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Chief Economist Mimi Song Appears in Bloomberg’s Tax Insights & Commentary

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Tax Insights & Commentary June 26, 2024, 4:30 AM EDT

Public Tax Reporting Should Spur Companies to Prepare Narratives

Exactera’s Mimi Song examines EU public tax reporting rules Businesses should review transfer pricing, explain their data

Thanks to an EU directive, many corporate taxpayers will have to make tax and financial data available to everyone starting June 22. Multinationals who must comply with these new reporting rules should review their obligations, model their transfer pricing throughout the year, and prepare to explain their financial information to the public.

Going Public

Multinationals involved in intercompany transactions are experiencing increasing levels of scrutiny—and they’re being obligated to provide more information to scrutinize.

Along with master and local files, tax authorities often request additional reports, such as Poland’s transfer pricing report and the UK’s proposed summary audit trail. Reviews of bank statements, business contracts, and social media profiles are also par for the course.

But while tax transparency was once lobbied only by tax administrators, it now addresses the needs of regulators, investors, and even the public.

One of the most game-changing tax transparency initiatives stems from the EU Directive on Public Country-by-Country Reporting. Adopted in 2021, the directive requires member countries to transpose public country-by-country reporting, or PCBCR, into law by June 2023.

Companies with annual consolidated revenue exceeding 750 million euros ($803 million) and operations in multiple EU member states must prepare country-by-country reports starting June 22—much as they do now. But instead of tax authorities sharing them with other administrations engaged in bilateral treaties, in-scope taxpayers will have to publish these reports on their websites for at least five years.

Whether it’s earnest proactive cooperation or a way to win points in environmental, social, and governance—the measurement of a company’s civic conscience and green behavior—companies are taking the hint, and many are already posting sensitive financial and tax data on their websites.

A quick glance at Heineken NV’s shows that in 2023, the beer giant reported an effective corporate income tax rate of 26.8% and had a consolidated total tax contribution of 15.2 billion euros. Proctor & Gamble Co. posted that it paid $4.3 billion in income taxes last year, and Volkswagen AG reported an income tax expense of 5.27 million euros.

Not every company wants a public display of their tax and financial data. In 2022, two institutional investors proposed that Amazon.com Inc. release public country-by-country reports and share insights into tax payments. The online retail powerhouse asked the Securities and Exchange Commission for permission to ignore the proposal, which was denied.

Other corporations may fear that public data could reveal trade secrets, which would hurt competitiveness, or that the data could be misconstrued due to the general public’s lack of financial and tax expertise, unfairly compromising corporate reputations.

Still, the OECD estimates that countries lose $100 billion to $240 billion in annual revenue to base erosion and profit shifting by multinationals—equivalent to 4% to 10% of the global corporate income tax revenue. Since the introduction of BEPS Action 13, country-by-country reports have been used as a transfer pricing risk assessment tool to gauge tax-avoidance behavior and determine where audit resources should be strategically deployed.

In mandating PCBCRs, the EU aims to enhance public scrutiny on the income tax multinational enterprises pay within the EU and foster greater corporate accountability. The effort could inspire better tax behavior given that public opinion often coincides with where consumers part with their euros. It also ensures that investors and regulators know of a company’s financials, risk position, and general attitude toward paying taxes before they commit to investing.

Taking Control

Whatever the goals or the protests, the bottom line is that for fiscal years after June 22, 2024, in-scope multinational enterprises must comply. So how can you publish financials, avoid misunderstandings, and stay in the public’s good graces? First, understand your obligations. Is your group in scope? Which entities are impacted in and outside of the EU? Who will prepare the PCBCR? Make a compliance plan that includes a consistency review in addition to the reporting.

Country-by-country reporting is a data collection exercise—don’t forget to share data with your transfer pricing experts to see how it aligns with the overall story in your master and local files.

Reconciling the data between PCBCR reporting and your transfer pricing documentation may not always be possible due to financial data segmentation. However, you should still be able to explain the challenges and support your intercompany positions in the transfer pricing report itself.

Know your audience. Your data will be available to anyone who knows how to perform a Google search—a group considerably underqualified to interpret your numbers.

Do it for them. Control your narrative by explaining the numbers and how they align with the group’s ESG ethos. Qualitative explanations go a long way in terms of quantitative disclosures.

Acknowledge red flags. It doesn’t take a finance degree to see that you’ve allocated significant profits to a jurisdiction with low headcount, or that material income just happens to fall primarily in low-tax jurisdictions. Suspicious setups may be legitimate, but the public likely will feel entitled to an explanation—provide one before such arrangements become an issue.

Prepare contemporaneous transfer pricing documentation. Model your transfer pricing throughout the year so you’re confident in your arm’s-length pricing. Does your functional analysis align with your true value drivers? Update financials annually so you have a current arm’s-length range.

Use public data to your advantage. Compare your company with industry competitors. What narrative are they telling? How does their data look next to yours?

Tax is a lens into your whole business. With the introduction of PCBCR, the whole world will have a view, but not everyone will understand what they’re looking at. It’s your job to ensure they see things your way. This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information Mimi Song is chief economist at Exactera. She manages client relationships and helps implement transfer pricing solutions. Write for Us: Author Guidelines To contact the editors responsible for this story: Daniel Xu atdxu@bloombergindustry.com; Melanie Cohen at mcohen@bloombergindustry.com.

© 2024 Bloomberg Industry Group, Inc. All Rights Reserved

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