The importance of CbCR context
New public disclosure requirements raise new considerations for affected businesses. According to an EY survey of 1,000 transfer pricing professionals, 96% say it will require “somewhat” or “substantial” additional work to prepare for public disclosure of the reports.
Many multinationals had already begun voluntarily publishing tax data – including information about their tax strategy. This can contribute to positive stakeholder perceptions around brand, corporate citizenship and transparency, which may ultimately translate into shareholder value.
However, one of the biggest risks associated with making CbC reports public is possible reputational damage due to misinterpretation or misrepresentation of the data they release. While tax authorities – the original recipients of CbCR – have the technical knowledge to analyze the data, non-tax professionals are less likely to fully understand the nuance and context inherent in such information.
Marlies De Ruiter, EYGlobal International Tax Services Policy Leader, once led the Tax Treaty, Transfer Pricing and Financial Transactions Division at the OECD and was responsible for developing the organization’s Action 13 CbCR regime more than a decade ago.
“At that stage it was a conscious decision to share tax information between governments only,” she says. “That’s because the tax reporting numbers alone don’t always tell the full story. For example, the numbers may show a low effective tax rate, but they don’t explain why. That may be because of loss compensation, accelerated depreciation or tax incentives used as governments intended to further public policy goals. The figures alone don’t explain this.”
Barbara Angus, EY Global Tax Policy Leader, advises multinationals to consider how to provide the context necessary for a wider audience to understand CbCR data that is made public. She says, “Formanybusinesses, it will be absolutely critical to provide an explanatory narrative that tells their story. On its own, complex CbCR information can easily be misinterpreted.”
Ronald van den Brekel, EY Global Transfer Pricing Market and Innovation Leader, agrees CbCR misinterpretation is a real risk. “Multinationals face the risk that the public will simply compare their employee headcount, profit margins and tax contributions, misinterpret this data and suspect companies of underpaying tax. Tax calculations are much more complex than this, however,” van den Brekel says.
For example, high-margin sectors often have an IP-rich value chain, and they are likely to pay more of their tax where their intellectual property is located, equity investment is being made and significant commercial risk is being taken.
“Companies are often in the spotlight because they generate higher margins, and they may be subject to more questions about where this residual profit ends up,” he says.
Optimizing the public CbCR process
The most effective way to shape this supporting narrative will vary from one organization to another and must be considered together with other public statements and reports, including those made from other parts of the business.
“It is important to have a process in place to collect and organize all relevant information, in addition to the audited financial statements. What is released could create tax controversy and businesses should be ready to explain how the information fits together,” says Luis Coronado, EY Global Tax Controversy Leader. Such processes are also key to avoiding any inadvertent data omissions or late filing, both of which could result in penalties and additional tax controversy.
Additionally, companies need to consider how the publicly disclosed information fits together with the information reported to tax authorities on tax returns and other filings. That’s because tax authorities will be looking at the newly public information in concert with what they receive directly.
“To reduce the potential for controversy, it is important to anticipate the questions that could arise and take action to address them in advance,” says Coronado.
The ownership and management of public CbCR within a business requires clear delineation and coordination between different functions. Effective coordination efforts should involve tax, as well as IT, legal, financial reporting, and public relations teams. Angus stresses that this process should be collaborative.
“The tax function should be heavily involved, but public CbCR needs to be an organization-wide collaborative effort, not least to ensure the tax information connects with the wider story the company is telling and contributes to a consistent narrative,” Angus says.
Best practices to consider
Putting these technical reports in context for public consumption will have its challenges. To help optimize their processes in this new era of public CbCR, affected multinationals should consider:
- Creating a CbCR process tailored for each jurisdiction where a public report will be filed, as differences exist in the requirements across jurisdictions. The mandatory public reporting processes should be primarily templated, covering business-as-usual disclosures. Any additional information can be compiled on a case-by-case, year-by-year basis to give context to tax exceptions and anomalies as they arise.
- Socializing a plan with key internal stakeholders: tax, legal and PR leaders as well as the sustainability team and other members of the C-suite can all offer insight. Establish a response team to answer post-publication questions.
- Determining how any tax-related public disclosures align with the organization’s broader transparency objectives.
- Monitoring how the public CbCR landscape continues to evolve globally. Be prepared to update internal processes to accommodate future changes within the EU and elsewhere.
Optimizing internal CbCR processes to ensure compliance with new public reporting requirements is critical. However, for many multinationals, the true mark of success will be the strength of the narrative supporting disclosures and the ease of interpretation by the broad range of different stakeholders.
