Why Public Country-by-Country Reporting is ‘the’ key element of multinational tax transparency
The next few weeks will see technology giants Alphabet, Amazon, Meta and Netflix release their annual financial results. And, as happens every year, investment analysts and journalists will pore over them to separate hard facts from hyperbole. But, as also happens every year, there will likely be an enormous gaping omission: namely, the complete and utter absence of a country-by-country breakdown of the company’s economic impact. This is probably the hottest topic in financial reporting across the world, and is now the subject of both an increasing number of investor resolutions (witness the AGMs of Amazon and Microsoft in 2022) and legislative diktat (as is being advanced everywhere from the European Union to Australia). For many tax justice organisations, public Country-by-Country Reporting is a number one campaign demand (closely followed by beneficial ownership disclosure).
At the Fair Tax Foundation, we believe that comprehensively implemented public Country-by-Country Reporting (pCbCR) significantly enhances the ability of stakeholders across the world to form an informed opinion as to whether a business is paying the right amount of tax, in the right place and at the right time. A core element of our Fair Tax Mark accreditation process for multinationals, pCbCR provides an indication of the economic footprint within a jurisdiction and may signal emerging financial and reputational risks. This is of particular interest to institutional investors and asset managers, who are also increasingly urging multinational corporations (MNCs) to embrace tax transparency as a core component of their ESG strategy. Crucially, this data provides essential insights as to whether a business is complying with the commitments detailed in their marketed financial results and tax strategy commitments.
It’s sorely needed too. A recent OECD analysis of anonymised data from 7,000 multinationals confirmed significant misalignments between the places where profits were declared and the places where economic substance and activities actually occurred. Tellingly, the income per employee ratio tended to be higher in countries, and in investment hubs, where headline rates of corporation tax were zero.
Of course, those MNCs that engage in aggressive tax planning and artificial profit shifting to low-tax or secrecy jurisdictions are unlikely to voluntarily publicise their results on a country-by-country basis. If they did, stakeholders would have serious questions about unusual or disproportionate financial reporting. On the flip side, there’s an opportunity for businesses providing voluntary pCbCR disclosures to stand out and show real confidence in their approach to accounting and transfer pricing.
At the moment, most large MNCs make pCbCR disclosures to tax authorities behind the scenes, and these are shared with some (but not all) tax authorities across the world But, ‘public’ country-by-country reporting will soon be mandatory for large MNCs operating across the European Union (albeit with some substantial loopholes), and similar requirements were recently announced in Australia. Handily, The EU Tax Observatory now maintains a database of CbC Reports, and features Fair Tax Mark accredited exemplars such as Atlantia, LUSH, Ørsted and SSE.
This is just a start though, and CbC disclosures need to be meaningful and comprehensive to truly have an impact. In addition to the taxes declared and paid (or claimed back) in each jurisdiction, stakeholders should be able to discern income, profit and the resources deployed. Being able to easily access pCbCR data in any format whatsoever is good, but ideally we would like to see this provided in a machine readable, open data format too.
At the Fair Tax Foundation, we work with businesses who are seeking to be exemplars of responsible tax conduct and tax transparency. In addition to our model tax notes and model tax policy, we now also offer a model pCbCR guide and template pCbCR reporting table. If completed, the reporting table would score full points in the pCbCR section of our Fair Tax Mark Global Multinational Business Standard assessment.
While big tech’s latest set of financial results will likely show their continued alignment with the old fashioned view that tax is a burden to be minimised, plenty of other global multinationals disagree. They don’t see the ability to find loopholes as a measurement of success. Lots of big businesses appreciate the positive impact tax contributions have on society and see the value of being clear with their stakeholders. Like them, we also believe pCbCR is a vital part of a sustainable tax approach.