Market leading insight for tax experts
View online issue

The growing calls for country by country reporting

printer Mail

The debate over fair taxation has intensified calls for multinational companies to disclose how much they contribute to the UK exchequer, by reporting their profits on a country by country basis. This is often put forward as a way of ensuring that the tax affairs of the multinational are transparent, so that all stakeholders can consider the actions of the company.

The need

The list of stakeholders interested in the tax affairs of business is rapidly expanding, and now includes consumers and non-governmental organisations (NGOs), as well as members of parliament, international organisations, government officials and the media. Their spotlight is on the company’s contribution to the economy and whether the behaviour of the organisation conforms to ideals of what is considered fair or acceptable.

There now appears to be a significant divide between what information businesses are legally required to reveal about their tax affairs, and the expectations of this business stakeholder base. This gap is unhelpful when engaging in what can already be a complex discussion, and the perceived lack of tax transparency is, in some cases, giving rise to misleading conclusions.

The current position

In respect of current taxes payable, the accounting standards require disclosure of the amounts payable or recoverable at the balance sheet date, but there is no guidance in IFRS on the reporting of uncertain tax positions. Neither are there specific requirements about taxes that are ‘not taxes on profit’, such as indirect taxes.

However, some industries have additional requirements and frameworks under which they operate.  For example, for the extractive industries, country by country reporting requirements already exist through: the Dodd-Frank Wall Street Reform and Consumer Protection Act (‘Dodd-Frank Act’); the extractive industries transparency Initiative (EITI); and the draft EU accounting and transparency directive.  Similarly, the EU has recently produced proposals for the financial sector.

What is country by country reporting?

Country by country reporting is the umbrella term used for reporting that requires disclosure of payments to and/or subsidies received from individual governments. The precise information required to be published varies under the differing frameworks:

  • Under EU proposals, from 1 January 2015, European banks and other ‘systematically important financial institutions’ will be required to disclose, on a country by country basis, to the European Commission: pre-tax profit or loss; taxes on profit or loss; and public subsidies received.
  • Under the extractive industries transparency initiative, those adopting the EITI standard report: payments made to national and local governments, including profit taxes.
  • Under the Dodd-Frank Act: payments made to federal and foreign governments, including taxes based on corporate income, production and profits. The disclosures are to be made by type of payment, by project and by government, for all payments that equal or exceed $100,000 individually or in aggregate.

The big question is whether extending these rules to other industries would address the concerns raised above, or create further challenges.

Many organisations are concerned that raw country by country reporting will not deliver greater understanding to stakeholders, but will instead create a potentially significant administrative burden

Tax transparency rather than just reporting

Country by country reporting is only one of the possible routes to greater tax transparency, and not the only solution. Whilst such reporting frameworks are already in use, their mere existence does not necessarily mean that wide adoption is the best way to deliver transparency.

Many organisations are concerned that raw country by country reporting will not deliver greater understanding to stakeholders, but will instead create a potentially significant administrative burden. It could also result in the divulgence of commercially sensitive information.

Business structures are complex and the interaction of complicated tax rules to those structures could mean that the publication of numbers in a prescribed form, without the ability to set them out in a more understandable manner, could increase misunderstanding rather than reducing it. Ultimately, there is a concern that the disclosed information may not be the panacea wanted by some sections of the fair tax lobby.

However, organisations cannot ignore the call for greater tax disclosure and there is a role for greater transparency about the taxes paid as part of stakeholder management. Indeed, if there is not a step change in the level of voluntary tax reporting, there is a material possibility that mandatory changes will follow.

I would like to see the debate move beyond the raw country by country reporting discussion to one that considers how companies can explain their tax affairs in a manner that is appropriate to them.

Read Ernst & Young’s recent report ‘Tax transparency: seizing the initiative’