stability Board on 11 November 2013, which are global systemically important institutions under these regulations, can be found on the website http://www.financialstabilityboard.org/publications/r_131111.pdf. A hard copy may be obtained from the Secretariat to the Financial Stability Board, Bank for International Settlements, Centralbahnplatz 2, CH-4002 Basel, Switzerland.

Regulation 2(7) does not apply for the purposes of the interim disclosure; therefore the government does not expect the interim CBCR disclosure to be audited.

Furthermore, in relation to the timing of the disclosure, institutions are required to disclose on or before 1 July 2014 and Regulation 2(3) states that the disclosure must relate to the period of account ending immediately prior to the date of publication. For example, if an institution has a period of account ending 30 June 2014 and it chooses to publish at any date prior to 30 June, the publication would relate to its preceding period of account i.e. the period of account ending 30 June 2013.

4. Prior disclosure

Regulation 5(1) states that “Where the information referred to in Article 89(1) of the capital requirements directive relating to an institution has already been published in another EEA State in accordance with that State’s implementation of Article 89(1) of the capital requirements directive the institution shall be treated as having met the obligation in regulation 2(1) provided the institution publishes where that information can be obtained.” Regulation 5(2) is a similar provision but relates to the interim reporting obligation i.e. the obligation in Regulation 3(1) rather than the ongoing reporting obligation i.e. the obligation in Regulation 2(1).

This provision ensures that institutions do not have to bear the reporting requirement again where it has already complied with it in another Member State. Therefore, if a parent company in an EEA State other than the UK has already complied with Article 89 under the laws of that jurisdiction and therefore published information “on a consolidated basis” for its UK institutions those UK institutions will not be required to fulfil the obligations in Regulation 2(1) and 3(1) if they make public where the information published by the parent can be found.

Similarly, Regulation 5(3) states that “Where the information referred to in regulation 2(4) relating to an institution has already been published in the United Kingdom in accordance with regulation 2(2), (3) and (5) to (7) the institution shall be treated as having met the obligation in regulation 2(1) provided the institution publishes where that information can be obtained.” Regulation 5(4), much like Regulation 5(2), relates to the interim reporting obligation.

This provision ensures that institutions do not have to bear the reporting requirement again where they have already complied with it in the UK. Therefore, if a parent company in an the UK has published the information in Regulation 2(4) “on a consolidated basis” for its UK institutions those UK institutions will not be required to fulfil the obligations in regulations 2 and 3 if they make public where the information published by the parent can be found.

As mentioned in section 2.9 above, the government would expect the institution to issue a public statement (for example on their website) once the group disclosure has been published pointing to where the disclosure can be found.