From BEPS to ESG: how the role of country-by-country reports has been revamped
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From BEPS to ESG: how the role of country-by-country reports has been revamped

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Paolo Ludovici and Marlinda Gianfrate of Gatti Pavesi Bianchi Ludovici describe the evolution of the country-by-country report at the OECD level and under the EU directives, and consider reporting for ESG policy purposes.

Several years after the introduction of the reporting model known as the ‘country-by-country report’ (CbCR), its function and role have evolved, particularly in the European framework.

The reporting model initially responded to the purpose of the OECD/G20 BEPS project as a tool available to tax administrations for tax risk assessment in respect of multinational enterprise (MNE) groups. It has since become an element for increasing the transparency of MNE groups, also affecting their reputation.

The OECD’s BEPS project

The CbCR originated as part of the BEPS project. The Action 13: 2015 Final Report provided rules concerning transfer pricing documentation and a set of disclosure standards for MNE groups to improve tax transparency as part of the minimum standards of the action plan that all countries adhering to the BEPS Inclusive Framework (IF) are required to adopt in their domestic legislation.

The rules contain an obligation for the ultimate parent entity (UPE) of MNE groups with annual consolidated group revenue equal to or exceeding €750 million (approximately $821 million) to provide annually, in a common template, aggregating information to be submitted to a relevant tax authority. Information is then exchanged between tax authorities.

The CbCR should be used appropriately by tax administrations for high-level transfer pricing risk assessment purposes and in evaluating other BEPS-related risks.

Focusing on the content of the CbCR, the model comprises three tables.

In Table 1, the UPE should include all the tax jurisdictions in which constituent entities (CEs) of the MNE group are resident for tax purposes and report revenues split between related and unrelated parties, profit (loss) before income tax, income taxes paid and accrued, stated capital, accumulated earnings, number of employees, and tangible assets.

In Table 2, the UPE shall indicate every CE by tax jurisdictions and flag their main business activities.

In Table 3, the MNE group can include any further information considered necessary or that would facilitate the understanding of the information provided in the other tables.

The last passage of the BEPS project related to CbCRs is within the pillar two model rules (the GloBE Rules). The GloBE Rules also provide for the possibility of safe harbours to reduce administrative burdens, where specific operations of MNE groups are considered to be taxable above the minimum rate.

On December 20 2022, the OECD released guidance on safe harbours and penalty relief.

Among others, the BEPS IF has agreed on the design of a Transitional CbCR Safe Harbour as a short-term measure that would exclude MNE groups’ operations in lower-risk jurisdictions from the scope of GloBE in the initial years.

The Transitional CbCR Safe Harbour is based on CbCR data for calculating MNE groups’ revenue and income on a jurisdictional basis. The GloBE Rules and the rules for CbCRs have a similar scope, and there are similar rules for identifying CEs and allocating income to a jurisdiction under a CbCR and the GloBE Rules. The CbCR is a proxy for excluding the low-risk jurisdictions from the compliance requirements of the GloBE Rules.

The Transitional CbCR Safe Harbour uses the CbCR as a risk assessment tool to establish whether a top-up tax liability results under the GloBE Rules. This use of the CbCR is deemed to be consistent with the Action 13: 2015 Final Report.

The EU directives

Within the EU, Directive (EU) 2016/881 (DAC 4) extended the scope of the mandatory exchange of information by including the automatic exchange of information on the CbCR for MNE groups with total consolidated revenue equal to or higher than €750 million. The rules are in line with the OECD standards.

According to Directive (EU) 2021/2101 (the Public Country-by-Country Reporting Directive), MNE groups with consolidated revenue over €750 million will be required to disclose CbC data for their operations in member states (MS). In addition, they would be asked to disclose how much tax they pay on the business they conduct outside the EU. Publication will be required for the first financial year starting on or after June 22 2024. MS shall adopt domestic provisions by June 22 2023.

The directive was introduced to achieve a higher level of transparency and ensure public scrutiny of corporate income tax information by enabling citizens to assess the contribution of MNE groups to the welfare of society in each member state by taxes paid.

Public reporting does not satisfy the same purpose as information sharing between tax authorities. In terms of content, the information to be reported to the public is less detailed than the information to be submitted confidentially to tax authorities (exclusion of a split of revenue between a third party and a related party, stated capital and tangible assets).

ESG reporting: GRI 207

Public transparency on tax is also an important part of companies’ corporate social responsibility.

Tax-related ESG reporting has been increasingly introduced in many countries.

The Global Reporting Initiative (GRI) is one of the international organisations that produce voluntary sustainability standards. Its standards are widely accepted as good practice for reporting on ESG topics.

In 2019, the GRI also released a tax standard, GRI 207: Tax. One of the requirements of the new standard is CbC reporting (Disclosure 207-4). This standard can be used by any company, regardless of size, to report information about its tax-related impacts on the economy, the environment, and people if it has determined tax to be a material topic.

The standard is applicable for reports published from January 1 2021.

In terms of content, the information to be disclosed is the same as the Action 13: 2015 Final Report, except for stated capital and accumulated earnings.

Companies should also report additional information for each tax jurisdiction (for example, total employee remuneration, taxes collected from customers on behalf of a tax authority, industry-related and other taxes or payments to governments, significant uncertain tax positions).

Based on the above, it is clear that the purposes indicated by the rules of CbC reporting over time have fostered the rise of its new functions, both in terms of tax liability (BEPS) and as a measure of the impacts of MNE groups’ tax practices on society (ESG metrics).

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