The recent implementation of the EU's Public Country-by-Country Reporting (EU Public CbCR) directive marks a significant shift in how businesses must report and disclose their group's financial data. How can companies adapt to these changes, and what risks must they mitigate to maintain compliance and protect their reputation from public scrutiny?

This article was written by Shaun Britz and Vera Zhuravleva. Shaun ([email protected]) and Vera ([email protected]) are part of RSM International Tax Services with a focus on transfer pricing.

Under the EU Public CbCR directive, both EU-based and non-EU headquartered international companies with a total consolidated revenue exceeding €750 million in each of the last two consecutive financial years are required to publicly disclose specific financial and tax information. This requirement applies if these companies have substantial activities within the EU, through either subsidiaries or branches that meet certain size criteria based on assets, turnover, or employee numbers. 

Companies must file reports within 12 months of the fiscal year end for years starting after 22 June 2024 and kept them publicly accessible on at least one official EU public registry and/or on the company’s website (depending on the local regulations) for a minimum of five years.  

Inside EU Public CbCR: What Companies Must Report

Companies are required to compile detailed reports that disclose several key metrics, providing a transparent view of their operations across different jurisdictions. The core data to be reported includes the nature of the business activities, total revenue, profits before tax, taxes both accrued and paid, accumulated earnings, and the number of employees for each EU jurisdiction. This format aligns closely with the existing BEPS Action 13 CbCR disclosures, yet it emphasizes a more granular breakdown of data, aggregating it on an entity basis for EU companies and on a country basis for non-EU entities.

The disclosure aims to offer a comprehensive snapshot of where international companies generate value and pay taxes. By providing such details, stakeholders can better understand the financial footprint of a company in each jurisdiction where it operates.  As the data will be stored for at least five years, they can easier get insights into different periods, identify year-on-year changes and see if it is in line with other publicly available information (information on the website, press releases, social media etc.).

Common Misinterpretations and Their Implications

The primary goal of EU Public CbCR is greater transparency; however, the potential for this data to be misinterpreted is high. For example, stakeholders without in-depth knowledge of international tax laws might incorrectly interpret high profits in low-tax jurisdictions as aggressive tax planning rather than legitimate business activity. Variations in effective tax rates across countries could also be misconstrued as signs of inequality or unethical practices, instead of reflecting differences in national tax policies and incentives. 

Such misinterpretations pose significant risks, potentially damaging reputations and leading to public and political backlash. This could increase regulatory scrutiny or prompt demands for stricter tax laws, impacting the company's financial standing and investor perceptions.

Strategic Approaches to Data Disclosure

Given the potential repercussions of misinterpretation, companies would need to strategically plan how they disclose data. This involves not only ensuring compliance with reporting requirements but also engaging in proactive communication with the stakeholders and the public. Companies may need to supplement their EU Public CbCR with explanatory notes or additional context to clarify why profits and taxes are distributed in their reported manner, especially in complex tax scenarios. Effective communication strategies could involve investor briefings, press releases, and dedicated sections in annual reports to explain the nuances of tax data reported. The time to assess the CbCR and prepare such strategy is now. If financial results in certain countries are not easily explainable from a tax perspective (i.e. there is no reasonable story behind the numbers), company will still have time to align the intercompany behavior with the arm's length principle, before the numbers go public.  

Forward Thinking

As we approach the implementation of the EU's Public CbCR directive, international companies must not only prepare to meet the technical requirements but also strategize their approach to managing public perceptions and regulatory expectations. The steps companies take today will not only ensure compliance but also shape their future in an increasingly transparent tax environment. How will your company leverage these changes to enhance its transparency and trust with stakeholders? 
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