Chand, V.

Picariello, S.

English

Serveur académique lausannois

1Kluwer International Tax Blog - 1 / 7 - 02.11.2021Kluwer International Tax BlogThe Revamping of Public CbCR in Europe: much ado aboutnothing?Vikram Chand  (Managing  Editor)  (Tax  Policy  Center  of  the  University  of  Lausanne,Switzerland) and Serena Picariello (Assistant Manager at Deloitte Luxembourg) · Tuesday,June 1st, 2021The vexed question of whether country-by-country reports (CBCR) on multinationalcompanies’ tax affairs should be made public[1] has been a recurrent topic in the taxdebates for years.In Europe several attempts were made along the year to have public CbCR withoutsuccess. Furthermore, the approach adopted by European countries with reference topublic CbCR has not been homogeneous.[2] Recently, the work towards public CbCRreceived a new impulse and has again been on the agenda of the EU legislator. PublicCbCR  has  been  proposed  as  an  amendment  to  the  Accounting  Directive2013/34/EU[3], hence requiring a qualified majority voting rather than the unanimitynecessary for the harmonization of tax rules. The latest proposal could become areality in Europe by June 2021 given the large support obtained during the initialnegotiations.[4]In the following paragraphs the authors explore the case for public CbCR in light ofthe revamping of the EU proposal, analyzing the different arguments in relation to thispolicy issue.Confidentiality of data and unfair competition A pillar for the exchange of a CbCR is the confidentiality of the information. Hence,the disclosure of CbCR data (also through the adoption of public CbCR) could makecommercially sensitive information – which, by definition, is confidential – available inthe public domain, resulting in potential repercussions for a business in a significantinfringement of taxpayer rights. This issue is particularly relevant in the context of theEU proposal, since it would also result in a discriminatory treatment towards MNEslocated in  the European Union.  With public  CbCR,  competitors  could exploit  theinformation provided and obtain an unfair competitive advantage, which, in particular,could be the case for MNEs not located in the European Union and therefore notsubject to mandatory publication of their data. Competitors that are not subject to theregulations will be able to use this information to their own advantage, without beingobliged to publish comparable data themselves. For example, should the MNE group2Kluwer International Tax Blog - 2 / 7 - 02.11.2021subject to public CbCR requirements conduct only one line of business in a particularcountry, competitors could easily determine the business line’s profit margins, whichare an important source of competitive information.Public’s control function The most well-established argument for publishing CBCRs is that providing more taxinformation to the public may put reputational pressure on the MNE which would thusreduce their appetite for (artificial) profit shifting. Reputational pressure, especially inlight of the public CbCR proposal, may represent a powerful tool in the hands of taxadministrations or other stakeholders to avoid MNEs’ “misconduct”.[5] However, taxplanning and tax avoidance should not be addressed through “naming and shaming”,since  this  approach  could  easily  lead  to  a  significant  infringement  of  taxpayerrights.[6] In this respect the key question is whether using reputational pressure is ajustified way to discourage aggressive tax planning and tax avoidance. Since the CbCRdata cannot reveal per se whether the reporting company has actually engaged inprofit  shifting  without  any  further  investigations,  the  disclosed information  couldpotentially be misinterpreted by the public (also due to their lack of expertise ininterpreting the data, in particular, by NGOs) and used to argue that there is taxavoidance. Using public pressure undermines the cardinal rule of each tax system, i.e.taxes should be assessed solely on the basis of the law, in favor of a new underlyingprinciple: MNE’s tax strategies and tax governance should also be judged in the courtof public opinion.[7]Are CbCR data meaningful information to the general public?Action 13 introduced a three- tiered transfer pricing documentation, which includesthe preparation of  1)  Local  File,  2)  Master  File  and 3)  CbCR. Hence,  the CbCRrepresents transfer pricing-related documentation, even though it is doubtful whethermeaningful transfer pricing insights can be extrapolated from an analysis of the CbCRdata on a standalone basis. In fact, out of the 3 tables only the (Un)/Related PartyRevenues indicator in Table 1 is directly connected to intercompany transactions.[8]Although it cannot be denied that the CbCR provides an unprecedented amount ofinformation to be exploited when conducting high-level tax risk assessments, it shouldnot be utilized as the sole basis for proposing changes to transfer prices or adjusting ataxpayer’s income allocation using formulary apportionment approaches. Since theCbCR information  does  not  contain  the  value  chain  analysis  of  the  MNE or  thefunctional analysis of a particular entity, its data may lead to ambiguous conclusionsin  an  attempt  to  identify  income-shifting.  In  fact,  it  has  been recognized  in  theliterature  that  the  use  of  CbCRs  for  tax  risk  assessment  may  pose  numerouschallenges.[9] It is contended that the information contained should be used withcaution by tax authorities  and not  be considered conclusive evidence to  proposetransfer pricing adjustments based on the formulary apportionment of income. Hence,the introduction of a public CbCR could have a potential  negative impact on theMNEs’ reputation, since it deeply relies on the ability of the general public to analyzethe report  correctly.  It  should  not  be  given for  granted that  the  public  has  theexpertise or the technical knowledge for interpreting the CbCR data.Voluntary public CbCR: an opportunity?3Kluwer International Tax Blog - 3 / 7 - 02.11.2021On the other side of the spectrum, several multinational groups – including Vodafoneand Shell  –  published the group’s CbCR on a voluntary basis,  considering publicdisclosure  an  opportunity  to  demonstrate  their  long-standing  commitment  totransparency. This approach seems to be in line with the B team principles too onPublic Tax Reporting[10]. In fact, in acknowledging that the OECD does not requirethis information to be published Vodafone stated “However, given the comprehensivenature of our public disclosures and the wider context of our Taxation and TotalEconomic Contribution Report,  we have no hesitation in  sharing this  informationpublicly.”[11] Today’s trend towards transparency should be read also in light of thenumerous cases of aggressive tax avoidance that came to light in the last decade.Hence, MNEs are now trying to differentiate themselves from “bad firms” before theeyes  of  their  consumers,  by  showing  a  commitment  towards  corporate  socialresponsibility in taxation, since they realized that the positive impact of enhanced taxtransparency outweighs the negative  effect  of  higher  tax  payments.  To this  end,publishing CbCR data is an effective and workable way to increase trust among thepublic even though it implies an additional compliance burden for the taxpayers whenpreparing such reports. In fact, to ensure understandability and avoid ambiguity of theinformation  provided,  Vodafone’s  public  CbCR is  is  89  pages,  with  27  pages  ofintroduction and explanation followed by 42 pages of country-related information,hence far beyond the information required to comply with Action 13 requirements.Other EU initiatives and the GRI’s Standards One argument for public CBCR is the existence of similar disclosure requirements incertain industries. The demand for public CbCR was already implemented in 2013 inthe  banking sector  by  way of  EU Directive  2013/36[12].  A  similar  directive  wasimplemented in the same year (i.e. Accounting Directive 2013/34/EU), to provide moretransparency with respect to a public disclosure of payments to governments made bycompanies operating in the extractive industry sector (gas, oil, mining). The aim wasrespectively to increase the requirements for financial institutions especially after thefinancial crisis and to enhance public scrutiny of how governments manage naturalresource revenues as a means to fight corruption. However, these specific rationalesdo not necessarily extend to MNEs in other sectors, hence the quest by several MNEsto not have a public CbCR requirement.On a related note, the Global Reporting Initiative (GRI)[13] – which is an internationalstandard-setting body that specifically focuses on sustainability reporting – launched anew global reporting standard — i.e. GRI 207[14] – effective for the reports publishedon or after 1 January 2021- within their set of sustainability reporting standards. Thestandard  requires  companies  that  have  voluntarily  endorsed  GRI  Standards  andidentified tax as a material topic to disclose information on how they manage tax andexercise good tax governance. GRI 207 consists of four disclosures and the fourthintroduces a CbCR reporting standard that requires companies to publicly disclosecertain  financial  information  (e.g.  revenue,  profit,  employees,  assets,  corporateincome taxes paid, etc.) on a per country basis. The GRI standards are already theworld’s most widely adopted framework for sustainability reporting, hence companiesseeking to publish reports “in accordance” with the GRI would need comply with itand publish CBC data. It is worth mentioning that the GRI expands on existing CbCRbased on Action 13 (for example, it requires a public disclosure of data and applies to4Kluwer International Tax Blog - 4 / 7 - 02.11.2021company of  any size,  type,  sector or  geographic location that  reports  under GRIstandards and identifies tax as a material topic). Since the GRI’s standards are largelyapplied by many MNEs, 2021 CbCR data may be publicly available (on a voluntarybasis but in relation to a larger audience) regardless of the introduction of publicCbCR requirements at EU/OECD level. ConclusionEnhanced transparency[15] should be considered a pivotal goal. The EU seems tomove  in  this  direction  as  in  the  Communication  published  by  the  EuropeanCommission on May 18, 2021 which describes the EU Tax Policy Agenda for the nextyears,  the  European  legislator  acknowledged  the  relevance  of  tax  transparencyespecially  in  relation  to  the  taxes  paid  by  large  economic  players.  In  fact  theCommunication reads as follows “The Commission will put forward a new proposal forthe annual publication of the effective corporate tax rate of certain large companieswith  operations  in  the  EU,  using  the  methodology  agreed  for  the  Pillar  2calculations.”.This said, there is no conclusive argument in favor of the introduction of public CbCRobligations.  Therefore,  given  the  current  proliferation  of  initiatives  in  favor  ofcorporate social responsibility and sustainability reporting paired with the decision ofMNEs to publish their CbCR, the rush in Europe towards a public CbCR may bepremature.Before the European Union makes any definitive decision on the obligation to publishreports, it would be advisable to wait for the developments at the OECD level. Action13, being a minimum standard, could potentially be subject to significant changesduring the upcoming months. In fact, one of the potential modifications envisaged inthe public consultation document[16] released in February 2020 by the OECD was thepublic disclosure of CbCR information. Furthermore, under the current proposal theCbCR’s  could  undergo  to  significant  changes  in  terms  of  design  (e.g.  potentialinclusion of additional information, such as royalties, interests and service fees) andscope (e.g. the appropriateness of the existing revenue threshold is currently underdiscussion).  Moreover,  it  seems uncertain at  this  stage if  the Pillar  I  or  Pillar  IIprojects require a change to the existing CBCR standard for its implementation. If yes,then it would be difficult to imagine that MNEs would agree to make that informationpublic (e.g. jurisdictions in which the MNE is booking residual profits as they would besurrender jurisdictions or the CBC safe harbour for ETR calculations).  [1] For recent academic work on this matter, see A. Oguttu, Curtailing BEPS throughEnforcing  Corporate  Transparency:  The  Challenges  of  Implementing  Country-by-Country Reporting in Developing Countries and the Case for Making Public Country-by-Country Reporting Mandatory, World Tax Journal (2020), IBFD.[2] For example, France in December 2016 the French Council of State ruled thatpublic CbCR is unconstitutional, as it undermines the freedom of an enterprise by5Kluwer International Tax Blog - 5 / 7 - 02.11.2021giving access to confidential information.[3] Directive 2013/34/EU of the European Parliament and of the Council of 26 June2013 on the annual financial statements,consolidated  financial  statements,  and  related  reports  of  certain  types  ofundertakings, amending Directive 2006/43/EC of the European Parliament and of theCouncil and repealing Council Directives 78/660/EEC and 83/349/EEC, OJ L 182(2013).[4]  During the Competitiveness Council  (COMPET) meeting held on February 25,2021, a compromised text issued by the Council Presidency for a public CbCR inEurope was discussed and the proposal seemed to have a broad support by MemberStates.  Following  this  breakthrough,  the  Council  and  the  European  Parliamentapproved on March 3 and March 4, 2021 respectively, mandates for their respectivenegotiating positions, with the aim to reach a potential agreement on the directive inthe first half of 2021. For further details see also, European Council, Press release –Council  approves greater corporate transparency for big multinationals,  (3 March2 0 2 1 ) ,  a v a i l a b l e  a thttps://www.consilium.europa.eu/en/press/press-releases/2021/03/03/council-approves-greater-corporate-transparency-for-big-multinationals/ (accessed 02 May 2021).[5] M. Lagarden, Behavioural Transfer Pricing – Towards Enhanced Transparency andCompliance?, 26 Intl. Transfer Pricing J. 3 (2019), Journal Articles and Papers IBFD.[6]  X.  Huang,  Ensuring  Taxpayer  Rights  in  the  Era  of  Automatic  Exchange  ofInformation: EU Data Protection Rules and Cases, 46 Intertax 3, p. 225 (2018). For amore  comprehensive  assessment  on  the  level  of  compliance  with  the  minimumstandards and best practices on the practical protection of taxpayers’ rights, see P.Baker, P. Pistone & C.E. Weffe, Observatory on the Protection of Taxpayers’ Rights:2018 General Report on the Protection of Taxpayers’ Rights (IBFD 2019), available athttps://www.ibfd.org/Academic/Observatory-Protection-Taxpayers-Rights   (accessed29  April  2021).[7]  Martin  Lagarden,  Ulrich  Schreiber,  Dirk  Simons,  Caren  Sureth-Sloane  et  al,“Country-by-Country Reporting Goes Public –Cui Bono?”, International Transfer Pricing Journal, 2020.[8] The other elements included in Table 1 of the CbCR are the following: Profit/lossbefore income tax, Income tax paid, Income tax accrued, Stated capital, Accumulatedearnings,  Tangible  assets  (other  than  cash  and  cash  equivalent),  Number  ofemployees; while Table 2 provides details regarding the main business activity(ies) ofeach Constituent Entity.[9] S. Picariello, V. Chand, “The Use of Country-by-Country Reporting for Tax RiskAssessment:  Challenges and Potential  Solutions”,  International  Tax Studies,  IBFD,1-2020.6Kluwer International Tax Blog - 6 / 7 - 02.11.2021[ 1 0 ]  S e ehttps://bteam.org/assets/reports/Public-Tax-Reporting-Learning-by-Doing-and-Through-Dialogue.pdf[11] Vodafone, Taxation and our total economic contribution to public finances 2018( 2 0 1 9 ) ,  a v a i l a b l e  a t  h t t p s : / / w w w . v o d afone.com/content/dam/sustainability/pdfs/vodafone_2018_ tax.pdf  (accessed 29 April2021).[12] Directive 2013/34/EU of the European Parliament and of the Council of 26 June2013 on access to the activity of credit institutions and the prudential supervision ofcredit  institutions  and  investment  firms,  amending  Directive  2002/87/EC  andrepealing Directives 2006/48/EC and 2006/49/EC Text with EEA relevance, OJ L 176(2013), Primary Sources IBFD[13]  GRI,  The  global  standards  for  sustainability  reporting,  available  athttps://www.globalreporting.org/standards  (accessed  02  May  2021).[ 1 4 ]  G R I ,  G R I  2 0 7 :  T A X  2 0 1 9 ,  a v a i l a b l e  a thttps://www.globalreporting.org/standards/media/2482/gri-207-tax-2019.pdf (accessed02 May 2021). [15]  For  further  details,  see  European  Commission,  Communication  From  TheCommission To The European Parliament And The Council – Business Taxation for the2 1 s t  C e n t u r y ,  C O M ( 2 0 2 1 )  2 5 1  f i n a l ,  a v a i l a b l e  a thttps://ec.europa.eu/taxation_customs/sites/taxation/files/communication_on_business_taxation_for_the_21st_century.pdf (accessed 25 May 2021).[16] OECD, Public consultation document: Review of Country-by-Country Reporting( B E P S  A c t i o n  1 3 ) ,  a v a i l a b l e  a thttp://www.oecd.org/tax/beps/public-consultation-document-review-country-by-country-reporting-beps-action-13-march-2020.pdf, (accessed 02 May 2021).________________________To make sure you do not miss out on regular updates from the Kluwer InternationalTax Blog, please subscribe here.7Kluwer International Tax Blog - 7 / 7 - 02.11.2021This entry was posted on Tuesday, June 1st, 2021 at 3:53 pm and is filed under CbCR,Europe, MNEsYou can follow any responses to this entry through the Comments (RSS) feed. 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The Revamping of Public CbCR in Europe: much ado about nothing?

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The Revamping of Public CbCR in Europe: much ado about nothing?

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Serveur académique lausannois