After a report by the Tax Justice Network (TJN) rekindled the debate on public CbCR, MNEs say they would be vulnerable to reputational damage caused by misinterpretation of their data if public CbCR were to come into effect. Data quality issues and questions around global standardisation leave tax directors dubious about the extent to which CbCR data accurately represents a company’s tax arrangements.
“CbCR data is typically derived from the financial statements and using the data for any tax analysis may be misguiding as the accounting profit is different from the taxable profit,” said Betty Fualefac, assistant tax director at international energy company Expro.
Tax directors have told ITR that CbCR data should not replace comprehensive analysis by revenue authorities. Questions around data quality would become even more of a concern if the data was to be made public and include the company name.
The OECD published anonymised corporate CbCR data in July 2020, containing details from 2016 submissions. The State of Tax Justice report, published by the TJN in November, used this information to push for public CbCR that would name the company behind the data.
The report calls for the G20 to “require the publication of individual multinationals' country-by-country reporting, so that corporate tax abusers and the jurisdictions that facilitate them can be identified and held to account”.
However, tax directors argue that CbCR reports should stay between revenue authorities and taxpayers to enable productive discussions and protect MNEs.
“These reports should be used by tax authorities to prompt questions under proper processes and where the taxpayers have a right of response to explain their position,” said an EMEA head of tax at an automobile company.
The risk of reputational damage
Some individual companies, including Vodafone, have voluntarily decided to publish their information in a move welcomed by tax campaigners. However, for the moment, the decision to publish data rests with companies. There is no consensus yet from an international body such as the OECD or G20 – and without this, individual countries will also find it difficult to introduce public CbCR.
The UK pursued the idea from 2016 but made a U-turn in April 2020, citing concerns over the accuracy and reliability of data. Seven months later, these concerns remain.
A UK government spokesperson for HM Treasury told ITR that “there are serious data quality issues and figures may be misleading. For example, there has been an inconsistency in the approach taken by multinational groups when reporting their profit before tax on the country-by-country report, with some including intragroup dividends receivable within that figure.”
Meanwhile, MNEs worry about inconsistencies in reporting between companies and jurisdictions. Tax directors argue that the rules for reporting should be tightened to avoid mismatches in the amount or the nature of data that companies provide. Fualefac pointed out that unless the data collected is standardised globally, comparisons cannot be carried out on a fair basis.
These worries apply to CbCR in any form, but they are particularly potent when it comes to public CbCR. Tax directors worry about damage to the company image due to incorrect conclusions being drawn from their data.
“My concern is misinterpretation of the CbCR data without reference to the facts and circumstances of the company or group involved, and potentially by non-tax specialists. Reputational damage is the key concern here,” said the EMEA head of tax.
Paul Tang, chair of the European Parliament sub-committee on tax matters, argued that companies risk greater reputational damage by keeping their data under wraps, as choosing not to publish implies that the company has something to hide. “Some MNEs still fail to understand that transparency is essential to restore the public trust that they also pay their fair share,” he said.
For MNEs, though, any public mistrust is directed at large corporates in general and represents a minor concern for individual companies. Publishing individual data introduces a much greater risk.
Benefits of public CbCR
All the same, some tax directors acknowledge that there could be benefits to public CbCR. The knowledge that data will be open them to public scrutiny could encourage MNEs to increase investment in data collection and analysis. This in turn could have internal benefits for the company.
“This will put MNEs in a more conscious mode. More care and time will be taken to ensure the data is accurate,” said Fualefac. “The public data can also help other MNEs compare results to that of their competitors,” she added.
Some suggest that MNEs’ worries about public CbCR are overblown. Tang said that objections from tax directors fail to take into account the evidence from companies like Vodafone that shows public CbCR is nothing to worry about. “The concerns… do not include the experience of corporates that have voluntarily adopted or are by law obliged to practice public country-by-country reporting,” he said.
Taxpayers believe that public CbCR will eventually be introduced. Any progress will likely require a multilateral solution because, as the UK’s U-turn demonstrated, countries are unwilling to go it alone. Nevertheless, the COVID-19 pandemic has intensified scrutiny on the tax affairs of MNEs and is likely to lead to tax hikes, more audits and calls for greater transparency measures. Public CbCR will recur as a talking point in discussions.
However, while some companies have struck out and published their data voluntarily, the majority have decided that the risk of public CbCR outweighs the reward. Taxpayers will fight this one all the way.
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