The consequences of public country-by-country reporting for family businesses

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 OECD have reached an agreement that their companies should disclose their tax data to the local tax authorities on a country-by-country basis.

In April 2016, the European Commission proposed to go a step further and compel all companies operating in the EU to make their tax data public on the Internet. A study commissioned by the Foundation for Family Businesses reveals that the negative effects of the publication obligation being discussed in the EU would far outweigh its potential benefits.

Current legal situation

According to European Commission plans, companies operating in the European Union 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. In addition, they are to make public the taxes they pay on those revenues. Companies domiciled in countries that are not EU Member States would have to publish this data only if they have subsidiaries 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 its draft directive, the European Union goes beyond the international agreements that have been reached in the interests of fair corporate taxation worldwide.

Risks of publishing country-by-country reporting (CbCR) data

In the opinion of Prof. 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 is one of the findings of the study entitled “Country-by-Country Reporting (CbCR) on the Internet”, which was conducted on behalf of the Foundation for Family Businesses. As Prof. Spengel states: “A detailed analysis reveals that the cost to companies of public reporting will outweigh the overall benefits.”

According to the study, by pushing ahead on its own, the EU is having a counterproductive effect on the BEPS project agreed upon by the OECD: 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 being obliged to publish comparable data themselves. “In Germany, these competitive disadvantages will have a particular impact on large family businesses.”

“An obligation to publish business secrets on the Internet in no way contributes to achieving fairer taxation; it simply weakens the international competitive position of the companies concerned. 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.”

Prof. 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 several 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. In Action Point 13 of the BEPS Project, the OECD and G20 nations proposed establishing a system of country-by-country reporting. 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 of every country in which they operate with the following information:

  • Sales revenues (broken down by affiliated and third-party companies),
  • Pre-tax profit/loss,
  • Income tax paid or owing, including an overview at Group level of any discrepancies in the income tax trend,
  • Reported capital,
  • Retained profits,
  • Number of employees, and
  • Tangible assets (with the exception of cash).

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.

PCbCR (Public Country-by-Country Reporting) refers to the expanded form of CbCR. In Germany, CbCR is regulated in Section 90 (3) sentence 2, 3 of the Tax Code (Abgabenordnung – AO), which merely states that data is to be provided to the tax authorities. 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.

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