In this article, we discuss the EU's push to introduce public country-by-country (CbC) reporting for multinational companies — an idea that was unpalatable for member states just a couple of years ago but now appears to have gained support within the bloc.
CbC reporting — what is it?
CbC reporting was introduced as part of the OECD's BEPS project. It is intended to enable tax authorities to better understand multinationals' intergroup tax affairs and more effectively target their compliance strategies, among other things, to prevent the shifting of profits to low-tax jurisdictions.
Action 13 of the BEPS Action Plan provided standard rules for the introduction by jurisdictions of new reporting requirements. Specifically, the CbC report requires multinationals with global annual revenue in excess of EUR750m to provide aggregate information relating to the global allocation of their income and taxes paid, together with certain indicators of the location of economic activity within the group.
This information must be provided annually for each jurisdiction in which a multinational does business.
An EU breakthrough?
As matters stand, CbC data is accessible only to governments and qualified researchers under strict confidentiality rules. The European Union has discussed for several years making the information public. Most recently, in November 2019, 13 countries rejected the European Commission's proposals.
Nevertheless, a breakthrough may have occurred. At the end of February 2021, internal market and industry ministers informally discussed the idea and the Portuguese EU presidency concluded that there was political support for it to seek a negotiating mandate. Then, in early March, the EU announced its intention to proceed with negotiations on a draft CbC reporting directive.
The directive would require multinationals or standalone undertakings with total consolidated revenue of more than EUR750m in each of the previous two consecutive financial years, whether headquartered in the EU or outside, to disclose publicly, in a specific report, the income tax they pay in each EU member state, together with other relevant tax-related information.
These reports would be required within 12 months from the date of the balance sheet of the financial year in question. Under certain conditions, a company may be able to defer such disclosure for a maximum of six years.
It is notable that the EU directive is narrow in scope, requiring companies to disclose only a limited set of tax data rather than more comprehensive information on their activities. This is likely to be a compromise on the part of the EU, given that the idea of forcing companies to publicly divulge commercially sensitive data remains highly controversial and strongly opposed by the corporate world.
Yet, even in this stripped-down form, final approval for the directive is far from assured. With some member states still opposed, the negotiating process could be something of a slog that ultimately hits the buffers, as we have seen with other contentious pieces of EU tax legislation.
Nevertheless, given recent trends and growing calls for more corporate transparency, we can expect to see this issue remain on the EU's — and potentially the OECD's — agenda for at least the foreseeable future.