A new age of country-by-country tax transparency in the financial services sector

The past decade has seen a continuous push for increased levels of tax transparency for multinational enterprises (MNEs). Large MNEs have provided revenue authorities with an OECD country-by-country report (CbC Report) for some seven years, with revenue authorities using CbC Reports and other transfer pricing documentation (in the form of local files and master files) to assess potential BEPS risks arising from group structures and international related-party transactions.

According to the OECD, around 120 jurisdictions had introduced a country-by-country reporting obligation as of February 2024. In parallel, there has been a push for further levels of multinational tax transparency, specifically focused on making tax-related information more accessible to the public (and not just to revenue authorities).

This push for public country-by-country reporting (Public CbCR) has culminated in a recent series of measures having been introduced across the world that, on first glance, appear to require the compilation of similar information to that contained in the OECD CbC Report. However, upon closer inspection, the nuances of these measures are such that MNEs must be careful in how, and from where, such information is compiled, to meet the requirements. For groups in the financial services sector, these issues are particularly pronounced, and the rules may be especially challenging to navigate.

The OECD’s Action Plan on Base Erosion and Profit Shifting, published on July 19 2013, was the organisation’s first announcement pertaining to CbC reporting, which called for the development of rules to increase transparency for tax administrations, taking into consideration the compliance costs for business.

This statement almost coincided with the June 26 2013 publication of Directive 2013/36/EU (part of the Capital Requirements Directives of the European Parliament and of the Council), which introduced mandatory country-by-country reporting requirements to the banking sector (specifically to credit institutions and investment firms). More specifically, as it relates to the financial services sector, Article 89 of Directive 2013/36/EU has required credit institutions and investment firms, from January 1 2015, to prepare, have audited, and publish the following information on a country-by-country basis:

• Names, nature of activities, and geographical location;

• Turnover;

• Number of employees;

• Profit or loss before tax;

• Tax on profit or loss; and

• Public subsidies received.

On October 5 2015, the OECD issued the final report on Action 13, with in-scope MNEs typically providing the OECD CbC Report for financial years beginning on or after January 1 2016. Importantly, from an OECD perspective, this information was not intended to be made available to the public but rather would be shared among tax administrations to monitor and manage BEPS risks.

As early as June 17 2015, which was prior to the OECD’s final report on Action 13, the European Commission launched a public consultation on corporate tax transparency in the EU to assess whether additional disclosures from MNEs “could help tackle tax avoidance and aggressive tax practices in the EU”. After several years of consultation, discussion, and debate, this resulted in Directive (EU) 2021/2101 of the European Parliament and of the Council, which amended Directive 2013/34/EU to introduce rules (applicable to financial years beginning on or after June 22 2024) regarding the public disclosure of income tax information by certain undertakings and branches.

Under Directive (EU) 2021/2101, member states should make EU Public CbCR mandatory for “ultimate parent undertakings” governed by their national laws if they recorded consolidated revenue exceeding €750 million for two consecutive financial years. Notably, however, paragraph 3 of Article 48b of Directive (EU) 2021/2101 provides an exemption for undertakings that are subject to Article 89 of Directive 2013/36/EU; i.e., entities in the financial services sector may not have additional reporting requirements under Directive (EU) 2021/2101.

In 2017, the Global Reporting Initiative (GRI) commenced a new project to develop tax transparency standards related to tax, led by the Global Sustainability Standards Board, its independent standard-setting body. This project culminated in the approval of the publication of GRI 207: Tax 2019 (GRI 207) in September 2019. GRI 207 includes three ‘topic management disclosures’ (disclosures 207-1, 207-2, and 207-3) and one ‘topic disclosure’, Disclosure 207-4, relating to country-by-country reporting.

According to an article published by the GRI on May 13 2024, 26% of the 1,000 largest public companies worldwide are voluntarily using GRI 207 in their sustainability report. As these standards are not mandatory, there appears to be a degree of variability in MNEs’ approaches to voluntarily reporting using GRI 207, including which of the four disclosures are reported on, the level of detail provided for each disclosure, and the frequency of when these disclosures are updated.

The Australian Public CbCR regime was first announced as part of a pre-election commitment in 2022. Unlike other Public CbCR reporting measures, whereby MNEs are required to make additional disclosures in their financial statements or self-report on their website, the Australian Public CbCR regime will require MNE information to be submitted to the Australian Taxation Office (ATO), which will make this information available on a centralised Australian government website.

The policy intent of the Australian Public CbCR regime can be summarised by the following statement from the Treasury portfolio minister: “Public country-by-country reporting will provide the community with a better understanding of how much tax multinationals pay relative to their activities. It puts the onus on large multinationals (with annual global income of A$1 billion or more) to be upfront about where they pay tax and how they plan their tax strategies.

“Better corporate tax transparency will improve tax integrity and inform the public debate over multinational taxation by providing stakeholders and experts with information about tax paid by multinationals.”

Although not yet law at the time of writing, the Australian Public CbCR measure is expected to apply to financial years beginning on or after July 1 2024; i.e., broadly aligned with the EU Public CbCR timeline. It will apply to a parent entity that is a ‘constitutional corporation’ with annual global income of A$1 billion or more (and where the group’s aggregated turnover includes at least A$10 million of Australian-sourced income). Of note, however, the contents of these measures differ significantly from EU Public CbCR in terms of data requirements, as Australian Public CbCR aligns more closely with GRI Disclosure 207-1 (approach to tax) and Disclosure 207-4 (country-by-country reporting).

In compiling the OECD CbC Report, MNEs have had a choice to use data from consolidation reporting packages, separate entity statutory financial statements, regulatory financial statements, or internal management accounts. However, the approach historically used by certain MNEs may differ from the approach being considered to comply with new measures in the future. For example:

• To meet the ‘qualified financial statements’ requirement that is part of the ‘transitional country-by-country reporting safe harbour calculations for a country’ requirement for the purposes of pillar two of the OECD Inclusive Framework, all the data must come from the same qualified financial statements (i.e., consolidated financial statements of the ultimate parent entity or the separate financial statements of each group entity).

• Based on the current way Australia’s Public CbCR regime has been drafted, the amounts reported must reconcile with the amounts shown in the audited consolidated financial statements. In circumstances where audited consolidated financial statements have not been prepared, the information published must be based on amounts that would be shown in such statements.

Based on these future requirements, depending on their approach to pillar two compliance and the finalised Australian Public CbCR rules, MNEs may need to amend or extend their existing OECD CbC Report data gathering processes to ensure the data can comply with the array of measures that may apply to them prospectively; e.g., the OECD CbC Report, Australia’s Public CbCR regime, Directive 2013/36/EU, Directive (EU) 2021/2101, and GRI 207.

Though many of the data points in the OECD CbC Report, the EU Public CbC Report, Disclosure 207-4 of the GRI Standards, and the Australian Public CbC Report are largely similar, there are some differences for certain data points (e.g., the basis on which ‘number of employees’ is determined, the level of detail required to indicate a constituent entity’s business activities, and whether related-party revenue should include revenue from related parties that are tax residents of the jurisdiction). Other notable differences include the following:

• Unlike the OECD CbC Report, the EU Public CbC Report does not require a disclosure on stated capital of each constituent entity; and

• Compared with the OECD CbC Report and the EU Public CbC Report, the Australian Public CbC Report (for certain jurisdictions) and GRI Disclosure 207-4 require an additional disclosure explaining the difference between the effective tax rate and the statutory tax rate, though there are no disclosures required for total revenue, stated capital, or accumulated earnings.

Unlike the OECD CbC Report, the EU Public CbC Report, and Disclosure 207-4 of the GRI Standards, the Australian Public CbC Report requires MNEs to apply jurisdictional-based country-specific reporting for Australia and certain jurisdictions (the draft list includes 41 and the final list is subject to a ministerial determination), and provides MNEs with the ability to apply aggregated reporting for all other jurisdictions (which includes all EU member states). In this regard, MNEs should consider whether to elect to present data for non-specified jurisdictions on an aggregated or disaggregated basis, which may include consideration of the fact that the EU Public CbC Report data will present data on a country-by-country basis for:

• EU member states; and

• Tax jurisdictions included in annexes I and II to the European Council conclusions on the revised EU list of non-cooperative jurisdictions for tax purposes.

The reality for many MNEs is that once the required disaggregated EU and Australian reporting countries are mapped out, there may be limited benefits from presenting an aggregated view for the other jurisdictions.

Perhaps most notably, Australia’s Public CbCR regime and GRI 207 differ from other country-by-country reporting regimes in that they include a requirement for MNEs to include a description of their approach to tax. Certain jurisdictions already have similar requirements; for example, paragraph 16(2) of Schedule 19 of the United Kingdom’s Finance Act 2016 requires specific groups to publish a group tax strategy in relation to UK taxation. However, Disclosure 207-1(a) of GRI 207 includes a requirement to describe the following:

• Whether the organisation has a tax strategy and, if so, provide a link to this strategy, if publicly available;

• The governance body or executive-level position within the organisation that formally reviews and approves the tax strategy, and the frequency of this review;

• The approach to regulatory compliance; and

• How the approach to tax is linked to the business and sustainable development strategies of the organisation.

The statement on the approach to tax may be of particular importance to MNEs in the financial services sector due to the heightened sensitivity to, and potential impact of, reputational consequences, as well as the potential need to explain relevant measures of ‘substance’ such as financial assets and control over those assets. In this regard, the explanatory memorandum to Australia’s Public CbCR regime suggests explanations can be included on company websites.

MNEs may also need to consider facts and collect data points beyond those needing to be reported in the various measures to conclude on the required extent of their Public CbCR obligations. For example, for the purposes of Australian Public CbCR, MNEs should first conclude whether the MNE parent is considered a ‘constitutional corporation’, and in cases where their Australian operations record less than A$10 million in revenue, determine the group’s ‘Australian-sourced income’ (which is broader in nature than just the revenue of the Australian entity or branch) to subsequently assess and conclude whether the MNE exceeds this Australian Public CbCR threshold. Also, note that collective investment vehicles (e.g., certain types of funds) may be out of scope.

Similarly, for Australian Public CbCR, MNEs should consider whether the ATO can provide an exemption in their circumstances; e.g., as stated in the explanatory memorandum to the bill introduced to Parliament, the ATO may grant an exemption if disclosures would impact national security, breach Australian law or that of another jurisdiction, or result in substantial ramifications for an entity by revealing commercially sensitive information.

For EU Public CbCR, Directive (EU) 2021/2101 provides an option for member states to allow for one or more specific items of information to be temporarily omitted from the report (for a period of no more than five years from the date of the original submission) where their disclosure would be “seriously prejudicial to the commercial position of the undertakings to which the report relates”, though any omission should be indicated with an explanation. Furthermore, unlike Directive (EU) 2021/2101, the Australian Public CbCR regime does not provide for exemptions for entities in the financial services sector subject to Article 89 of Directive 2013/36/EU.

Notwithstanding the alignment of policy intent of each public tax transparency and country-by-country reporting initiative, it is evident that the design and implementation of each measure has resulted in some key differences in the regimes in terms of which organisations must comply and the exemption criteria. There are different data requirements – some nuanced and some significant – and variations in how such data will ultimately be reported and published, which may lead to potential confusion when digested at the public user level.

While EU Public CbCR and Australian Public CbCR is expected to affect a broad population of large MNEs across all sectors, for MNEs in the financial services sector in particular, the upcoming introduction of Australian Public CbCR will represent the first significant uplift in almost a decade in the data points made public for certain jurisdictions in which they operate.

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