What are the advantages of country-by-country reporting?
Tax scandals at major listed companies with a broad shareholder base have prompted calls for greater transparency in taxation policy. As a result, many countries taking part in the base erosion and profit shifting (BEPS) project initiated by the G20 and implemented by the OECD have reached an agreement that their companies should transparently disclose their tax data to the local tax authorities on a country-by-country basis.
Family businesses endorse country-by-country reporting, which represents an important contribution to achieving fairer taxation and equitable competitive conditions. Transparent disclosure to the local tax authorities and the international exchange of this data are effective measures to counter tax evasion.
Compared with other countries, German family businesses in particular already pay the highest taxes. In the Country Index for Family Businesses, Germany ranks second to last in terms of taxes. Studies show that family businesses are subject to an especially high tax rate.
International groups that resort to minimising tax burdens abroad ultimately distort the competition. In doing so, companies circumvent their obligation to finance governmental functions, therefore adding to the pressure placed on those that pay their fair share of taxes.
Providing tax authorities with tax data broken down by country for these major corporations would allow them to more accurately identify indications of aggressive tax planning than was previously possible. Especially developing countries, which often have more weakly structured tax authorities, stand to benefit from this.
Initial scientific studies confirm the effectiveness of the confidential exchange of tax data among the relevant tax authorities as initiated by the OECD. Several studies come to the conclusion that the confidential sharing of tax data with the competent authorities has led to an increase in effective tax rates, which have risen by one to two percentage points. More than 100 countries have participated thus far. A study conducted by the Centre for European Economic Research (ZEW Mannheim) summarizes the research findings.
Germany has already implemented the rules. Country-by-country reports must be prepared for all financial years starting 2016 and reported to the Federal Central Tax Office – BZSt.
“Family businesses are the ones that suffer when big corporations with digital business models reduce their tax burdens to a minimum by making systematic use of tax loopholes.”
Q&A for country-by-country reporting
The European Union is discussing the unilateral approach of going beyond the international agreements that have been reached in the interests of fair corporate taxation worldwide. In April 2016, the European Commission proposed to compel all companies operating in the EU to make their tax data freely available on the Internet. Back then, it was difficult to foresee the impact of the country-by-country reporting. OECD as well as EU member states criticised this step as being hasty.
According to the proposal, companies operating in the EU with annual revenues of over 750 million euros are to be obliged to disclose their business activities and the revenues they earn in every single country in which they operate. Furthermore, they are to publish the taxes paid on those revenues (public country-by-country reporting). Companies domiciled in countries that are not EU Member States would have to report this data only if they have subsidiaries or facilities in the EU.
In July 2017, a corresponding draft directive of the European Commission was revised by the European Parliament on its first reading. The bill also requires the approval of the Council of the European Union before it can be passed.
In the opinion of Professor Christoph Spengel of the Centre for European Economic Research (ZEW), the European Commission’s plans threaten to result in substantial competitive disadvantages for European companies. This was revealed by a study conducted on behalf of the Foundation for Family Businesses: “A detailed analysis shows that the cost to companies of public reporting will outweigh the overall benefits.”
Publishing tax data on the Internet is an ineffective way to combat tax evasion. In the case of companies in certain sectors that are already obliged to publish data on the Internet, there have been few or no positive effects with respect to combating tax evasion. Moreover, studies confirm that compelling banks to publish country-by-country reports, for instance, has not led to any increase in effective tax rates. No demonstrable effects have been reported for the commodities industry.
Any solo effort on the part of the EU would jeopardise country-by-country reporting. If tax authorities from non-EU countries are able to access data from European companies without having to provide anything in return, they will not be motivated to participate in full in the BEPS project. “Hence the mutual exchange of data will become virtually superfluous from the third countries’ point of view,” the study concludes.
What is more, companies subject to the regulations would be obliged to publish sensitive internal data. Customers, suppliers and competitors that are not subject to the regulations could use this information to their own advantage without needing to publish comparable data themselves. “In Germany, these competitive disadvantages will have a particular impact on large family businesses.”
What would have a positive effect on tax justice is the international coordination of transfer prices. These are the prices set by international corporate groups to value products and services exchanged across borders – for example, with a subsidiary or between affiliates. Unjustified transfer prices are a key element of aggressive tax planning.
“More cooperation between the relevant tax authorities and clear rules are the key to tax justice. The OECD should promote and coordinate efforts aimed at achieving this.”
Professor Rainer Kirchdörfer,
Executive Board member of the Foundation for Family Businesses
Glossary on country-by-country reporting (CbCR)
BEPS stands for base erosion and profit shifting. The BEPS project was initiated by the G20 countries. It was developed further by the members of the OECD (Organisation for Economic Cooperation and Development) and numerous developing and emerging economies to create a joint action plan. The goal of the project is to counter harmful tax competition and aggressive tax planning by companies operating internationally.
CbCR stands for country-by-country reporting, which the OECD and G20 nations proposed establishing in Action Point 13 of the BEPS project. Under this system, companies with annual consolidated revenues of at least 750 million euros in the previous fiscal year would have to provide the tax authorities with a structured overview of every country in which they operate with the following information for each fiscal year:
They must also provide a list of the names and key business activities of their Group companies in the individual tax jurisdictions. The CbC data provided to the tax authorities is treated confidentially. Starting 2016, German companies subject to reporting are obliged to file reports for financial years.
PCbCR In Germany, CbCR is regulated in section 138a of the Fiscal Code (Abgabenordnung – AO) and states that data is to be provided to the tax authorities and international data is to be transferred to the local relevant tax authorities in Germany by the Federal Central Tax Office. Under the version of PCbCR proposed by the European Commission, the above-mentioned information is to be published on the Internet – and thus made accessible to the public.
Material on country-by-country reporting (CbCR)
English version: The EU Proposal for Country-by-Country Reporting on the Internet
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