The purpose of this article is to inform readers about the proposed introduction of the obligation for transnational corporations (TNCs) operating in the European Union to publish country-by-country reporting (CBCR).
To understand the role of public CBCR, we briefly review the history of the development of the CBCR concept, analyze the results of public discussions that followed the publication of the EU draft directive on public CBCR, and summarize the viewpoints expressed by TNCs, representatives of civil society and officials on the published draft.
At the end of the article, some assumptions are made about the prospects for enactment of this draft legislation and the immediate obvious consequences of the implementation of its provisions.
Tags: CBCR, European Union, TNC, draft, country-by-country reporting
Практика публичных отчетов CBCR в ЕС как инструмент прозрачного налогообложения
Целью данной статьи является информирование читателей о предлагаемом введении обязательства для транснациональных корпораций (ТНК), действующих в Европейском Союзе, публиковать отчеты по странам (CBCR).
Чтобы понять роль публичных отчетов CBCR, мы кратко рассмотрим историю развития концепции CBCR, проанализируем результаты общественных обсуждений, последовавших за публикацией проекта директивы ЕС о публикации CBCR и сопоставим точки зрения, выраженные ТНК, представителями гражданского общества и авторами опубликованного законопроекта.
В конце статьи высказаны некоторые предположения о перспективах принятия этого законопроекта и предполагаемых последствиях реализации его положений.
Ключевые слова: CBCR, Европейский Союз, ТНК, законопроект, публичный отчет по странам.
- Increasing the role of public CBCR in tax transparency
In recent years, national governments and international organizations have focused their attention on tax evasion and avoidance by transnational corporations, given that TNCs are the largest taxpayers and their tax payments represent a significant source of budget revenues, especially within the budgets of developing countries with commodity-based economies.
As of the early 21st century, the number of TNCs in the world exceeds 80,000 with more than 850,000 subsidiaries. Their headquarters are located mostly in developed countries (50,200). More than half of the subsidiaries (495,000) are based in developing countries.
TNCs produce almost half of the world’s manufacturing products and more than two-thirds of foreign trade. They control approximately 80% of patents, licenses and R&Ds, high tech and know-how. TNCs dominate in certain world commodity markets, i.e. 90% of the global grain market, as well as the coffee, corn, timber, tobacco, jute and iron ore markets; 85% of the global copper and aluminum markets; 80% of the global tea market; 75% of the global crude oil market, as well as natural rubber and banana markets. American and foreign TNCs account for up to 50% of all US exports. In Britain, the comparative figure would be 80%, in Singapore – 90%. TNCs employ more than 70 million people who produce over a trillion dollars’ worth of goods and services annually.
Understanding the role of TNCs in global economy and sustainable development, the impact that TNCs can have on political and social processes in the world, many international organizations have actively developed various programs to fight tax evasion, including by improving tax transparency.
The concept of public country-by-country reporting is one of the ideas to date, which, when adopted on a global scale, will impede transborder tax base manipulations that are often practiced by different TNCs.
Country-by-country reporting is designed to enable tax authorities of a particular state to obtain information on how the tax burden imposed on a TNC is distributed across the countries where it operates, how its revenues and profits are generated in these countries, and the extent to which revenue and profit distribution corresponds to the distribution of the corporation’s tax burden, as part of preventing tax evasion.
Public CBCR is expected to contribute to data transparency, which will, in turn, enable interested parties to assess government tax policies in countries hosting TNCs, in particular, to identify corruption risks, shedding light on any special agreements and preferential measures existing between certain companies and governments of different countries. Consequently, on the one hand, representatives of civil society will be able to more effectively influence tax policy and tax administration practice, and on the other hand, TNCs, striving to maintain their reputation as bona fide taxpayers, will practice less aggressive tax planning schemes.
The idea of publishing CbC reports fully aligns with the principle of tax transparency, which is one of the bases for building a modern tax system in democratic states.
Historically, the term “corporate transparency” was initially applied in the regulation of corporate relations and securities markets. However, subsequently the term “transparency” also came to be used in tax regulation.
From a doctrinal point of view, tax transparency can be considered from three aspects:
- from the viewpoint of a taxpayer’s disclosure of information on its tax base, as well as assessed and paid taxes;
- from the viewpoint of how a taxpayer communicates information to all stakeholders interested in seeing that it complies with the requirements of tax legislation;
- from the viewpoint of how a tax authority informs the public about a taxpayer’s tax payments, and whether there are tax claims against the taxpayer.
To a large extent, tax transparency comes down to providing information on a taxpayer’s fulfillment of its tax obligations to the following groups of persons:
- non-governmental organizations,
- politically active persons,
- the media,
- tax authorities.
Persons belonging to these groups have an understandable interest in tax information.
- Shareholders, members and creditors are interested in this information as they want to be confident in earning a return on their investment and minimizing investor risks.
Customers, consumers, non-governmental organizations and politically active persons use information on tax payments to influence the authorities through direct and indirect democracy.
- Analysts and the media collect information on tax liabilities for further analysis and dissemination as part of their core activities.
- Finally, there is no need to comment on why tax authorities are interested in information about the taxpayer; it is quite obvious.
It is important to note that historically, the development and implementation of regulations aimed at improving tax transparency have been triggered by financial crises (1997-1998, 2008-2009), when all interested countries begin to experience a lack of budgetary funds, or in the wake of yet another media scandal associated with aggressive tax minimization schemes used by large TNCs or famous personalities and corporations, such as Lux Leaks, the Panama Papers, the Apple tax scandal, the Starbucks tax scandal, etc.
If we briefly analyze the history of the development of tax transparency, then we can say that this idea was formulated quite clearly in the 1998 OECD Report on Harmful Tax Competition.
Due to the stress caused by the 2009 economic crisis, G-20 leaders proclaimed that the era of banking secrecy was over, although much of it referred to tax secrecy, and not banking. To develop this idea, the OECD launched the Global Forum on Transparency and Exchange of Information for Tax Purposes.
In February 2013, the OECD published its BEPS action plan, which included requirements for tax transparency.
In the EU an important step in developing the idea of tax transparency was the Tax Transparency Package developed by the European Commission in March 2015. This document presented measures for the mutual exchange of tax rulings within the EU and raised the issue of revising the Corporate Code of Conduct as regards taxation matters.
It is noteworthy that this document highlighted the need for public disclosure of tax rulings. On the other hand, it was noted that disclosure of information would help combat aggressive tax planning through public control.
However, as noted in the document, this practice was found to be no more effective than the automatic exchange of tax information between tax authorities with the motivation that public information disclosure would raise the issue of protection of data and sensitive commercial information, and might also lead to the abuse of published information.
All this clearly demonstrates the main contradiction, which is used by opponents of public disclosure of information contained in CbC reports in their fight with its supporters. Namely, while recognizing the effectiveness of such a tool as public CBCR to combat tax evasion, opponents of its introduction regularly indicate that publicly available information on a TNC’s activities can be used to harm the disclosing company.
That is why, despite all the obvious advantages of public CBCR, including much smaller human and material resources required for its promotion, this type of tax control has both supporters and opponents.
The latter include not only TNCs themselves, but also those countries that recognize the need to combat tax evasion, but prefer to retain full control over their tax information, thereby remaining a key player among the other stakeholders.
- A journey into the history of public CBCR
Despite the fact that it is just recently that public information disclosure has attracted much attention, modern initiatives to introduce public CBCR are not attempts to create a completely new institution inherent exclusively to tax law.
Earlier, a similar attempt was made by the United Nations in Section C of the Code of Conduct on Transnational Corporations.
The elaboration of the United Nations Code of Conduct on Transnational Corporations was started in 1974 and was aimed at creating comprehensive, albeit not binding, rules for the conduct of TNCs in host countries.
In addition to economic, cultural, environmental and social obligations, the Code of Conduct included rules of conduct in the field of finance and taxes. As part of these rules, TNCs were asked to commit to publicly disclose financial and other information on their activities on a regular basis.
The draft Code envisaged that TNCs would provide complete, clear and true information about the company’s structure, policies, activities and ongoing operations, including financial and other conditions. The information should be disclosed periodically on an ongoing basis, in general, every six months, but not later than 12 months from the end of each financial period. In addition, corporations should provide access to financial information during the year. In particular, they should report the corporation’s income, the sources of income, capital investments, and R&D financing.
Other information included corporate structure, including information about related companies, the objectives of their business, shareholding percentage, as well as intercompany transactions, information about employees, and transfer pricing policies.
The extent, detail and frequency of the information provided should take into account the nature and size of the transnational corporation as a whole, the confidentiality requirements, and effects on the transnational corporation’s competitive position, as well as the cost involved in producing the information.
The information provided for the TNC was to be broken down by country or geographical area with regard to the activities of its main entities.
The information required by the Code was to be in addition, as necessary, to information required by national laws, regulations and administrative practices of the countries where multinational corporations operated.
The Code noted that transnational corporations should supply to the competent authorities in each country where they operate, upon request or on a regular basis, all information required for legislative and administrative purposes relating to the activities and policies of their entities in the country concerned.
TNCs were also asked to provide the competent authorities in the host countries with information held in other countries that they needed in order to obtain a true and fair view of the operations of the corresponding transnational corporation as a whole, to the extent that the requested information related to the activities of the entities in the countries requesting such information.
Thus, if the draft Code had been successfully finalized and adopted, public disclosure of information on the activities of TNCs would have been reflected in international documents much earlier than it is commonly believed today.
However, work on the TNC Code of Conduct reached a deadlock, and the relevant UN Commission ceased working at the drafting stage. It was clear that the reasons for this were that the draft Code of Conduct for TNCs was largely written in the interests of developing countries. Therefore, to some extent, it significantly affected and infringed the interests of the U.S. and other developed countries.
Apparently, there were other objective reasons that prevented this project from being completed; above all, the fact that the Code of Conduct under development was not a binding document of international law, and even if it was adopted, it could not effectively change the interaction between TNCs and their host countries. In addition, the idea of public CBCR would require the unification of requirements for financial reporting, which seemed an impossible task for the UN at that stage of development.
However, in this context, it is worth to mention that after more than 20 years, the U.S. was among the countries that pioneered public disclosure of tax related information.
In the U.S., legislators’ ideas for improving corporate transparency led to the adoption of the Dodd-Frank Act of July 21, 2010, which contained relevant provisions in Section 1504 on public disclosure of payments by resource extraction issuers. It should be noted that the goal of the American legislators was not to increase tax transparency, but to minimize the consequences of the 2008 financial crisis and prevent similar crises in the future. This regulatory act had a secondary effect on taxation, but the information that companies disclose can be seen and used by U.S. tax inspectors.
- Discussion of the public CBCR initiative in the EU
It is planned that public country-by-country reporting will be implemented in the EU through amendments to EU Accounting Directive 2013/34/EU.
It is proposed to supplement the Directive with Chapter 10a, which includes Articles 48a-48i establishing the obligation of large transnational companies to publish their country-by-country reporting on the corporation’s worldwide financial performance and taxation.
The relevant bill was discussed by the European Commission in the first semester of 2016, and was regularly examined by the Council of the European Union in 2016-2017; it is expected that the bill will be discussed by the European Parliament in May 2018.
The purpose of this directive is to increase corporate tax transparency, where public control can become an additional tool to help combat base erosion and profit shifting, “building on reputational effect and democratic debates”.
As for the list of disclosed information, it should relate to corporate income taxes and help demonstrate that the country, where such profits are actually generated, corresponds to the country of taxation.
In the opinion of many non-governmental organizations, if public CBCR were introduced:
- an analysis of changes in published country-by-country reports would make it possible to draw conclusions about the effectiveness of tax administration;
- open data on tax revenues would allow taxpayers to monitor each country’s financial activities;
- “public tax control” by civil society would increase the effectiveness of ordinary tax control by competent state authorities;
- disclosure of tax schemes would prevent aggressive tax planning from distorting market competition;
- conditions for the activities of transnational corporations and small- and medium-sized national businesses would be partially equalized, which would benefit both small- and medium-sized companies.
On the other hand, representatives of large taxpayers, who are responsible for public CBCR, as well as EU MPs lobbying their interests, have drawn attention to the fact that the introduction of public CBCR by the European Union could put major European companies at a disadvantage compared to their competitors from countries that have not implemented public CBCR. The obvious reason for such an unfavorable scenario might be that, by abandoning tax secrecy and obliging the largest taxpayers to publish so much commercially important information, the EU could place its own transnational companies under attack from foreign competitors, which have the right to keep their strategies secret.
Therefore, amendments were made to the draft law at the discussion stage, namely concerning the right of taxpayers to protect their commercially important information, by omitting, when publishing CbC reports, information that might harm the taxpayer. Such exceptions should be made with the consent of the competent tax authority, but, nevertheless, the possibility of certain exemptions when publishing information in public CbC reports was thus recognized by the EU. The corresponding amendment was adopted by the European Parliament on July 4, 2017.
As part of the discussion on the draft law, it is important to note the comment issued by the Economic and Social Committee on September 21, 2016, namely that the EUR 750 million filing threshold would not remain unchanged and should be subject to public review.
Otherwise, public CBCR processes would be less effective, since with the agreed EUR million filing threshold, 85-90% of TNCs would not fall under the Directive.
In order to somehow equalize European TNCs subject to this amendment and TNCs from other jurisdictions, the scope of public CBCR was expanded. Public CBCR obligations have been imposed not only on European TNCs, but also on other similar TNCs with subsidiaries or branches in Europe. Thus, EU TNCs and non-EU TNCs operating in the EU were placed in the same position in terms of disclosure obligations.
Public consultations on the potential for further transparency on corporate income tax are presented in Factual Summary conducted during the summer of 2015 and winter of 2016.
The following groups of people were involved in the consultations:
- private individuals;
- non-governmental organizations;
- industrial associations;
- trade unions;
- professional consultants
from Belgium, France, Germany, Great Britain, Italy, Finland, Spain, the Netherlands, Austria and the Czech Republic.
The survey involved both TNCs and small- and medium-sized businesses where the following answers were received from companies and industrial associations.
Approximately 34% of the companies are satisfied with the status quo prevailing at the time of the survey (second half of 2015) and do not want to see any changes in tax transparency.
- Approximately 45% of the companies believe that measures to increase tax transparency should be carried out at the EU level by implementing the BEPS Initiative. The remaining 55% believe that such changes should be carried out exclusively at the national level.
- Most firms and industrial associations agreed that it was preferable to resolve this issue within the OECD and not within the EU. The reason is that the range of OECD members is much wider than that of EU members; therefore, CbC reporting perimeter would include more companies, which would have a positive impact on competition.
- More than half of the companies disagreed with the statement that firms should pay most of their taxes in the jurisdiction where they receive the most profits.
- Companies expect an increase in their costs due to the need to prepare and publish a new type of reporting, but at the time of the survey they could not assess the amount.
- Companies unanimously expressed negative attitude toward publishing country-by-country reporting due to the following risks:
- risk of disclosing the company’s business strategy;
- opportunities for unfair competition to the detriment of European companies, especially U.S. firms;
- risk of reduced tax revenues in the EU;
- risk of a deterioration in relations between EU tax authorities and tax authorities of third countries;
- reputational risk for European companies due to incorrect interpretation of disclosed data.
- The vast majority of companies obviously do not want to disclose more data than required under the BEPS Plan.
- 75% of the companies are not interested in obtaining information about their competitors from publicly available CbC reports.
- Two-thirds of the companies and industrial associations do not believe that disclosure obligations should somehow depend on the size of the company.
- Only 30% of the companies agree that public disclosure of tax information must be a condition for access to the European Economic Area (EEA).
- The vast majority of companies agree that if the EU introduces more stringent disclosure rules than in other countries, this will create problems for EU companies.
- 81% of the companies assume that information disclosure may entail additional undesirable consequences for their business.
- 38% of the companies believe that the introduction of public CBCR will lead to a reduction in tax revenues in the EU, and only 10% of the companies anticipate an increase in such revenues.
- More than 60% of the companies do not want to disclose specifics related to their tax management.
With regard to preparation of the draft law on public CBCR, several large business lobbyists (Business Europe and AmCham) have expressed concern that public CBCR may harm investors by imposing additional compliance requirements, which would result in additional costs for taxpayer and force taxpayers to disclose confidential information.
Another large lobbying organization, Insurance Europe, expressed concern about the fact that public CBCR would not provide meaningful information to interested parties, since existing differences between accounting and tax rules would be ignored, and, as a result, non-professionals would not be able to use the published data.
It should be noted that, in the vast majority of cases, the opinion of non-governmental organizations and trade unions is diametrically opposed to the opinion of companies and industrial associations, that is, there is a significant split in public opinion on this issue in the EU.
Obviously, politicians, trade unions, non-governmental organizations and ordinary individuals have a strong interest in obtaining information about the taxation of TNCs.
On the one hand, it can be said that this interest does not go beyond the right to freely obtain and disseminate information, as well as the right to participate indirectly in the establishment of tax norms according to the principle of no taxation without representation.
On the other hand, to some extent, the skeptical position of the business community regarding the possibility that companies may lose their competitive advantages as a result of CBCR is shared by a number of national governments of EU Member States. Some media publications during the discussion on the public CBCR initiative even mentioned that this initiative was obstructed by EU member states.
The skeptical position of individual European states regarding publication of CbC reports was reflected in Decision No. 2016-741 DC of the French Constitutional Council regarding the disclosure of information, whereby the court ruled that the disclosure of information through CBCR was contrary to the French Constitution.
The decision was made under the following circumstances.
In October 2016, France adopted Decree No. 2016-1288, and in November 2017 it passed Act No. 830, which introduced CbC reporting obligations in France. However, a number of senators and deputies of the French parliament were of the opinion that these acts largely impeded business and distorted normal competition.
As a result of the sparked discussion, the French Constitutional Council ruled that these regulatory acts were inconsistent with the Constitution since, in the opinion of council members, the obligation of some business entities to publish economic and tax indicators of their activities in individual countries where such activities are conducted would allow other entrepreneurs operating in the same markets (i.e. competitors) to identify the main elements of their industrial and commercial strategies. Such an obligation contradicts the freedom of entrepreneurship and constitutes a violation that is clearly disproportionate to the goal pursued.
It should be noted that the French Constitutional Council is not the only body that doubted the compliance of public CBCR rules with the constitutional rights of citizens.
We will remind that similar rules exist in the United States in Section 1504 of the Dodd-Frank Act of 2010. In the United States, these rules are enforced by the Securities and Exchange Commission (SEC).
The U.S. Chamber of Commerce, the American Petroleum Institute and two other trade associations have attempted to challenge SEC’s actions in court for procedural errors, including by claiming that, in itself, Section 1504 of the said act violates free speech rights of oil companies, which contradicts the First Amendment of the American Constitution. In the end, the court found procedural violations in SEC activities, and SEC was forced to develop new by-laws on this subject.
The court did not examine the constitutionality of the provisions of Section 1504. However, the very attempt to challenge by-laws based on Section 1504 and their recognition by the court as unconstitutional, even on procedural grounds, shows that in the United States there are also many doubts as to how much obligations to publish a company’s country-by-country reports correspond to an individual’s basic constitutional rights.
- Examination of the public CBCR initiative on procedural aspects of bill enactment
It is important to note that the draft law is of certain interest both from a substantive and procedural point of view. It involves borderline issues affecting both taxation and financial reporting spheres.
According to the Lisbon Treaty on the Functioning of the European Union, decisions can be taken either unanimously or by a double qualified majority.
The double majority (or qualified majority) procedure is in place for most policy areas, including financial reporting regulations. In this field, a decision is officially adopted if a majority of the EU Member States have voted “yes”, and at the same time, the “yes” votes represent at least 65% of the European population.
A unanimous decision, that is, the agreement of all Member States, is required for policy areas of particular sensitivity or concern in the light of the national sovereignty of the Member States. This procedure applies to taxation, social security and social protection, the accession of new countries to the EU, foreign policy, common defense policy and operational police cooperation between EU countries.
Thus, the proposal amending the Accounting Directive contains taxing legislation issues, a certain ambiguity remains: should this bill be adopted unanimously, or is a qualified majority enough for approval?
When this procedural issue was examined by competent EU bodies, opinions were also divided. For example, the Legal Department of the EU Council expressed the opinion that a unanimous vote was required, while the Committee on Legal Affairs of the European Parliament supported the position that only a qualified majority should be required. This issue has not been resolved to date; ambiguity remains.
- The chances of implementing the idea of public CBCR assessment of possible consequences of introducing public CBCR
Apparently, in the fight for public CBCR as a tool of tax transparency political reasons largely dominate over economic reasons. Moreover, these measures are more a response to public demand that is not only related to demands for information disclosure, but to the public’s desire to see a more equitable distribution of revenues from the exploitation of global resources by transnational corporations, including a new important resource that is extremely efficient both economically and politically, namely data obtained and aggregated by the digital economy sector.
Nevertheless, that it is highly likely that amendments to EU Directive 2013/34/EU will be adopted by the European Parliament and will become part of the European legal system in the foreseeable future.
The reasons for this are as follows:
The amendments mentioned above do not stand alone. They are part of a package of measures to implement the BEPS Action Plan in European legislation and a package of other measures to combat aggressive tax planning by TNCs.
These measures are actively supported by the state apparatus, non-governmental organizations, and a significant number of individuals, whereas voices “against” these measures expressed by the TNCs themselves are not so explicit.
It is perfectly clear that aggressive tax planning in TNCs will not disappear completely. Enhanced tax transparency and additional tax reporting will complicate tax avoidance schemes used by TNCs, and will entail higher costs for the construction of such schemes.
If the proposed amendments are adopted, some small positive effect can be expected, especially if we consider the effect of these amendments in conjunction with other actions from the BEPS Plan. Obviously, TNCs will not be able to transfer corporate profits to low-tax havens and offshore jurisdictions as easily as before.
Although, publishing CbC of European TNCs reports arguably may give certain advantages to TNCs from the U.S., China and other non-European countries if such competitors try to abuse tax information published by European TNCs. However, publication of CbC reports can bring certain benefits to TNCs, subject to proper level of corporate governance. For example, by declaring fairly substantial tax payments to the budget of a particular state, certain TNCs can thus position themselves as socially responsible and conscientious taxpayers, and so demand some reciprocal steps from the state, such as priority in granting licenses and permits, facilitated conditions for access to limited resources at the disposal of the state, advantages when participating in public procurement, etc.
By increasing tax payments reflected in published CbC reports, TNCs may, to some extent, justify themselves in the eyes of the state and civil society, for example, when they are accused of environmental offenses. Finally, shareholders and creditors can use disclosed tax strategies of TNCs to make certain economic decisions.
However, one more issue needed to be discussed further — increasing transparency in tax administration as described above automatically leads to the fact that the amount of information protected by tax secrecy is significantly reduced. While enhancing tax transparency outreach, more attention should be paid to tax secrecy, which, despite significant changes in legislation, still retains its value for the taxpayer. This means that further work should adhere to the principle “the rights of a taxpayer… and the obligations of a taxpayer are to be taken together, with each given appropriate weight such that one does not override the other.”
 United Nations Code of Conduct on Transnational Corporations // http://myanmar-law-library.org/law-library/international-law/investment-agreements/international-investment-agreements/investment-related-instruments/draft-united-nations-code-of-conduct-on-transnational-corporations.html
 Directive 2013/34/EU of the European Parliament and of the Council of 26 June 2013 on the annual financial statements, consolidated financial statements and related reports of certain types of undertakings, amending Directive 2006/43/EC of the European Parliament and of the Council and repealing Council Directives 78/660/EEC and 83/349/EEC Text with EEA relevance
 Financial Transparency Coalition, (2016), “Why Public Country-by-Country Reporting for Large Multinationals is a Must – Questions and Answers”, available at: https://financialtransparency.org/wp-content/uploads/2016/02/Joint_Civil_Society_QA_pCBCR.pdf
 Factual Summary of the responses to the public consultation on assessing the potential for further transparency on corporate income taxes. Brussels, 20th January 2016. \\ http://ec.europa.eu/finance/consultations/2015/further-corporate-tax-transparency/docs/summary-of-responses_en.pdf
 Why Public Country-by-Country Reporting for Large Multinationals is a Must. Questions and Answers \\ https://financialtransparency.org/wp-content/uploads/2016/02/Joint_Civil_Society_QA_pCBCR.pdf
 The Model Taxpayer Charter, Article 1(5), https://ec.europa.eu/taxation_customs/sites/taxation/files/docs/body/cfe.pdf
Information about the author:
N.N. Emelianova, Dr of L.,professor RUDN, Department of International Law.
Информация об авторе:
Н.Н.Емельянова, д.ю.н.,профессор РУДН, Кафедра международного права.