Finding a Platform for Total Tax Reporting
In 2023 expect several developments in the increasingly fast-moving world of public country-by-country tax reporting and transparency.
In the European Union, member states have about six months to transpose the bloc’s public CbC directive into their national legislation by the June 22 deadline. It will become clearer over the coming months how various member states will adapt public CbC reporting to their national circumstances and how they will choose to interpret a so-called safeguard clause in which member states can allow companies to defer reporting on commercially sensitive information for up to five years. This public reporting will apply to EU and non-EU-based companies with at least €750 million in global turnover over a two-year period and will require them to disclose their income tax expenses and accruals, revenue from related and unrelated parties, pretax profits, and employee headcount for their affiliated groups. Operations would be broken down by EU member state and aggregated for non-EU operations. Disaggregated disclosures would also be required for activities in jurisdictions placed on the EU’s list of noncooperative jurisdictions.
In introducing public CbC reporting, the EU sees itself as a global leader in financial and corporate transparency. The underlying rationale is that increased transparency will benefit all stakeholders because it will give employees and investors better insight into business risks and will help companies access financing options more easily by giving them a clearer risk profile. The EU believes this transparency will give the public greater insight into the opaque world of corporate income tax.
“The public should be able to scrutinise all the activities of a group of undertakings if the group has certain types of entities established within the Union,” according to the directive.
Meanwhile, Australia is seriously considering public CbC reporting. In October 2022 the government announced a proposal that would require large multinationals to publicly release their CbC tax information. That proposal would apply to significant global entities — those with at least AUD 1 billion in global revenue. Listed and unlisted Australian public companies would need to publicly disclose their number of subsidiaries along with their tax domiciles. Also, tenderers for Australian government contracts exceeding AUD 200,000 would be required to disclose their country of tax domicile. If approved, the Australian Taxation Office would compile and release the information.
In the United States, SEC Chair Gary Gensler has testified that he supports disaggregated tax reporting for public companies. And in the background are voluntary disclosure frameworks published by organizations like the Global Reporting Initiative, the B Team, the Extractive Industries Transparency Initiative, and the World Economic Forum.
But the EU’s premise — that the public should be able to scrutinize all corporate group activities — raises questions about how that corporate information should be transmitted or contextualized for the public. In the case of the EU’s public CbC directive, reporting companies are encouraged to share additional information contextualizing their public CbC reporting data, but it is not mandatory, nor has the EU suggested a framework on how companies can do so.
Total Tax Contribution Reporting
Contextualized reporting is an issue that the European Business Tax Forum (EBTF) is tracking for several reasons. The European Commission has suggested that large EU companies should not only publicly report CbC information but also publish their effective corporate income tax rates in light of the OECD’s pillar 2 minimum corporate tax, although the commission has not issued a concrete proposal. Meanwhile, EU companies already make financial statement disclosures, which include tax information. In an April 2022 study, “Tax Transparency & Public Country-by-Country Reporting,” the EBTF noted that companies with a European presence could be subject to those three disclosure requirements — public CbC reporting and the disclosure of their effective corporate income tax rates, in addition to the existing requirement that they disclose their financial statements — with little guidance on how to harmonize or contextualize them. The problem is that raw CbC corporate income tax data simply don’t provide a holistic picture, according to the group. The EBTF commissioned PwC to study OECD CbC filings and additional tax data from 20 multinationals. PwC found that for every €1 of corporate income tax that the 20 companies paid on a cash basis, they bore an additional €0.95 of other business taxes and handled an additional €4.07 in other taxes collected globally. However, the study notes that the last two figures are not reported in OECD CbC template filings, although they present important aspects of a company’s tax picture. According to the EBTF, companies are better served by reporting their total tax contribution as opposed to pure public CbC reporting.
PwC also favors total tax contribution reporting, and it has a two-part framework for companies to use. The first part addresses taxes borne by a company, and the second part addresses taxes collected by a company on behalf of the government.
According to PwC, “taxes borne” by a company comprise five different bases: profit, people, product, property, and planet (environmental) taxes. Profit taxes include corporate income taxes and withholding taxes on payments to third parties. People's taxes include income tax, social welfare taxes, and taxes related to employment. Product taxes include indirect taxes on production, consumption, and sale of goods and services. Property taxes include taxes on the ownership, sale, transfer, or occupation of Property.
According to the firm, “taxes collected” by a company include payments that aren’t traditionally classified as a pure tax, such as license fees.
However, collecting this information isn’t always a linear process because the data may be held or controlled by different stakeholders across a business. Although there are tools that help companies collect data for the nonpublic CbC reports they send to tax authorities under OECD base erosion and profit-shifting action 13, companies are innovating to complete total tax contribution reports or add context to public CbC Reports.
Reporting Solutions
Companies such as Dutch insurance and asset management company NN Group are deploying their own solutions. In its 2020 total tax contribution report, NN Group outlined how its tax team has developed tools to keep track of its tax positions. First, in 2018 the company implemented software enabling fully automated reporting of its tax positions during quarterly financial closing cycles. In 2020 the company collaborated with its IT department to create a management information system that the company claims enables better tax data analysis by allowing the tax department to quickly access critical, relevant data during quarterly closing cycles. The company also started work on an asset platform for accounting and reporting purposes, which includes the automatic generation of tax Data.
Meanwhile, some service providers are offering automation solutions, including Dutch company TaxVibes, which has tools to automate and integrate CbC reporting into a company’s enterprise performance management software. The company says it bridges the gap between tax, finance, and IT.
PwC has a tax management maturity model in which the firm reviews tax management within a client’s business and helps design a tax control framework. That review looks at six main components. The first is a company’s business and tax environment, including its strategy, organization, soft controls, and levels of tax awareness. The second is a company’s business operations, including status, control, and documentation of tax-influencing business processes. The third is a company’s tax operations, such as whether the company has processes and controls to ensure that it is meeting its tax compliance and reporting requirements. The fourth is a company’s tax risk management, including its ability to identify tax risks, implement controls to mitigate tax risks, and communicate with stakeholders. The fifth is a review of a company’s monitoring and testing infrastructure. The final component is a review of a company’s tax assurance system.
Excel spreadsheets — a mainstay of tax departments — are another option for tracking data, but they have a potential problem, according to Stevi Frooninckx, chief tax officer and co-founder of tax governance platform Loctax. Frooninckx told Tax Notes that spreadsheets can become like single-use data: used for a project, saved in a file, and potentially lost. It’s an issue that endures constant troubleshooting; all the Big Four accounting firms offer solutions and white papers to help tax departments manage this spreadsheet risk and improve their tax risk Management.
Frooninckx and his colleagues — who have a mix of Big Four and in-house experience — founded Loctax so tax departments can centralize all their tax work and obligations on one platform. This should better enable them to respond to tax transparency and environmental, social, and governance-related demands and communicate with context, he said. According to Frooninckx, users can organize all their tax processes and work to be completed via workflows or specific applications. For example, some applications manage controversy, project work, corporate tax compliance, and indirect tax. Once users organize their work in the Loctax platform, they can connect with stakeholders through the platform, set out tasks, and flag deadlines, among other Functions.
“What’s important is that from all this work, we capture key data, key documents, key performance indicators, there is a full audit trail, and this gets saved in a structured repository of essential data. From that repository, the data is available for future use, and with the data, users have control. Dashboarding becomes possible. Reporting becomes possible. Users can slice and dice the data set in tables, and a tax control framework becomes possible,” Frooninckx told Tax Notes.
One problem Frooninckx sees with the current state of corporate tax governance is that tax work can sometimes be siloed among different stakeholders, meaning there is little global visibility over a company’s entire tax work and tax function. Public CbC reporting could exacerbate these issues, particularly if reporting companies want to add context to their reports but are not organizationally equipped to do so. According to Frooninckx, Loctax is designed to support total tax contribution reporting, which he pointed out will help its EU-based clients collect an accumulated pool of data to contextualize their upcoming EU public CbC reports.
A Changing Reality?
Meanwhile, the reality on the ground is that companies — in the absence of legally mandated public reporting — are slow to adopt voluntary tax reporting, according to a recent report from KPMG Meijburg & Co.
The firm performed a benchmark study on tax transparency in Belgium, the Netherlands, and Luxembourg and examined how nearly 90 companies have responded to the Global Reporting Initiative’s voluntary tax reporting standard, GRI 207, which went live in 2021.
The GRI 207 tax standard contains four parts. The first part, disclosure 207-1, asks for the organization’s approach to tax, which includes its approach to regulatory compliance and how its tax strategy ties into its overall business and sustainable development strategies.
The second, disclosure 207-2, seeks information about the organization’s tax governance, control, and risk management. This includes its approach to identifying, monitoring, and managing tax risks and an explanation of how its approach to tax is embedded within the Organization.
The next disclosure, 207-3, concerns stakeholder engagement and management of tax concerns and asks organizations to describe their approaches to public tax policy advocacy, strategies for engaging with tax authorities, and procedures for addressing feedback.
Lastly, disclosure 207-4 concerns CbC reporting and is the meat of the tax standard. Organizations must reveal all jurisdictions in which they are tax resident and share specific pieces of information for each jurisdiction, Including:
- number of employees;
- corporate income tax paid on a cash basis;
- corporate income tax accrued on a profit/
- loss basis;
- revenues from intragroup transactions
- involving other jurisdictions; and
- revenue from third-party sales.
KPMG found that about three-quarters of the companies it studied declared one of three things: that they use the GRI sustainability reporting standards for their overall corporate sustainability reporting; that they use GRI 207 as a guideline for their tax reporting but do not strictly follow it; or that they would use GRI 207 moving forward. Although many of the companies use the GRI frameworks in some capacity, few are specifically using GRI 207 to report, according to KPMG. This might suggest that the companies fail to see tax as a material reporting topic, but the report contends that some of the companies may not be ready to fully meet GRI 207’s disclosure requirements, considering that several do publish their tax Policies.
The report found that a “relatively low number” of the Belgian companies it studied publicly report their tax affairs. Meanwhile, in the Netherlands, where companies have adopted the broader GRI framework more quickly than in other countries, companies are more hesitant about public tax reporting. According to the study, they largely haven’t identified tax as a material reporting topic or are not addressing quantitative tax transparency. In Luxembourg, companies that do release tax information typically do so on a regional or global basis rather than on a CbC basis.
That said, the report acknowledges the technology and cultural challenges that large multinationals face in collecting CbC information. Companies are rightfully hesitant to divulge potentially sensitive information and may not have the proper technology to thoroughly collect all data, including data that can provide much needed context. But the reality is that public CbC reporting is here, and companies must adapt in the face of ongoing developments and decide the best tech or governance option to comply with these increasingly public disclosures.
This article was first published on TaxNotes.