Taxpayers prepare data for public CbCR in the EU

Businesses told ITR that the EU could push for greater data standardisation rules to reinforce the CbCR regime. This might even make it easier for taxpayers to maintain high quality data.

“It would be great to have the EU streamline what expectations member-states have from multinationals in terms of reporting,” said one tax director at a multinational tech company. “We see countries developing their own format to extract and retrieve the data, but it would be great to have just one format apply to all EU members.”

The European Parliament has only been in place since May, and the EU now has a new commission, but this shift to public CbCR has raised the stakes for taxpayers.

MEPs adopted a cross-party resolution on October 24 calling on the European Council and member-states to ‘break the deadlock’. The existing EU legislation better identifies the flow of corporate tax revenue by adding measures such as the location where tax is paid as part of the disclosure requirements.

At the same time, the rise of sustainable reporting standards alongside public CbCR, such as the Global Reporting Initiative (GRI) and the EU directive on cross-border tax arrangements (DAC6), has given taxpayers more to worry about in recent years.

These initiatives, coupled with the EU commitment to public CbCR, will define the challenges taxpayers face in making sure their data is the best quality possible. If the information isn’t top quality, transparency is worthless.

Back to the drawing board

Tax directors are relying more on risk analysts to sift through their corporate tax returns and identify gaps across their disclosures. The misinterpretation of tax data can cost a company its reputation and hit its balance sheet. Everything is on the line, even investor relations, when businesses are sharing data.

One head of tax risk at an oil company explained that he had to add a transfer pricing specialist in the last few months to his team and add extra work across his existing team to deal with the additional filing burdens.

“We are required to provide more and more data, but we don’t even know what they are going to do with that,” said the tax director at a multinational media company. “The tax authorities are aggregating information that they can’t use.”

Many taxpayers are sceptical about the value of public reporting and whether the public will understand their filings when tax authorities already seem to have a hard time developing insights from the first set of CbCR disclosures.

“Everyone said we are going to get a wave of audits when we file the first CbCR and what do you see internationally, nothing has really happened yet,” said one group tax director at a pharmaceutical company.

There are ways to limit the room for misinterpretation among the public and the authorities. Data disclosures with detailed descriptions and visualisations can minimise the risk of reputational damage for companies.

Multinational companies are focusing on developing better data management strategies to structure and control the flow of information, especially at the inter-company level so department insights are consistent across the global entity.

Most heads of tax are either learning about data governance or reviewing their existing practices. Many tax heads are falling back on analytical tools provided by the Big 4 and other service providers, but some companies have taken the initiative to develop in-house tools.

The hope is that companies will be able to stay ahead of the curb, by identifying any anomalies that tax administrations might question. These methods might put businesses in a better position in this age of uncertainty.

Fear of change

The EU Parliament’s resolution on public CbCR comes after some countries pushed back against the public disclosure of corporate income tax information due to legal concerns.

EU jurisdictions, including Luxembourg, Ireland and Poland, have questioned the legal basis of public CbCR and would prefer to negotiate the filing requirements in the Council Working Party on Taxation, where unanimity between EU member-states is required instead of qualified majority voting.

However, this has not been the case in the past where the EU introduced CbC reporting for large financial institutions through majority voting. This has led some MEPS to question the validity of using legal uncertainty as an excuse.

"By blocking tax transparency of large companies, European governments are gambling with citizens' trust in the European Union,” said MEP Sven Giegold, financial and economic policy spokesperson of the Greens/EFA group.

One of the arguments against public disclosures is the risk of confidential, valuable information being revealed to competitors. Such arguments can work against taxpayers because avoiding disclosures have led stakeholders to conclude that the company has something to hide.

For example, the complexity of international tax has disadvantaged investors from forming a full picture on the long-term growth of companies. This has taken a toll on trust in company filings, according to one investment analyst at a UK-based asset management company.

Many companies are adding detailed tax disclosures as part of their annual reports to help manage perceptions and reduce the risks of tax transparency. Some tax heads always thought the EU would adopt public CbCR and think the next step will be to ensure consistency across member-states. This might mean more certainty and simplicity in the long-term.

While there have been no data leaks from CbCR so far, multinational companies still fear the damage that public disclosures could do to their reputations and their balance sheets. If companies fail to be consistent in their reporting because of poor data quality then they may face more tax authority audits and public backlash over time.

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