Making the most out of your public Country-by-Country-Reporting

Mandatory Reporting

The OECD CbC Reporting was introduced as part of BEPS Action Point 13 and was incorporated into the OECD Transfer Pricing Guidelines in 2017. It serves as an essential tool for tax authorities to assess the risk of profit-shifting and tax avoidance schemes by large MNEs. The information within the CbC Report is, however, confidential and not publicly accessible. 

The primary objective of the OECD CbCR is, therefore, to improve the quality and quantity of information available to tax authorities. The (EU) Public CbCR initiative, on the other hand, aims to provide transparency to the public, including investors, NGOs, consumers and other stakeholders in order to strengthen trust in how companies approach their financial contributions into the countries in which they operate. Further objectives of the initiative are to “foster greater corporate accountability, enable better informed public debate and contribute to maintaining trust in the fairness of national tax systems”.  

The (EU) Public CbCR is based on an EU Directive targeting MNEs with total consolidated revenues exceeding EUR 750 million for each of the preceding two consecutive financial years (this threshold also applies for the OECD CbC). The EU Directive is applicable if the groups’ ultimate parent undertaking is based in the EU, or – in case its headquarters is outside the EU – the MNE operates in the EU through a branch or subsidiary. 

The current Austrian draft of the local implementation of the EU Directive makes the CbC reporting applicable for financial years starting after 21 June 2024. For many of the Austrian headquartered MNEs this means that they will have to disclose their public CbC data for the financial year 2025 i.e. during 2026 (if their balance sheet date is 31 December).

Combining Tasks

While this may still seem far away, CbC reporting is not the only thing keeping tax departments busy. MNEs with consolidated revenues of over EUR 750 million are also subject to newly introduced global minimum taxation (“Pillar II”), which needs to be implemented in the overall reporting processes of the group. As part of this global minimum taxation, CbCR data is the basis for claiming temporary “Safe Harbour” rules, that are meant to help ease the burden of the – at times - very complex data collection process of Pillar II.  We therefore suggest taking a closer look at the group’s CbC data with a view of public disclosure and Pillar II purposes sooner rather than later – what to look for in this data is discussed below. 

Other CbC Reporting-Frameworks

The OECD and the EU, however, are not the only institutions introducing or working with CbC Reports. While Australia is another example of countries planning on introducing public Country-by-Country reporting outside the EU, the Global Reporting Initiative (GRI) framework as well as e.g. the Standard & Poor’s Global Corporate Sustainability Assessment (S&P GSA) also use the concept of CbC data. The GRI framework is currently the most widely used framework for sustainability reporting and the S&P GSA is used in the Dow Jones Sustainability Index. 

Tax in sustainability

But why is tax – and especially CbCR – present in the sustainability conversation? Besides its rather obvious role as an important governance topic for any organisation, tax is also a social factor and often taxes are a company’s largest financial contribution to the societies in which it operates. This becomes even more obvious when looking at the Total Tax Contribution of a group, which goes beyond the income taxes shown in a CbCR and also addresses other taxes paid by a company (e.g. the employer borne wage taxes and social security payments, product taxes and more). If you are interested in learning more about how companies in different territories are approaching tax transparency reporting, take a look at our global tax transparency study and look out for the 2024 study which will cover even more countries (publication expected in October 2024). 

Challenges and Opportunities 

Challenges

The most crucial challenge is achieving high-level data quality. Especially within large groups with presence in many countries, gathering the necessary data for CbC reporting can be difficult. Automating the data collection process and using tools to validate the data collected can positively impact data quality and lower the resources needed to handle the reporting. Additional third-party assurance will give an extra layer of trust. 

The data challenge, however, is nothing new as the OECD CbC reporting had similar data requirements as the EU public CbC reporting (see above). What is new is that the data collected will be published and will be subject to public scrutiny and interpretation. It is, therefore, not only advisable to have a “dry-run” ahead of the mandatory reporting but also to analyze what kind of conclusions can be drawn from the reporting itself.

Since the EU public CbC reporting not only requires the publication of the amount of income taxes being paid, but also additional information such as numbers of employees or total accumulated earnings, it allows readers to analyze the data in more detail and draw their individual conclusions from it. This has the potential to cause misinterpretation and consequently reputational damage and lost trust.

What you can do

To counteract, companies facing mandatory disclosure under EU public CbC reporting should consider giving additional information about their tax practices. They could address why the effective tax rate is below the statutory tax rate for some countries or explain a company’s overall approach to tax. However, giving additional context to certain CbC-data does not seem possible – at least not to a large extent – when it comes to the information published via the Austrian Commercial Register. Incorporating such additional narrative around a group’s taxes in its sustainability reporting or in a separate tax transparency report are possible solutions to this.

Note, that it will also be possible to postpone the publication of (parts of) the public CbC data in case a company would otherwise suffer significant negative consequences on their market position, but omitting information can by itself also be interpreted in various ways by the company’s stakeholders and the public. Companies will, therefore, also need to carefully explain the reason for their omissions and give additional context as described above.

Opportunities

Improved stakeholder communication

(Austrian) companies falling under the new EU regulation can use the public CbC reporting requirement to (re-)evaluate if and how a company communicates its tax matters to its stakeholders and might even draw inspiration from companies in other countries, that have already introduced some mandatory tax reporting. 

One example of mandatory tax disclosure is the UK with mandatory disclosures on a company’s tax strategy. Another example is Spain which already requires the public disclosure of some quantitative information (profit before tax and corporate tax paid by country). Companies in both countries have taken the opportunity to build trust with their stakeholders by going beyond the minimum requirements in their jurisdiction and providing additional information on their overall tax governance and tax payments in their annual tax transparency reports.  

GRI 207 is the standard that is most prominently used to give such additional insights, and can also be extended to include a more holistic view on tax payments from companies by showing a Total Tax Contribution, a more extensive “tax footprint” (as recommended by the World Economic Forum)

Transparency

The aim of such tax transparency reports is – as the name implies – to give its readers more transparency on the company’s tax matters. This includes a better understanding of how the company organizes its tax governance, what (tax) risks they take and what tax challenges they face. Making such tax topics accessible and understandable for stakeholders outside the organization – presumably many with little experience in tax law - can be a positive feature in how a company presents itself and can help to build trust in its overall governance. Furthermore, internal stakeholders like employees are also interested in how their employer approaches its taxes. 

Publicly available information on a company’s tax approach is generally also welcomed by investors, as taxes have become a widely discussed topic, with rules and regulations to combat tax evasion and aggressive tax planning being introduced in many jurisdictions. Getting an understanding of the tax strategy, governance and whether a company is willing to take risks regarding its taxes can be valuable information for investor’s own risk management. 

Ratings 

In addition, there is a growing number of (ESG-)ratings that implement tax transparency as one of their measurements (e.g. the S&P Global Corporate Sustainability Assessment used by the Dow Jones Sustainability Index, the ESG Metrics from FTSE Russell, Sustainalytics and more). 

Going beyond tax transparency reporting

There are further ways to combine tax and sustainability within an organisation- e.g. by aligning tax strategy and reporting with the sustainability strategy and reporting, or by considering how transfer pricing is affected by the efforts made to become more sustainable. Introducing a company’s tax experts into the overall governance and sustainability discussions also helps identify potentially valuable interconnections that help drive efficiency and support a consistent presentation of the business model. 

Conclusion 

Much can be gained from the introduction of mandatory tax disclosures like Country-by-Country reporting, but companies need to be aware of potential pitfalls and prepare their information with the necessary care and caution. 

We at PwC Austria are, of course, happy to support you on your journey of mandatory or voluntary tax reporting with experts in automatization, data analytics, transfer pricing, tax strategy, tax governance and tax risk and control management.