Will Public Disclosure of Country-by-Country Reporting Data Become Mandatory?

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By David Ernick, Esq.

PricewaterhouseCoopers LLP, Washington, DC

The OECD project on Base Erosion and Profit Shifting (BEPS) promises to lead to the most significant changes to the taxation of international business in a generation. One of those changes may be an unprecedented level of public disclosure of certain tax data to be reported on a country-by-country basis. This commentary explores how a seemingly simple request from the G8 for confidential reporting to tax authorities of a country-by-country breakdown of profits and taxes paid by multinational enterprises (MNEs) may be evolving into mandatory public disclosure of those data points and many more.

In addition to fundamental tax law changes to substantive tax rules to address BEPS concerns, the BEPS Action Plan promised greater "transparency" to counter perceived problems with existing rules.1 With respect to transfer pricing, the goal of increased transparency has resulted in a new "three-tier" approach to transfer pricing documentation, consisting of a local file, master file, and country-by-country (CbC) reporting.2 One of the goals as it relates to the new documentation requirements is to improve the effectiveness of transfer pricing risk assessments and audits conducted by tax authorities.3

The OECD's work to develop a CbC reporting template is responsive to a request from the June 2013 G8 Lough Erne Leaders Communique: Comprehensive and relevant information on the financial position of multinational enterprises aids all tax administrations effectively to identify and assess tax risks.  The information would be of greatest use to tax authorities, including those of developing countries, if it were presented in a standardised format focusing on high level information on the global allocation of profits andtaxes paid. We call on the OECD to develop a common template for country-by-country reporting to tax authorities by major multinational enterprises, taking account of concerns regarding non-cooperative jurisdictions.4 (Emphasis added.)

It is important to note that the G8 request was thus for "high level information" in order to conduct a tax risk assessment (there was no specific connection to a transfer pricing risk assessment). Public disclosure of this information was not contemplated; it was designed for use solely by tax authorities. And the data points to enable tax authorities to conduct this general tax risk assessment were limited to two items – profits and taxes paid.

The OECD initially responded to this request shortly thereafter in Action 13 of the July 2013 BEPS Action Plan, which described the goal of the OECD to:Develop rules regarding transfer pricing documentation to enhance transparency for tax administration, taking into consideration the compliance costs for business. The rules to be developed will include a requirement that MNE's [sic] provide all relevant governments with needed information on their global allocation of the income, economic activity and taxes paid among countries according to a common template.5

It soon became apparent, however, that the OECD interpreted its mandate from the G8 as a floor, and not a ceiling, as to what it could provide to improve transparency. The original draft of the CbC template was not limited to profits earned and taxes paid, but had 18 columns for different data points required to be reported on an entity-by-entity basis.6 The final version of the CbC template was narrowed somewhat, but still requires reporting of eight general data points on a country-by-country basis7 – significantly more than what the G8 requested. And the purpose of CbC reporting was somehow expanded from being useful in assessing tax risk in general to providing "useful information for transfer pricing risk assessments and audits,"8 although no explanation was ever offered as to how each data item sought by the template was relevant and should be used for those purposes.

One of the most important questions regarding how the OECD carries out the G8's mandate with respect to CbC reporting, however, will be with respect to the confidentiality of the data reported in the CbC template. The G8 mandate was that the data be reported to tax authorities, and many of the public comments received by the OECD from the business community stressed the importance of maintaining confidentiality. Public disclosure of CbC reporting data runs the risk of disclosing commercially sensitive information (such as revenues, profitability, number of employees, and value of tangible assets in each country where an MNE operates) to competitors, and also risks that the information could be taken out of context or used inappropriately.9 For that reason, several commentators requested that the CbC template be filed only with tax authorities and exchanged with other countries solely by Competent Authorities through exchange of information provisions (under tax treaties, tax information exchange agreements (TIEAs), or multilateral conventions) with strong confidentiality protections.

The OECD was receptive to those comments, and ultimately provided recommendations that tax administrations take "all reasonable steps" to ensure that confidential and other commercially sensitive information provided through CbC reporting is not publicly disclosed.10 Those recommendations were further supported in a February 6, 2015 implementation package for transfer pricing documentation and CbC reporting (CbC Implementation Package)11 which announced a framework (agreed to by all countries participating in the OECD/G20 BEPS Project) for government-to-government mechanisms to exchange CbC reports. It recommended that jurisdictions have enforceable legal protections with respect to confidentiality of the reported information, consistent with similar provisions in tax treaties, TIEAs, the Multilateral Convention on Mutual Administrative Assistance in Tax Matters, or the Global Forum on Transparency and Exchange of Information for Tax Purposes.

So although the purpose of CbC reporting and the data required to achieve that purpose had greatly expanded from what the G8 had requested, it seemed as though at least the idea that this type of reporting would only be provided to tax authorities, and not publicly disclosed, would be preserved. In an attempt to allay taxpayer fears that the procedures set forth in the CbC Implementation Package will not be sufficient to ensure that data from CbC reporting will not be leaked to the press and publicly disclosed, the U.S. Treasury Department has stated that suspension of information sharing by the United States would result should such a breach occur.12

For U.S. companies, the assurances regarding confidentiality of data from CbC reporting are critical. The concerns expressed recently regarding the potential for public disclosure in a similar CbC reporting regime are instructive. Section 1504 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) included provisions which require SEC-registered extractive industry companies to report all "payments" made to U.S. Federal and foreign governments.13 "Payments" is defined to include taxes on income, profit, or production; royalties and fees; production entitlements; bonuses; dividends; and payments for infrastructure improvements.

Regulations written by the Securities and Exchange Commission which were designed to implement this CbC reporting regime eventually became the subject of litigation regarding whether the Dodd-Frank Act required public disclosure of such information. Complaints regarding the regulations centered on both the costs of complying and the potential for competitive injury likely to result from the provision of commercially sensitive information to other market participants.14 The public disclosure requirement was criticized as putting U.S. extractive companies at a competitive disadvantage because of the forced disclosure of cost structures and profitability figures, with the potential for billions of dollars in business lost to competitors (including foreign state-owned enterprises) who would take advantage of this information in future negotiations.15 Those same concerns are implicated by the OECD CbC reporting requirements, making confidentiality of such reporting imperative.

Yet there are reasons to question the strength of the commitment by OECD/G20 countries to confidentiality of CbC reporting data. Little more than a month after the release of the OECD/G20 implementation package detailing proposed confidentiality protections, the European Commission (EC) released a "tax transparency package" containing several legislative proposals.16 The most widely publicized part of that package was a proposal to amend a 2011 Directive in order to provide for mandatory automatic exchange of information on cross-border tax rulings and "advance pricing arrangements."17

However, the transparency package also indicated that the EC will do work to assess whether public reporting of certain CbC data should be mandated.18 The EC attempts to justify the proposal by stating that it would create a "level-playing [sic] field" among European Union (EU) companies, in that public disclosure of certain CbC data is already required in the EU for banks (under the Capital Requirement Directive IV (CRD IV)) and large extractive and logging industries (under the Accounting Directive).19 The goal of the proposal is to "place companies under closer public scrutiny and create more awareness of their tax practices," and to "deter aggressive tax planning."20

The timing of the proposal from the EC is troubling, in that it follows so soon after the OECD made public assurances in the CbC Implementation Package that data from CbC reporting would not be publicly disclosed. The fact that several countries21 would make a commitment to confidentiality in their role as members of the OECD yet shortly thereafter in their role as members of the EU agree to consider mandatory public disclosure of data from CbC reporting seems to undercut the OECD's assurances regarding confidentiality. Also, it should be noted that the fact that this proposal comes from the EC does not necessarily mean that it will only apply to EU-headquartered MNEs and not have extra-territorial application to U.S. MNEs.22

Moreover, the EU is not the only source of proposals for mandatory public disclosure of data from CbC reporting. As part of its Third International Conference on Financing for Development on July 13-16, 2015, the United Nations (UN) also will be considering public disclosure of such information. Few details are available at this stage, but the so-called "Zero Draft" of the "Outcome Document" of the conference indicates that public CbC reporting is being considered in order to increase revenues and decrease tax evasion.23 Furthermore, in addition to actions by multilateral organizations like the OECD, EU, and UN, individual countries may take unilateral actions to require public disclosure of data from CbC reporting. Australia, for example, is reported to be considering just such a proposal.24 It seems likely that pressure will continue to build for public disclosure of data from CbC reporting.25

Consequently, the outcome of the OECD's work on country-by-country reporting is likely to be far different, in several respects, from the G8's initial modest request for a confidential country-by-country breakdown to tax authorities of profits and taxes paid. There will be a much broader scope of information required to be reported, which will be used for transfer pricing risk assessment purposes, not simply for general "tax risk" assessment purposes. Although the BEPS Action Plan from July 2013 stated that "transfer pricing documentation requirements should be less burdensome and more targeted,"26 most commentators have expressed concerns that the opposite will happen. And the costs and burdens will expand quickly if, as seems likely, non-uniform rules are implemented and MNEs are forced to file multiple CbC reports with different requirements in various jurisdictions as to what needs to be reported, by whom, the reporting timeframe, the level of data aggregation, the reporting basis, and potential audit requirements.

As CbC reporting proposals are rapidly expanding, perhaps the greatest concern for U.S. MNEs will revolve around the potential for public disclosure of commercially sensitive information.  U.S. business concerns around CbC reporting initially focused on the fact that it might provide foreign tax authorities a potent weapon to extract more tax revenues from U.S. companies. But recent proposals raising the specter of public disclosure of data from CbC reporting may well mean that those concerns will be eclipsed by the potential for foreign competitors to take advantage of this detailed financial information from U.S. companies. Although foreign MNEs may also have to publicly disclose such information, the simple fact that the United States remains the world's largest economy means that the United States has the most to lose.

Aside from the question of disclosure itself, profound questions also exist regarding the comparability and usefulness of the CbC report in the public domain. When the OECD scaled back the format of the report from the original draft – requiring information on a country rather than an entity basis – they chose to ask for this on an aggregated (and not consolidated) basis.  Depending on the amount of intercompany trading taking place between related-party entities in a particular territory, this may well lead to highly misleading distortions in reported results. Furthermore, MNEs have the option to complete the template in either parent company or local subsidiary GAAP – again, very profound differences may result. These issues are perhaps manageable if the CbC report is being used solely for risk assessment on the MNE in isolation; however, public disclosure appears much more geared around comparing MNEs with each other. With these inherent impediments to comparability, the benefit to wider stakeholders from exposure seems at best questionable, and may well lead to taxpayers fielding burdensome reconciliation questions.

This commentary also will appear in the June 2015 issue of the  Tax Management International Journal.  For more information, in the Tax Management Portfolios, see Gleicher, 892 T.M., Transfer Pricing: Alternative Practical Strategies, Chapter 7, "Transfer Pricing: A Case Study (Methods and Documentation)", Blum, Canale, Hester, and O'Connor, 947 T.M., Reporting Requirements Under the Code for International Transactions, and in Tax Practice Series, see ¶3600, Section 482 — Allocations of Income and Deductions Between Related Taxpayers, ¶7170, U.S. International Withholding and Reporting Requirements.

Copyright©2015 by The Bureau of National Affairs, Inc.


  1 See BEPS Action Plan (July 2013), available at http://www.oecd.org/ctp/BEPSActionPlan.pdf, p. 7:

The actions implemented to counter BEPS cannot succeed without further transparency, nor without certainty and predictability for business. The availability of timely, targeted and comprehensive information is essential to enable governments to quickly identify risk areas. While audits remain a key source of relevant information, they suffer from a number of constraints and from a lack of relevant tools for the early detection of aggressive tax planning. As a result, timely, comprehensive and relevant information on tax planning strategies is often unavailable to tax administrations, and new mechanisms to obtain that information must be developed. At the same time, mechanisms should be implemented to provide businesses with the certainty and predictability they need to make investment decisions.

  2 See Guidance on Transfer Pricing Documentation and Country-by-Country Reporting (Sept. 2014), available at http://www.oecd-ilibrary.org/docserver/download/2314301e.pdf?expires=1430773424&id=id&accname=guest&checksum=45D94CB815AE6A3B12E260CAE7E06AAA

  3 Id. at p. 9:

Action 13 of the Action Plan on Base Erosion and Profit Shifting (OECD, 2013) recognises that enhancing transparency for tax administrations by providing them with adequate information to conduct transfer pricing risk assessments and examinations is an essential part of tackling the base erosion and profit shifting (BEPS) problem.

  4 Available at https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/207771/Lough_Erne_2013_G8_Leaders_Communique.pdf.

  5 BEPS Action Plan (July 2013) at p. 23.

  6 See Discussion Draft on Transfer Pricing Documentation and CbC Reporting (Jan. 2014), Appendix III, available at http://www.oecd.org/ctp/transfer-pricing/discussion-draft-transfer-pricing-documentation.pdf.

  7 See Guidance on Transfer Pricing Documentation and Country-by-Country Reporting (Sept. 2014), Annex III, available at http://www.oecd-ilibrary.org/docserver/download/2314301e.pdf?expires=1430861338&id=id&accname=guest&checksum=C4DE07C572219E38ADC3348E3F5F5EDD.

  8 Id. at p. 14.

  9 Note that these concerns echo those expressed in litigation regarding regulations implementing CbC reporting for the extractive industry pursuant to the Dodd-Frank Act, discussed below.

  10 Guidance on Transfer Pricing Documentation and Country-by-Country Reporting, at p. 24.

  11 Action 13: Guidance on the Implementation of Transfer Pricing Documentation and Country-by-Country Reporting, available at http://www.oecd.org/ctp/beps-action-13-guidance-implementation-tp-documentation-cbc-reporting.pdf.

  12 See comments of Robert Stack, Deputy Assistant Secretary for International Tax Affairs, U.S. Treasury Department, in U.S. Treasury's Stack, McDonald Reflect on Draft Guidance For Country-by-Country Reporting Under OECD BEPS Action 13, 23 Transfer Pricing Rep. 1579 (Apr. 16, 2015).

  13 See Tax transparency and country-by-country reporting - An ever changing landscape, pp. 15-19, available at http://www.pwc.com/gx/en/tax/publications/tax-transparency-reporting-an-ever-changing-landscape.jhtml.

  14 See API Asks U.S. District Court to Vacate SEC Country-by-Country Reporting Rule, 21 Transfer Pricing Rep. 606 (Oct 18, 2012). With respect to costs, the SEC estimated that initial compliance costs could approach $1 billion, with recurring annual costs of $200 million to $400 million. See SEC Adopts Country-by-Country Reporting Rule Required Under Dodd-Frank Act, 21 Transfer Pricing Report 408 (Sept. 6, 2012).

  15 Id.

  16 Communication from the Commission to the European Parliament and the Council on Tax Transparency to Fight Tax Evasion and Avoidance (Mar. 18, 2015), available at http://ec.europa.eu/taxation_customs/resources/documents/taxation/company_tax/transparency/com_2015_136_en.pdf.

  17 Id. at p. 4-5.

  18 Id. at p. 5.

  19 Id.

  20 Id.; see also European Commission – Fact Sheet, Combatting corporate tax avoidance: Commission presents Tax Transparency, paragraph 3.5 (Mar. 18, 2015), available at http://europa.eu/rapid/press-release_MEMO-15-4609_en.htm.

  21 Austria, Belgium, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Luxembourg, Netherlands, Poland, Slovakia, Slovenia, Spain, Sweden, and the United Kingdom are members of both the OECD and the EU.

  22 For example, CRD IV applies not only to EU-headquartered groups, but also to the EU operations of groups headquartered in third countries. See Tax transparency and country-by-country reporting - An ever changing landscape, p. 28, available at http://www.pwc.com/gx/en/tax/publications/tax-transparency-reporting-an-ever-changing-landscape.jhtml.

  23 Zero draft of the outcome document of the third International Conference on Financing for Development (Mar. 16, 2015), ¶25, available at http://www.un.org/esa/ffd/overview/third-conference-ffd/pre-conference-documents.html.

  24 See Federal budget 2015 to expose multinationals' secrets, Australian Financial Review (May 6, 2015).

  25 See, e.g., the comments from Christian Aid on Discussion Draft on Transfer Pricing Documentation and CbC Reporting, available at http://www.oecd.org/ctp/transfer-pricing/volume1.pdf:

Christian Aid is firmly of the belief that the Country by Country (CbC) report be made public. As highlighted in the introduction there are potential uses of CbC beyond risk assessment; it can help with building trust and understanding between MNEs and societies, as well as assisting in assessing the efficacy of government policy. By being able to see the contributions that an MNE is making to a society, and comparing with performance in other countries, societies can hold both governments and corporations accountable, reward good performance, and seek to change poor performance.

  26 See BEPS Action Plan at p. 21.

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