The EU’s country-by-country reporting rules in short
Following an agreement by G20 countries, companies exceeding 750 million euros (795 million USD) in annual revenue are currently obliged to report their country-by-country operations to tax administrations. Now, the EU has adopted rules to make this information public for operations in the region.
Most large multinationals will likely fall in the scope of these rules, based on these conditions:
1. the company’s consolidated global net turnover exceeds 750 million euros a year;
2. the company has headquarters or a subsidiary in the EU;
3. if the company’s HQ is outside of Europe, the subsidiary meets two of these three criteria:
a. balance sheet total exceeds 4 million euros,
b. net turnover exceeds 8 million euros,
c. has more than 50 employees.
In short, in-scope companies – whether private or public – will have to publicly disclose the following information: revenue; profits; taxes, accrued and paid; number of employees; and value of assets. This information, based on consolidated accounts, will be made public for each of the EU countries where a company operates and will be aggregated for non-EU countries into one line, except for operations in listed tax havens, which will have to be disclosed separately. The specific mechanisms for reporting will differ from country to country within the EU and will only be disclosed in national legislation in the coming months. They may include reporting within existing annual and corporate reports or require a standalone report.
The report will have to be published on a company’s website and be freely accessible. The reporting requirements will become mandatory for accounting periods beginning on or after June 22, 2024, with the first reports being published from June 2025. As the legal application date is fast approaching, companies must ensure they are ready for CbCR disclosure in the next reporting cycle.
The Australian and United States CbCR proposals
In the context of its October 2022 budget, the Australian government announced a plan to introduce public CbCR for MNEs operating in the country for income years commencing July 1, 2023.
While the proposal initially went far beyond EU CbCR rules, the Australian government recently released a revised draft legislation that reduces its scope and defers its introduction by a year. With the updated proposal, CbCR would only apply to Australia and an initial list of 41 specified jurisdictions (including Hong Kong, Singapore and Switzerland).
In the United States, following investor concerns that existing income tax disclosures do not provide sufficient information, the FASB issued an Accounting Standards Update in December 2023 to strengthen the transparency of income tax disclosures. Under this new framework, all companies subject to income tax will have to disclose, for each jurisdiction where they pay income tax, the amount of income taxes paid and the rate reconciliation. Changes will be effective for fiscal years after December 15, 2024, for public companies and after December 14, 2025, for private ones.
What it means for companies
NGOs and tax-justice campaigners, as well as journalists and financial analysts, advocated for this public country-by-country reporting. The first EU reports published in 2025 will likely be closely scrutinized and elicit ample commentary, and the information disclosed by the reports will be subject to interpretation and data analysis showing aspects such as profitability per country, productivity per employee or proportionality of tax on revenue. These ratios will provide analysts and investors with detailed financial indicators and tax activists with concrete figures for their “name and shame” campaigns. In addition, and because of a current lack of a uniform format required by the legislation, companies run the risk of presenting their data in a complex and hard-to-grasp manner that leaves room for misunderstandings and false interpretations. A report that is not accompanied by explanations and a clear presentation leaves companies at risk of losing control of their narrative.
Public country-by-country reporting is therefore likely to affect companies in different ways – from increased reputational risk to broader adjustments in companies’ strategies, as when faced with an activist investor who is questioning a company’s tax story.
For private companies, public CbCR will disclose detailed financial information that is usually not publicly available. This will likely trigger massive interest from investors and competitors that goes far beyond tax information.
Reputational risk
Tax compliance is increasingly scrutinized by tax administrations. However, public expectations go beyond mere compliance, and companies need to reflect on how their tax stories, as revealed by public reporting, can help them build - or at the very least not damage - public, employee and stakeholder trust. Tax policy is increasingly understood as a way of tackling inequality, reducing income gaps and ensuring better-distributed corporate wealth. Public awareness of the issue has put tax justice firmly on the agenda, providing trade unions and NGOs an impetus to push for heightened transparency and action. When this is not done adequately, corporations run great risk of major reputational damage, both internally and externally, and additional costs.
Effective tax positioning does not stop with reporting and goes well beyond compliance. It requires continued communications; transparent, data-driven reporting; and meaningful engagement with key stakeholders, including trade unions and NGOs. This is particularly relevant in Europe, where the EU has a solid tax-transparency framework that seeks to fight tax fraud, modernize value-added tax and re-level the playing field, openly tackling unfair tax competition beyond European borders. Transparency expectations are not limited to Europe but have been embedded in accounting standards with the International Ethics Standards Board for Accountants’ (IESBA) latest revision of the code of ethics for professional accountants addressing tax planning and related services. The latest version of the IESBA document provides “an ethical framework in the public interest to guide professional accountants in making judgments and decisions when providing tax planning or related services.”
Additional consequences for business
Impact on finances and investment performance
Tax transparency is a key issue for environmental, social and governance (ESG) ratings agencies, and companies are evaluated on their corporate tax gap and revenue reporting transparency, among other things. Tax controversies may result in ESG rating downgrades linked to the risk of regulatory action and public scrutiny. Rating downgrades may lead to exclusion from ESG indices and passive funds, with impacts on the financial performance and liquidity of securities. Companies may also find that they come under shareholder pressure regarding tax disclosures, with several examples in recent years of annual general meeting resolutions proposed by NGOs with the support of several European institutional
investors.
ESG controversies, in addition, can lead to market capitalization losses, along with increases in funding costs. ESG funds, a growing segment of the investment management industry, are likely to cut ties with controversial stocks.
Impact on executive remuneration
According to a recent Deloitte study, 42 of the top 100 European companies include an ESG metric in the executive remuneration frameworks. Almost half of executive remuneration plans in the Nordics include an ESG criterion – and this phenomenon could expand to other EU countries. As tax information is increasingly considered part of the “G” in ESG, the new rules and increased transparency will inevitably raise both investor and employee questions around the proportionality of such remuneration in light of income tax paid.
Impact on competition
While reputational risks associated with greater tax transparency might constitute the most visible threat to corporations, competition issues should also be seriously considered. Through public EU CbCR, competitors will not only gain specific information on a company’s operations inside the European Union, but also could manage to deduce crucial insights on its operations in other jurisdictions.
For example, by cross-referencing corporate reports and public CbCR data, it could be possible to determine that the profitability of a pharmaceutical company with operations spread across different sites relies on a single facility.
Even if EU member states allow for specific items of information to be omitted from public CbCR reports when their disclosure would be seriously prejudicial to the commercial position of a company, those omissions are only temporary, and might not always be granted. In addition, the mere fact that information is omitted from a report could lead to further questioning by competitors or other stakeholders. As a result, corporations will have to strengthen their existing narratives to face potential threats to their operations or their business models.
Impact on employees
Companies may also see employees taking an interest in the public reporting. For example, in France, there is a legal mechanism that obliges employers to share part of the company’s profits with employees.
The profitability ratios may fuel disputes on the share employees get. Similar rules exist in other European countries.
Download a copy of this report here.
