From 2025, income and taxes paid by multinational companies in different jurisdictions will be on display for public scrutiny. Where Country-by-Country reports were initially only shared behind “closed doors” between tax authorities, this will become publicly available as a measure to increase tax transparency and decrease aggressive tax planning.
In the last couple of years, the general public has become more interested in the tax behavior of multinational groups. We have witnessed increasing public claims that big multinational groups pay low effective tax rates, resulting in intensified media coverage whereby triggering controversial discussions over the effective tax rates of companies like Starbucks, Apple and Fiat.
Along with such public claims, many tax regulations have been implemented or become more stringent to tackle the so-called term “aggressive tax planning”. In 2016, the OECD set out a new obligation to file the Country-by-Country Report (CbCR) as one of the measures implemented within Action 13 of the Basis Erosion and Profit Shifting (BEPS) Project. As stated in the OECD Guidelines, this obligation provided tax administrations with a consistent and global template for a high-level view of the allocation of income and taxes paid across jurisdictions. At the same time, it provided the tax administrations with access to relevant information to assess transfer pricing risks beyond what would have been achieved solely under their domestic law.
“Name and shame” approach?
Now – shortly following the implementation of the CbCR requirement for multinational companies – this obligation will be extended, requiring groups to prepare a public CbCR that could constitute a “name and shame approach”. In this regard, the EU Parliament accepted the draft version of the CbCR Directive and made it publicly available in the Official Journal of the European Union in December 2021.
According to Article 48b of the CbCR Directive, multinational groups active in the European Union and stand-alone entities with presence in more than one Member State whose consolidated global revenues are higher than EUR 750 million in the last two business years must provide the public with the CbCR starting fiscal year 2025.
Article 48c of the Public CbCR Directive lists the information to be included in the public CbCR by third states and each EU Member State – on an aggregated level. Country specific information shall consist of the following:
- a short description of the business activities;
- number of employees;
- profit before tax;
- tax expenses;
- income taxes paid; and
- amount of retained earnings.
Although the banking and extractive industries have made tax information available since the year 2015, the effectiveness of this new tax strategy is yet to be proved. However, it is expected that some consequences might follow such as a shift in business volume to countries where public CbCR will not be mandatory or business transfers to European states with low tax rates.
Public CbC reporting is more related to unethical but legal tax planning. The list of information required might not be exhaustive and claimed to have been already prepared under CbCR. However, multinational groups will undoubtedly have to focus on creating an understandable CbCR to avoid any possible misinterpretation or judgment by the general public, while evading to facilitate confidential details to its competitors.