Country by Country Reporting: Sleeper agent alert
Country by Country Reporting (CbCR) is an EU reporting requirement that some multinational businesses are only now discovering. For some UK-headquartered groups, the first public reporting deadline is fast approaching.
Author: Jon Rowden
At Reportl we keep an eye out for changes to regulation that affect corporate reporting. Often those changes are clearly signposted in advance, national regulators instigate their own communications programme to encourage early preparation, there’s a buzz around the change ahead, plans are laid and put into practice.
But it doesn’t always work like that, because just occasionally a piece of new reporting regulation turns out to be something of a “sleeper agent”, a change that has been around for a while, but springs out from seemingly nowhere to take directors, executives and their advisers by surprise. Sometimes the changes bring significant effects.
This appears to be playing out, at least for some, in connection with an EU-directive that has been designed to enhance public reporting of the tax paid by large multi-national groups that have a meaningful presence within the EU, including those headquartered outside the EU. The requirement is called “Country by Country Reporting” usually shortened to “CbCR”. As to the content of the reporting, the clue is in the name, it's about publicly reporting on the company website the amount of tax paid in certain jurisdictions a Multi-National Company ("MNC") operates in.
The EU rules apply to financial years starting on or after 22 June 2024 and mean that for calendar year companies a first report relating to tax paid during 2025 is due to be published by the end of 2026.
The CbCR position for UK MNCs
The UK’s tax authority, HMRC has required multi-national groups to privately file a version of such information since 2017. Their digital format is XML and whilst some MNCs have chosen to also publish their CbCR information, many have not, preferring to keep the information private.
Quite reasonably neither HMRC or any of the other UK financial reporting regulators are leading on the EU’s CbCR directive, because the UK is no longer in the European Union. But the EU rules have an extra-territorial effect, which may come as a surprise.
CbCR’s iXBRL format requirement
The format for the EU’s required disclosure is iXBRL, the digitally-tagged approach to reporting that the EU requires to be applied for listed companies annual reports (and which is also used extensively in UK and US corporate reporting). A new taxonomy of tags has been created by the EU to cater for the CbCR disclosure requirements.
As is often the case with EU directives, there’s an added dimension of complexity, because each EU jurisdiction is empowered to implement the requirement differently within its own national reporting requirements. To explain the implications, one of the large accounting firms has created a helpful country-by-country tracker in connection with implementation.
Starting a practical process to comply with CbCR
At Reportl, we do not advise on the legal applicability of CbCR for MNCs. We are experts in the software which transforms regulatory necessity into advantage for companies. We turn essential CbCR compliance into online reporting that combines with effective engagement around the company’s contribution to society through the payment of taxes. We also help agencies to energise their clients’ reporting by offering practical suggestions based on our experience of implementing new regulation.
Four step energiser for CbCR compliance
To help kick-start a consideration of CbCR, we’ve put together a four step energiser that can lay firm foundations for a project to comply with the EU’s new requirement.
Step 1 Determine the applicability and extent of scope
Assess whether a multinational group has consolidated global net turnover of €750 million and either:
an EU governed subsidiary with two of the following characteristics:
Balance sheet total > €5m, Net Turnover > €10m or 50 or more employees, ora branch governed by EU law that generates turnover of €10m
These metrics need to be met for two consecutive years. If met, further exploration of scope is appropriate and will involve a consideration of the particular way CbCR is being implemented in the relevant jurisdictions. This may also signal a need for legal or accounting professionals to advise.
If the CbCR requirement isn’t triggered, then the process ends, but if there is any doubt then it’s usually best to consult.
Step 2 Pause to consider the possibility of deliberate non-compliance
In addition to direct financial penalties, which vary from country to country, the EU rulemakers have chosen an unusual way to prompt MNCs outside the EU to comply. In broad terms, if an MNC falls within scope, then the auditors of the EU-governed subsidiary or branch that triggers the requirement need to comment within their subsequent audit report on whether the group has complied by making public CbCR information in the prescribed way. If the group has not complied, then an exception is noted within the audit report.
Generally, management teams and directors often seek to avoid such exceptions in audit reports. Also, where MNCs have policies and controls relating to compliance with applicable regulation, any breach could have wider consequences, for example in connection with any statements made by directors relating to the effective operation of material controls that cover compliance with applicable regulation. It is difficult to maintain that material controls are effective when material requirements are being ignored.
Step 3 Inventory the existing information and identify any gaps or anomalies
For UK MNC’s, the existing filing to HMRC forms the foundation for EU CbCR compliance, but it won’t necessarily contain all the information that is relevant to the group and a gap analysis should be undertaken as part of the ingredients for a project plan. If a review of the existing information relating to the amount of tax paid in each country gives rise to some obvious questions, then exploring any anomalies needs to be factored into the plans.
Step 4 Devise a communications plan
It’s often helpful to begin with the end in mind. For CbCR reporting, perhaps the initial choice is between basic compliance, which is essentially a table with accompanying iXBRL tags and limited explanation, or a more comprehensive approach to accompany the required information which also explains the tax contribution in context and can include narrative around the country-by-country position. There are many companies that already prepare public disclosures in this area and they can be used as a source of reference and inspiration.
These four steps should provide a firm foundation for a CbCR project plan.
Reportl is purpose built to meet new and evolving digital requirements where full online disclosure including iXBRL tagged reporting is required. Reportl offers a best-in-class solution to leading reporters.
If you believe the EU’s CbCR requirements may affect you, please reach out at [email protected] and we would be happy to talk through the broad principles and practicalities involved.
