Public country-by-country reporting: Tax transparency and CSR

Public country-by-country reporting (CbCR) is a mandatory reporting requirement to increase tax transparency measures. Companies need to respond in a clear and thoughtful way to a much wider base of stakeholders than ever before to minimise reputational risk and to tell their story in order to demonstrate social integrity and build public trust.

Background

Never before has tax been more important to governments, taxpayers and other stakeholders. Tax forms the basis for public spending and governments want larger budgets to achieve their specific goals. Mandatory reporting regimes continue to develop and additional public disclosures is now a reality. Another such mandatory tax transparency measure is “public country-by-country reporting” which followed soon after the OECD BEPS action plan.

Public country-by-country report

On 12 April 2016, the European Commission proposed an EU Directive which will require large companies in the European Union (EU) to publically disclose country-by-country reporting (CbCR) of tax and other financial data. Prior to this draft directive, the OECD BEPS Action 13, required large companies to disclose this information only to the tax authorities. If approved, this disclosure will have to be filed with the relevant business register and made available on the company’s website for five years.

The European Parliament and the Council of Ministers have to approve the proposal before it is entered in the Official Journal of the European Union and it comes into force 20 days after being announced in the Official Journal. The member states will have one year to enact the EU Directive into their domestic law and it will apply to financial periods beginning on or after 1 year the date of enactment.

What does this mean for an MNE?

It applies to EU headquartered groups with consolidated turnover in excess of EUR 750 million, however, it does not apply to banks and financial institutions. The same groups or enterprises that have to comply with public CbCR will also be filing a CbCR report under OECD BEPS Action 13. There are some differences between public CbCR and CbCR under OECD BEPS Action 13, as not all of the data points that are reportable under OECD BEPS Action 13 have been included in the proposed public reporting. In its impact assessment, the Commission concludes that certain data points should not be made public as the objectives of the directive is not sufficient to justify the competitiveness risk associated with disclosing that data. Groups with non EU headquarters will also be required to publish on the website of the non-EU parent company. One of the possible impacts would be the involvement of a company’s auditors, primarily to confirm that the report required by the directive has been made available and is accessible, however, the exact nature of the audit requirement is unclear.

Tax transparency and Corporate Social Responsibility (“CSR”)

Tax transparency will continue to evolve as the mandatory reporting regimes develop and as companies respond to demands from a more varied group of stakeholders. Public CbCR is one such disclosure of mandatory reporting which would impact the reputation and well-being of companies by external perceptions of how companies manage their tax affairs.

Companies need to respond in a clear and thoughtful way to a much wider base of stakeholders than ever before, including not only tax authorities and governments, but also regulators, investors, non-governmental organisations (NGOs), the media and the general public. Building public trust should remain a top priority for companies and leading businesses should demonstrate integrity and their core principles by offering openness and a willingness to engage. Enterprises need to consider carefully their response to further transparency and in particular to CbCR and the way it reflects the allocation of results across the value chain. CSR teams have been harping about tax transparency and demonstrating social integrity but haven’t found a way to do so and now with this mandatory requirement they have the opportunity to tell their story in their own unique way.

To have a more detailed conversation about how these issues can affect your business, please contact me or one of my colleagues. Please answer these four questions, which address CbCR and Tax Transparency.