A New Standard for Country-by-Country Reporting on Tax?

Maya Forstater
February 19, 2019


This blog post is based on an article that was first published in Tax Journal and is reproduced with permission.

The vexed question of whether country-by-country (CBC) reports on multinational companies’ tax affairs should be put into the public domain has been a sticking point in debates on responsible tax practice for years. Organisations such as the Tax Justice Network argue that if companies publish details of revenues, profits, and taxes broken down by country, this would allow the public to judge whether they are paying a ‘fair share’ of taxes. Ethical investment companies (including the Norwegian sovereign wealth fund) have also joined the call for public CBC reporting. Some tax professionals agree that public CBC reporting would be a game changer for responsible tax, but others argue that these detailed raw figures from company tax filings are not appropriate for public disclosure, would cause confusion and through misinterpretation would undermine confidence in the tax system.

While transparency is generally a good thing, tax returns are usually confidential, and there remains no clear consensus on the costs and benefits of enforcing disclosure of this particular set of private sector data.

A new standard?

At the end of last year, the Global Reporting Initiative (GRI) released a new draft standard on tax and payments to governments. It suggests that many of the items of data that large multinational companies are now required to include in their confidential tax filings under the G20/OECD Base Erosion and Profit Shifting (BEPS) action plan should also be published.

Proposed Disclosure Items

Required Recommended
  • Number of entities
  • Names of the principal entities
  • Primary activities of the entities
  • Number of employees
  • Total employee remuneration
  • Third-party sales
  • Intra-group transactions with other tax jurisdictions.
  • Profit/loss before tax
  • Tangible assets other than cash and cash equivalents
  • Corporate tax paid on a cash basis
  • Corporate tax accrued on profit/loss
  • Country-level tax reconciliation (qualitative explanation is acceptable)
  • Significant tax incentives
  • Taxes withheld and paid on behalf of employees
  • Taxes collected from customers on behalf of a tax authority
  • Industry-related and other taxes or payments to governments
  • Significant uncertain tax positions
  • Balance of intra-company debt and the average interest rate paid on that debt.

Note: Text in italics reflects indicators included in the BEPS template; regular text is additional to the BEPS template.

What makes this initiative different from others is that the GRI standards are already the world’s most widely adopted framework for sustainability reporting. The standards, covering areas such as energy, water, anticorruption, diversity, and child labour, are already used by many major multinational companies. If the new tax module is adopted, companies seeking to publish reports “in accordance” with the GRI would need comply with it, if they consider tax to be a material issue. The publication of the GRI’s exposure draft has therefore sparked new conversations between the worlds of sustainability reporting and tax reporting.

Exploring the case for public CBC reporting

The most well-established arguments for public CBC reporting of payments to government relate to the extractive industries. The aim is to support public scrutiny of how governments manage natural resource revenues as a means to fight corruption. However, this specific rationale does not necessarily extend to companies in other sectors.

NGOs have been the strongest advocates of broader CBC reporting, across all sectors, focused on corporate income tax. They appear most likely to use the data to generate broad “tax avoidance” estimates by comparing tax results with a formulary apportionment scenario. A common method is to calculate “misalignment” between the current location of taxable profit and indicators of the group’s “real economic activities” (based on a combination of sales, employees, and assets).

It has also been proposed that this same “misalignment” indicator will be adopted by the UN as a measure of “illicit financial flows” (a term which relates to dirty money; funds crossing borders that are illegally earned, transferred, or utilised, such as money related to organised crime, terrorist finance, tax evasion, and corruption). As part of the Sustainable Development Goals, governments have committed to reduce illicit financial flows, and the UN agency UNCTAD (the United Nations Conference on Trade and Development) proposes to assess the tax-related component of such illicit financial flows by comparing the share of corporate profits and the share of employees and sales, in each jurisdiction, on an aggregate basis

Publishing figures that are likely to be interpreted in this way may not meet the public interest test of relevant, reliable information for decision making or promoting positive impacts. In particular, public misinterpretations might increase pressure on revenue authorities to make capricious tax demands, thus undermining fairness and integrity in the tax system. This was a key concern in the development of Action 13 of the BEPS action plan, where it was agreed that CBC reports are intended to be confidential to revenue authorities.

Perhaps the most compelling argument for publication is that investors and investor groups are calling it. However, it is not clear whether investors can in practice use this data or whether they view it as a symbol of transparency. Is it meaningful without the additional information that companies provide to revenue authorities? This is somewhat of a chicken-and-egg problem, as testing whether CBC reports can be meaningfully interpreted depends on there being some data in the public domain. One area where some data is already published is the limited CBC reports produced by financial institutions in the EU under the CRD IV regulations since 2016. It is notable that after an initial flurry of interest in the first year of reporting there has been no further published analysis of the past three years of data.

(In the spirt of open data I’ve gone ahead and put together the past three years of data on a spreadsheet for anyone who wants to use it)

It is also notable that SAM, the analysts that develops the Dow Jones Sustainability Index, does not rely on CBC reporting to assess a company’s tax results. It has recently developed a methodology assessing the substance of a company’s tax results. The core metric it uses is the group-wide effective tax rate (ETR). The methodology compares the ETR of a multinational company with an industry average and asks for an explanation if a company is paying significantly less tax than its peers. Acceptable reasons for low tax rates are codified, including group-wide losses, one-off events such as large investment write offs, and losses from acquired companies.

One argument for publishing CBC reports is that the information has already been compiled and would cost little to publish. This is true for companies that are covered by regulations introduced as part of the BEPS Action Plan (i.e., multinational enterprises with a consolidated group turnover of €750m or more). However, for companies that are not covered by the regulations, compiling a voluntary CBC report could be costly. And in practice, the draft GRI standard defines the indicators slightly differently than the OECD, requiring more work to compile. For all companies, publication raises the question of the need for assurance, as well as for lengthy explanatory documents.

Widening the conversation

The GRI Standards are governed by a Global Sustainability Standards Board (GSSB) whose members come from business, civil society, labour, investment, and “mediating” institutions (service providers). They have a mandate to develop standards which reflect the broad public interest in having access to relevant and reliable information to support well-informed decisions; enable positive impacts on economic, social, and environmental systems; and promote transparency, fairness, and integrity of processes that affect the public domain. They seek to develop standards that are stretching but which have clear foundations in “authoritative intergovernmental instruments” or “documented, widely held expectations of responsible behaviour.” However, the draft tax standard was developed by a small technical committee largely drawn from those already strongly committed to CBC reporting.

The GRI, like any voluntary leadership initiative, is trying to walk the line between encouraging companies to adopt ambitious best practice and adopting untested, impractical, cumbersome requirements. If new tax disclosures are to achieve uptake, they will need to be supported by a business case which convinces more than a small handful advocates. Equally, if tax professionals and multinationals do not believe these disclosures are appropriate, the ball is urgently in their court to develop a meaningful, reliable model for enhanced public transparency on tax.

The GSSB is well aware that the proposed topic disclosures are controversial. It discussed these concerns at length. Project sponsor Dr Kenton D Swift said that the question of whether this is “too much too soon is a legitimate concern” and noted that businesses consulted in a first round of “field testing” have expressed concern and uncertainty about the purpose and value of public CBC reporting. Judy Kuszewski, chair of the GSSB, noted that the proposed disclosures represent “a very, very demanding standard” which does not reflect current practice in most industries. The GSSB is keen to get wider input from potential reporters and data users.

Comments on the draft standard GRI standard are invited before 15 March 2019.



CGD blog posts reflect the views of the authors, drawing on prior research and experience in their areas of expertise. CGD is a nonpartisan, independent organization and does not take institutional positions.

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