Global tax transparency has been the center of attention for the past several years, as relevant stakeholders around the world have shown growing support for increased tax transparency from multinational enterprises (MNEs). Policymakers have been keen on taking measures against profit-shifting through information sharing and collection from businesses,1 with a trend of increasing requirements on public disclosure and scrutiny of businesses’ critical tax information.2 Investors continually seek vital information about businesses to facilitate their investment decisions—including interactions between business strategy and overall tax policy, and alignment between economic value generation and tax payment obligations. Meanwhile, a growing number of MNEs are determined to prioritize strong environmental, social, and governance (ESG) values. In fact, certain MNEs have already voluntarily published their country-by-country (CbC) tax data points and additional information to the public.
Public CbC reporting with corporate income tax (CIT) information for the purpose of global tax transparency is a major initiative of tax authorities and international organizations around the world. The European Union (EU) has led the charge in pioneering such efforts. On December 1, 2021, the EU published Directive 2021/2101 (the “Directive”), which contains new requirements for public CbC reporting, entered into force on December 21, 2021. Under the Directive, large MNEs3 with EU presence4 will be required to publish a public CbC report on their website and/or a public register.
EU member states are expected to transpose the Directive into domestic legislation by June 22, 2023, and the rules would apply to the first financial year starting on or after June 22, 2024, at the latest. However, EU member states can choose to adopt the rules earlier. For example, Romania, Slovakia, and Spain have already implemented public CbC reporting rules as of today.5 Moreover, a number of EU member states, e.g., Poland, Sweden, Netherlands, Germany, Hungary, and Ireland, have made substantial progress in their domestic legislation process and will soon follow suit in implementing the Directive.
Public CbC reporting is gaining regulatory focus beyond the EU as well. The SEC is evaluating the need for increased tax and financial reporting for public companies, and Australia’s 2022–2023 federal budget, released on October 25, 2022, proposed a new provision that requires MNEs to take on public CbC reporting of certain tax information beginning July 1, 2023.
With the rapid development of the global public CbC reporting landscape, it is critical for large MNEs to consider putting into place a concrete plan for tracking their global reporting obligations and releasing currently confidential tax information externally. It may be beneficial to explore an automated process/system for pulling together the public CbC data and/or tracking global reporting obligations; such tools can ease the long-term workload and aid in achieving full compliance globally.
If not handled thoughtfully and appropriately, these soon-to-be required information disclosures can cause reputational damage to an MNE. Large MNEs need to keep in mind that many readers of public CbC reporting likely will not have a background in financial or tax reporting, and their interpretation of the data may drastically deviate from what the data actually represents. To produce an information disclosure that is received by the general public in a way that aligns with the ESG values of an MNE, it is critical to include a qualitative explanation and clarification alongside the quantitative disclosure. It is recommended to involve the internal ESG department as well as external advisors for such purposes. As the total tax contributions of large MNEs have been increasingly driven by non-CIT taxes, disclosure of total tax payments broken down by category may show a more accurate picture of the company’s ESG values.
In summary, global public CbC reporting requirements appear to be rapidly approaching—now is the time for large MNEs to take preemptive actions and get ahead of schedule to create CbC disclosures that can stand up to scrutiny from both tax authorities and the general public.
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- 1Some examples of information sharing and collection from businesses by policymakers include EU Directives - DAC 6 eff. 2018 (Reporting on cross-border tax arrangements), DAC 7 eff. 2021 (Marketplace tax reporting (Reporting obligations for digital platforms), and DAC 8 proposed in 2022 (Tax reporting on cryptocurrencies); Organization for Economic Coordination and Development (“OECD”) Action 13 Country-by-Country reporting, etc.
- 2Examples of requirements for public tax information disclosure include EU Directives - Capital Requirement Directive eff. 2013 and Accounting Directive eff. 2013, Extractive Sector Transparency Measures Act by Canadian Government eff. 2016, etc.
- 3Large MNEs are defined as MNEs with total consolidated group revenues exceeding EUR 750 million for each of the last two consecutive financial years.
- 4EU presence is defined as a group with a parent entity based in an EU member state, or a subsidiary located in an EU member state.
- 5Specifically for Romania, the rules will be effective for the first reporting financial year beginning on or after January 1, 2023.