OECD’s Country-by-Country reporting and
its alternatives
Master Thesis Fiscale Economie
Martin Stupavsky
10147799
Final version August 15, 2018
2 Statement of Originality
This document is written by Student Martin Stupavsky who declares to take full responsibility for the contents of this document.
I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have been used in creating it.
The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.
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Table of contents
1. Introduction ... 5
2. Literature review ... 8
2.1 Tax avoidance and corporate tax transparency ... 8
2.2 OECD’s Country-by-Country Reporting ... 10
2.3 EC’s Public Country-by-Country Reporting ... 14
2.4 Australia’s Tax Transparency Code ... 16
2.5 EU’s Capital Requirements Directive IV: Article 89 ... 18
2.6 Extractive Industries Transparency Initiative ... 20
2.7 Other alternative methods ... 22
2.8 Sub-conclusion ... 23
3. Criteria ... 25
3.1 Effectiveness ... 25
3.1.1 Tax transparency and the tax authorities ... 25
3.1.2 Tax transparency and the public ... 26
3.2 Confidentiality ... 26 3.2.1 Competitiveness ... 26 3.2.2 Corporation’s reputation ... 27 3.3 Feasibility ... 27 3.4 Sub-conclusion ... 27 4. Analysis ... 29
4.1 OECD’s Country-by-Country Reporting ... 29
4.2 EC’s Public Country-by-Country Reporting ... 33
4.3 Australia’s Tax Transparency Code ... 37
4.4 EU’s Capital Requirements Directive IV: Article 89 ... 40
4.5 Extractive Industries Transparency Initiatives ... 43
4.6 Sub-conclusion ... 45
5. Conclusion ... 49
References ... 51
Directives ... 56
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List of Tables and Figures
Figure 1 - 'Double Irish Dutch Sandwich' ... 9
Figure 2 - Implementation of CbCR by the EC ... 14
Figure 3 - Conclusions of the analyses ... 46
Table 1 - Tax evasion vs. tax avoidance ... 57
Table 2 - Overview of allocation of income, taxes and business activities by tax jurisdiction 57 Table 3 - List of all the constituent entities of the MNE group included in each aggregation per tax jurisdiction ... 58
Table 4 - Additional information ... 58
Table 5 - Comparison by reporting terms ... 58
Table 6 - Comparison by data requirements ... 59
List of Abbreviations and acronyms
ATO Australian Taxation Office
BEPS Base Erosion and Profit Shifting
CbC Country-by-country
CbCR Country-by-country reporting
CRD Capital requirements directive
CRS Common reporting standard
EC European Commission
EITI Extractive Industries Transparency Initiative
EP European Parliament
GDP Gross domestic product
HMRC Her Majesty’s revenues & customs IASB International accounting standards board
IP Intellectual property
IFRS International Financial Reporting Standards
MNE Multinational enterprise
MSG Multi-stakeholder group
NGO Non-governmental organization
OECD Organization for economic co-operation and development TIEA Tax information exchange agreement
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1. Introduction
Over the last century the world has witnessed unseen economic growth. Globalization has created a global market and increased trade between countries all around the world.1 To be
able to compete on the global market, companies have merged and grown to sizes which are now greater than some countries GDPs.2 Multinational entities (MNEs) have outgrown their
domestic markets and have established subsidiaries and business activities all over the world. To keep up with these developments, the domestic and international tax laws and tax treaties have gone through significant changes in the past years such as the Base Erosion and Profit Shifting (BEPS) initiative. The MNEs, however, seem to always find ways to abuse the shortcomings of these laws to lower their effective tax expenses. One of the better-known examples is the ‘Double Irish Dutch Sandwich’ which has been widely used by MNEs, among them Google.3 Such practice of actively lowering payable tax and breaking the spirit of the law,
while staying within the letter of the law, are often referred to as tax avoidance.4
Although these practices have been in place for years, they have only become apparent to the majority of the public since the economic crisis. Since then the public, politicians and the press have been vocal in criticizing MNEs, accusing them of not paying their ‘fair’ share of corporate taxes. Even companies such as Google, Amazon and Starbucks have been in the spotlight for knowingly engaging in tax avoidance by actively lowering their effective taxes.5
The European commission (EC) as well as the Organization for Economic Co-operation and Development (OECD) have responded to the public’s outcry. After years of deliberation on how to tackle tax avoidance the OECD has, in 2015, come up with the final 15 reports of the BEPS action plans. To enhance tax transparency while taking compliance cost into consideration, OECD created action plan 13. This plan requires MNEs to create a master file on its global business operations and transfer pricing policies, as well as country specific local file with detailed transactional transfer pricing documentation. Additionally, large MNEs are annually required to file a Country-by-Country report (CbCR) that provides the amount of revenue, profit before income tax and income tax paid and accrued for each jurisdiction in which they do business.6 As of 2016, the EC, following OECD’s CbCR, requires large
multinational companies to publish and share their CbCRs within the EU, country by country.7
1 Gerber D. (2010). Global competition: law, markets, and globalization. Pp. 1-2. 2 Global justice. (2015). Corporations vs governments revenues: 2015 data.
3 Fuest. C, Spengel C., Finke K., Heckemeyer J. and Nusser H. (2013). Profit Shifting and “Aggressive” Tax Planning by
Multinational Firms: Issues and Options for Reform. P.4.
4 Dyreng, S., M. Hanlon, and E. Maydew. (2008). Long-run corporate tax avoidance. 5 Barford, V. & Holt, G. (2013). Google, Amazon, Starbucks: The rise of 'tax shaming'. 6 OECD (2015). Transfer Pricing Documentation and Country-by-Country Reporting. P. 9. 7 OECD. (2015). BEPS explanatory statement. P.6.
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Clearly CbCR is not the only available method to tackle tax avoidance by increasing tax transparency. Even before the implementation of OECD’s CbCR, the EU introduced public CbCR for its financial sector through Capital Requirements Directive (CRD) IV. Now instead of just requiring public CbCR for the financial sector, the EU is trying to improve tax transparency even further by proposing a new mandate to the current accounting standard, which would require MNEs from all sectors to disclose an adjusted version of the CbCR template in their consolidated public financial reports. Elsewhere in the world, Australia is also working on enhancing tax transparency and has introduced the voluntary tax transparency code (TTC), while the global extractive industries sector has launched the Extractive Industries Transparency Initiative (EITI).
Despite these other methods, CbCR remains OECD’s and EC’s key tool to counter multinational companies’ tax avoidance. However, its effect of increased tax transparency on preventing tax avoidance remains unclear in practice due to its short lifespan and non-public disclosure. First CbCRs for 2016 have only been filled as of 31 December 2017 and were automatically exchanged with other Member States’ tax authorities on 30 June 2018.
With CbCR’s short lifespan and unclear consequences for the prevention of tax avoidance the question that needs to be answered is as follows:
Main research question: To what extent is OECD’s country-by-country reporting the best option for preventing multinational companies to engage in tax avoidance compared to other available methods?
The main research question will be elaborated on through the following sub-questions:
Sub question 1: What is OECD’s country-by-country reporting and what are the alternative methods?
Sub question 2: Which criteria are relevant to test how good each method is in preventing tax avoidance?
Sub question 3: Based on the chosen criteria, which model prevents tax avoidance the most? The goal of this thesis is to analyze how well OECD’s CbCR prevents tax avoidance and to determine whether there are no better alternatives.
The research question is especially relevant given the increasing demand for more corporate tax transparency from the public and politicians. As the new initiative of the EC and the OECD are only just being implemented, more research will be needed on its effectiveness. The
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research question begins where prior research on country-by-country reporting has left off 8
and compares its functionality with a wider range of alternatives.
The paper is structured as follows: first, the literature review will explain more about OECD’s country-by-country reporting and the available alternative methods. How they function and how they try to prevent corporations from engaging in tax avoidance by increasing transparency. Next, criteria will be defined to evaluate each of the available methods. The paper will then present an analysis of each method using the selected criteria. Finally, the answer to the main research question will be presented in the conclusion.
8 For the most recent thesis on CbCR compared to EC’s public CbCR please refer to thesis written by Papalampros Ch. (2017).
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2. Literature review
To help answer the main research question, this chapter discusses the existing literature on the chosen methods. Firstly, section 2.1 explains tax avoidance and corporate tax transparency. Section 2.2 describes what OECD’s CbCR is and how it works. Subchapter 2.3 expands on the public CbCR proposed by the EC. Next, section 2.4, explains how the Australia’s newly implemented tax transparency code works. Section 2.5 tells us more about the EU’s Capital Requirement Directive IV and subchapter 2.6 explains what the Extractive Industries Transparency Initiative is. Section 2.7 describes why the listed methods have been chosen, which other methods are relevant and why they haven’t been selected for this paper. Finally, section 2.8 presents a brief summary of the relevant literature.
2.1 Tax avoidance and corporate tax transparency
Taxes play an important role in the functioning and structuring of every company. As well as being an administrative burden, taxes make up a significant cost for an enterprise. As the main goal for most corporations is profit, companies tend to work towards lowering these costs, thus lowering their effective corporate tax rate. One way of reaching this goal is to engage in tax avoidance.
Tax avoidance
Although often confused with tax evasion, which is illegal, tax avoidance consists of practices which are legal in both spirit and the letter of the law.9 10 Rational tax payers try to lower their
obligation to pay taxes, while staying within both the spirit and the letter of the law. Tax avoidance is called ‘aggressive’ 11 when the letter of the law is consciously interpreted in bad
faith.12 In such situations, the tax payer takes advantage of a questionable interpretation of the
letter of the law, hence uses a tax ‘loophole’. Although unethical, the misinterpretation remains seen as legal.
There are multiple examples of ‘aggressive’ tax avoidance techniques which can be used to lower effective tax rates. Firstly, as MNEs operate in several jurisdictions, they are structured as groups with an extended number of subsidiaries. Therefore, they are free to leverage loopholes and disparities of the international tax law system, which are not available to corporations working on national level.
9 Hanlon, M., and Heitzman, S. (2010). A review of tax research. P. 130.
10 Please refer to Appendix Table 1 for comparison between tax evasion and tax avoidance.
11 For simplicity reasons, after this point tax avoidance can be read as ‘aggressive’ tax avoidance. 12 Payne, D. M., and Raiborn, C. A. (2018). Aggressive tax avoidance. A conundrum for stakeholders, governments, and
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Further, companies can engage in transfer mispricing. Often contradicting reality, this scheme adjusts intracompany transfer prices in a way that shifts profits from high taxing countries to those with low rates.13 The actual value creation, however, stays in high taxing countries and
takes advantage of the local infrastructure while not paying a ‘fair’ amount of corporate tax as a compensation.
Figure 1 - 'Double Irish Dutch Sandwich' 14
Final example involves moving assets and capital to low taxing jurisdiction. A version of this scheme, illustrated above in Figure 1, is the ‘Double Irish Dutch Sandwich’. This tax avoidance technique, used among others by Google, is an intellectual property (IP) based profit shifting strategy that takes advantage of the disparities between the source-based taxation laws of the US, Netherlands and Ireland.15 By transferring a part of the IP outside of the US to Bermuda,
Google manages to lower its effective corporate tax rate on its non-US income down to 3%.16
Even though most of the actual value creating activities however happened in the US and the EU, the profits were reported in Bermuda, where corporate profits are not taxed.
Tax transparency
The publication of low effective tax rates paid by the MNEs has led to a public outcry and a response by the OECD and the EC. According to the European Parliament (EP),17 tax
avoidance is costing the EU between 50-70 billion euros annually through lost tax revenue. Its
13 Kay, T. (2014). The offshore shell game: U.S. Corporate Tax Avoidance through Profit Shifting. Pp. 184-190. 14 Fuest. C, Spengel C., Finke K., Heckemeyer J. & Nusser H. (2013). Profit Shifting and “Aggressive” Tax Planning by
Multinational Firms: Issues and Options for Reform. P.4.
15 Fuest. C, Spengel C., Finke K., Heckemeyer J. & Nusser H. (2013). Profit Shifting and “Aggressive” Tax Planning by
Multinational Firms: Issues and Options for Reform.
16 Sullivan, M.A. (2012). Economic Analysis: Should Tech and Drug Firms Pay More Tax? P. 655.
17 EP. (2015). Bringing transparency, coordination and convergence to corporate tax policies in the European Union. Study by
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prevention is therefore more than desired. One of the tools used to tackle tax avoidance is the increase of corporate tax transparency.
Before OECD introduced BEPS, tax transparency was very limited. Under the current accounting standards, such as IFRS 8, MNEs are only obligated to separately disclose geographical accounting information for the country in which the parent company is located in.18 In the remaining countries where the company is active, the information can be
aggregated into a single sum. This implies that when the parent of a MNE is located in country A, it only has to separately disclose its revenue, profits and tax paid for the activities in country A. The remaining activities executed in jurisdictions B, C & D can be consolidated into a single total. The information about the amount of revenue profit and taxes paid or accumulated per jurisdiction is therefore unavailable.
The low level of tax transparency of current reports stems from the fact that the current accounting standards have been developed to produce financial statements that are relevant for the managers, investors and shareholders of the company and not for the tax authorities. Instead of geographical categorization per jurisdiction the information is mostly presented per business unit or production line. The amount of profit that a single subsidiary of a MNE has made in a specific jurisdiction and the amount of corporate tax it has paid on this profit is therefore not available to the public or the tax administration of a foreign jurisdiction.
Another issue that affects the corporate tax transparency is the fact that under current accounting standards, MNEs publish their financial information consolidated as a group. To make sure that the information presented is representative for the entire global group as a single entity, all of the intracompany transactions and balances are eliminated. Although the elimination increases the substance of the presented information at the same time it diminishes tax transparency and creates a leeway for tax avoidance practices such as intra-group transfer price adjustments.19
2.2 OECD’s Country-by-Country Reporting
Tax transparency and tax avoidance have been fiercely discussed topics for a couple of years now. One of the solutions invented to improve tax transparency, was the CbCR. The original concept of CbCR was introduced by Richard Murphy in the beginning of the 2000s as a relatively simple idea. He demanded large MNE’s to be more transparent and to disclose their profit/loss accounts, limited balance sheets and cash flow information for each of the
18 IASB. (2006). International Financial Reporting Standard 8. Operating segments. London: IFRS Foundation. 19 Murphy, R. (2009). Holding multinationals to account wherever they are.
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jurisdiction they operate in disaggregated.20 The simple idea, however, has since been the
subject of extended debates and has been significantly adjusted. An updated version of the original idea has been published by the OECD.
OECD’s objectives
The OECD presented its version of the CbCR template in the final BEPS report in 2015. The report consists out of 15 action plans, each designed to tackle a specific root cause of BEPS structures.21 According to the OECD, the main purpose of the plan is “to restore confidence in
the system and to ensure that profits are taxed where economic activities take place and value is created”.22 To increase tax transparency and to tackle tax avoidance, action plan 13 gives
guidance on how countries should adjust the required transfer price documentations, including the CbCR. The objectives of action plan 13 are listed by the OECD as:23
1. to ensure that taxpayers give appropriate consideration to transfer pricing requirements in establishing prices and other conditions for transactions between associated enterprises and in reporting the income derived from such transactions in their tax returns;
2. to provide tax administrations with the information necessary to conduct an informed transfer pricing risk assessment; and
3. to provide tax administrations with useful information to employ in conducting an appropriately thorough audit of the transfer pricing practices of entities subject to tax in their jurisdiction, although it may be necessary to supplement the documentation with additional information as the audit progresses.
CbCR’s information disclosure
Once in force, the initiative requires MNEs to provide the local tax authorities with tax related information following the three-tiered standardized approach. 24
Firstly, the MNEs need to create a master file that contains a high-level overview of the company’s global core activities, its overall transfer pricing policies, and its global allocation of income and economic activities.25 The main purpose of the master file is to provide the tax
administrations with adequate information to evaluate any potential company specific transfer pricing risks. The master file should also contain a “blue print” of the company’s group and
20 Murphy, R. (2012). Country-by-country Reporting: Accounting for globalization locally. P.2. 21 OECD. (2015). BEPS explanatory statement. P. 6.
22 OECD. (2015). BEPS explanatory statement. P. 4.
23 OECD. (2015). Transfer pricing and Country-by-Country Reporting. P. 12. 24 OECD. (2015). Transfer pricing and Country-by-Country Reporting. P. 10. 25 OECD. (2015). Transfer pricing and Country-by-Country Reporting. Pp. 14-15.
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should provide the MNE’s group’s organizational structure, a description of its businesses, its intangibles, intercompany financial activities and its financial and tax positions.26
Secondly the local file, created separately for each jurisdiction the company’s entities are located in, is required to contain transfer pricing information specific to material transactions of the local tax payer. The file needs to include the cost, price, provisions and licenses of the item traded for each material transaction. This file also needs to include a description of the local structure and of the local management team.27
Finally, a CbCR is required which consists of three templates. In the first template, the tax payer provides aggregated tax information for each jurisdiction relating to the global allocation of income and taxes paid. 28 The purpose of this template is to help the local authorities with
high-level transfer price risk assessment purposes. The template consists of a table that gives an overview of the allocation of income, taxes and business activities of the MNE per tax jurisdiction and requires the following information:29 30
• total revenue
• profit before income tax • income tax paid on cash basis • income tax accrued for current year • stated capital
• accumulated earnings • number of employees
• tangible assets other than cash and cash equivalent
The second template forms a list of all constituent entities of the MNE group, aggregated per tax jurisdiction.31 Included in the template are the names of the constituent entity resident in
the tax jurisdiction, the organization’s tax jurisdiction or incorporation if different from tax jurisdiction of residence and the category of the organizations main business activity. For example, R&D, holding or managing intellectual property, purchasing or procurement, manufacturing or production, etc.3233 The final template is optional and presents the tax payer
with an opportunity to provide any additional information, such as explanation of the
26 OECD. (2015). Transfer pricing and Country-by-Country Reporting. P. 15. 27 OECD. (2015). Transfer pricing and Country-by-Country Reporting. Pp. 27-28. 28 OECD. (2015). Transfer pricing and Country-by-Country Reporting. P. 16. 29 OECD. (2015). Transfer pricing and Country-by-Country Reporting. P. 29. 30 For official templates please refer to the Appendix tables 2,3 & 4. 31 OECD. (2015). Transfer pricing and Country-by-Country Reporting. P.30. 32 OECD. (2015). Transfer pricing and Country-by-Country Reporting. P. 30. 33 For the remaining list of categories please refer to Appendix table 3.
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information provided to help the tax authority better understand the compulsory information provided.
Final CbCR version compared to the 2014 draft
Although the final version of the CbCR presented by the OECD in 2015 has been described as innovative, it has still been severally watered down when compared to the previous draft version published in 2014.34 The most significant alternations can be summarized as follows:35 36
• The previous version proposed publishing additional information such as employee remuneration costs, related-party royalty payments, related-party interest payments, relayed-party service fees and total withholding taxes paid. All of these figures, which have not been implemented in the final version of the OECD’s CbCR are deemed to be essential in finding out whether a company actively avoids taxes.
• Although the previously mentioned threshold of € 750 million represents about 90% of all corporate revenue, only 10-15% of all the MNE groups are included in the scope. As a solution, the previous draft included a tool that enabled local tax authorities to request the information from MNEs not required to file CbCR through a special request. This tool has not been included in the final version.
• Specific guidance rule on the scope of the included MNEs which has been discussed in the draft version is missing in the final one. This means that private investment funds such as private equity groups and tax-exempted organizations will not have to file CbCR if the group does not consolidate its reporting.
• Finally, the discussion about the publication of the CbCR in the draft version has also not been represented in the final version. As such, under current OECD guidelines the CbCR will only have to be made available to the tax administrations and not to the public.
Implementation by the EC
By making OECD’s CbCR compulsory, the EC has followed a global trend of increasing tax transparency. Under the council directive 2016/881/EU, the EC requires all MNEs with total consolidated revenue equal to or higher than € 750 million, located in the EU or with operations in the EU, to file country-by-country report.37 The per jurisdiction report, structured by the
previously discussed OECD’s BEPS action plan 13 templates, has to be filed in the Member
34 OECD. (2014) Discussion Draft on Transfer Pricing Documentation and CbC Reporting. Public Consultation. 35 TUAC. (2016). The Case for Making Country-by-Country Reporting Public, p.5.
36 For the full list of comparisons of required information please refer to Appendix Table 6 - Comparison by data requirements. 37 EC. (2016). Country-by-country reporting.
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state in which the ultimate parent entity of the MNE or any other reporting entity is a resident for tax purposes. The Member state is required to automatically exchange the reports with any other Member state in which one or more constituent entities of the MNE are either resident for tax purposes or are subject to tax with respect to the business carried out through a permanent establishment.
Figure 2 - Implementation of CbCR by the EC 38
The implementation time line can be seen above in Figure 2. The reports are to be filed annually starting with the year 2016. The reports are due not later than 12 months after the last day of the MNE’s group fiscal year, making the first deadline December 31, 2017. These reports should be automatically exchanged by each Member State with other Member states tax authorities not later than 30 June 2018.39
2.3 EC’s Public Country-by-Country Reporting
Alongside the introduction of CbCR, following the templates set by the OECD, the EC is trying to push tax transparency even further. On 12 April 2016 the EC proposed to amend accounting directive 2013/34/EU. Under this amendment, all large MNE groups with a total revenue of or exceeding € 750 million, with undertaking or branches within the EU are required to include a version of CbCR in their annual public financial reporting.40
EC’s objectives
With this proposal, the EC is trying to tackle tax avoidance through increasing tax transparency even further. It believes that the pressure of public scrutiny will lead to taxing profits effectively where they are generated. Furthermore, it believes that public scrutiny can increase public
38 OECD (2017), Country-by-Country Reporting: Handbook on Effective Implementation. p. 10. 39 OECD (2017), Country-by-Country Reporting: Handbook on Effective Implementation. p. 10.
40 EC. (2016). Proposal for a directive of the European Parliament and of the council amending Directive 2013/34/EU as regards
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trust in the tax system as well as companies’ corporate social responsibility to pay ‘fair’ amount of corporate taxes.41
Public CbCR’s information disclosure
The directive requires the presented information to be disaggregated per country for corporations’ activities in the Single Market and for all the countries which are on the tax heaven list created by the EC, due to deliberately creating a prominent landscape for tax avoidance and tax evasion.42 The reaming activities outside of the Single Market can be
disclosed aggregated.
Under article 48c of the directive, the companies shall present the information separately for each Member state and should include:43
• A brief description of the nature of the activities • The number of employees
• The amount of net turnover, which includes the turnover made with related parties • The amount of profit or loss before income tax
• The amount of income tax accrued (current year) which is the current tax expense recognized on taxable profits or losses of the financial year by undertakings and branches resident for tax purposes in the relevant tax jurisdiction;
• The amount of income tax paid which is the amount of income tax paid during the relevant financial year by undertakings and branches resident for tax purposes in the relevant tax jurisdiction; and
• The amount of accumulated earnings.
Public CbCR vs. OECD’s CbCR
When compared to the OECD’s CbCR, EC’s public CbCR seems to be similar, however, key differences are present.44 As mentioned before, EC’s CbCR requires corporations to disclose
CbCR as part of their public financial statements whereas OECD’s CbCR only required for it to be shared with the local tax authorities. Furthermore, to get the proposal approved, the EC’s seems to have trimmed the required information. Under the proposal the corporations do not
41 EC. (2016). Proposal for a directive of the European Parliament and of the council amending Directive 2013/34/EU as regards
disclosure of income tax information by certain undertakings and branches. P. 2.
42 For current list of non-cooperative jurisdictions for tax purpose published on 5 December 2017 please refer to:
http://www.consilium.europa.eu/media/31945/st15429en17.pdf
43 EC. (2016). Proposal for a directive of the European Parliament and of the council amending Directive 2013/34/EU as regards
disclosure of income tax information by certain undertakings and branches. pp. 14-15.
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need to separately disclose revenues with third parties and related parties and are not required to disclose stated capital, accumulated earnings and tangible assets other than cash and cash equivalents.
Implementation process
Currently, the future and potential implementation of EC’s public CbCR remains uncertain. On 4 July 2017, the European Parliament (EP) approved the proposed directive and adopted a number of amendments. The main two were: not allowing aggregation of data from outside of the Single Market and temporary omission, subject to a yearly requested authorization, of information that would be seriously harmful to the business activities of the MNE group.45 As
of now, the directive seems to be ‘stuck’. The council of EU member states continue debating the proposal. Until the debate has been resolved, the negotiations between the council, EC and the European Parliament cannot be initiated. As the member states seem to be divided on this matter, the chances of the actual implementation seem to be bleak.46
2.4 Australia’s Tax Transparency Code
Australia is another country that is following the trend of increasing corporate tax transparency. In addition to the implantation of OECD’s CbCR, which is only available to Australia’s tax authorities, the Australia’s Board of Taxation has introducing the Tax Transparency Code (TTC). The code is a voluntary set of principles and standards designed to involve medium and large businesses in relation to the public disclosure of tax information.47 The TTC has
been endorsed by the Australian government in the Federal Budget of 2016-2017.
TTC’s objectives
The main idea behind the introduction of the code is to complement Australia’s existing tax transparency measures, encourage increasing of tax transparency within the corporate sector and to enhance the community’s understanding and involvement in Australia’s corporate tax law.48
TTC’s information disclosure
The companies that are highly encouraged to disclose their tax information are medium, businesses with and aggregated Australian turnover of at least A$100 million but not more than A$500 million, and large companies with and aggregated Australian turnover of A$500
45 Eurodad. (2017). Public country by country reporting: state of play in Europe December 2017. P. 3. 46 Eurodad. (2017). Public country by country reporting: state of play in Europe December 2017. Pp. 6-7. 47 ATO. (2016). Voluntary Tax Transparency Code.
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million or more. Medium companies are only encouraged to disclose Part A of the code where as large companies are encouraged to disclose part A as well as part B. Part A excerpts include:49
• “Businesses should disclose a reconciliation of accounting profit to income tax expense, and from income tax expense to income tax paid or income tax payable. • The reconciliation should also identify material temporary or non-temporary
differences.
• Businesses should disclose an Australian accounting effective tax rate (ETR) and a global ETR for the worldwide accounting consolidated group calculated based on company tax expense.”
Part B forms an extension:50
• “Company’s tax policy, tax strategy and governance including approach to risk management and governance arrangements, attitude towards tax planning, accepted level of risk in relation to taxation; and approach to engagement with the ATO.
• Company’s total tax contribution. This consists out of disclose of Australian corporate income tax. However, the corporation can also optionally disclose other Australian taxes and imposts paid to Government, for example Petroleum Resources Rent Tax, royalties, excises, payroll taxes, stamp duties, fringe benefits tax and state taxes as well as disclosure of Government imposts collected by the business on behalf of others, for example, GST and Pay as You Go withholding taxes.
• Company’s international related party dealings. This should provide a qualitative disclosure of key categories of dealings with offshore related parties which have a material impact on the business’s Australian taxable income, including the nature of material categories of dealings and the country in which the related party is located.” TTC’s implementation
The board hasn’t published any template or format in which the information should be presented nor the specific placement of the disclosure. Therefore, companies are free to either disclose the information in their general public financial statements or they can create a specific file for it. Furthermore, as the code is purely voluntary, there are no legal fines, deadlines nor required audits. Instead, the board encourages all medium and large companies, including domestic companies and foreign MNEs active in Australia, to disclose the information for each
49 ATO. (2016). A tax transparency code. P. 18. 50 ATO. (2016). A tax transparency code. Pp. 19-21.
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fiscal year ending after 30 June, 2016.51 Although the disclosure of TTC is officially voluntary,
the Australia’s government has warned the public that the initiative might become mandatory if not enough corporations decide to participate.
TTC vs. OECD’s CbCR
Compared to OECD’s CbCR, the Australian tax authorities have chosen to make TTC voluntary and publicly available. By doing so the authorities have moved the responsibility to the tax payer. Not participating or not disclosing the information advised to disclose, can send a negative signal to tax authorities, the public as well as investors. Although the numerical information disclosed through TTC is similar to the OECD’s CbCR, TTC advises larger corporations, with a turnover of A$500 million or more, to disclose company’s tax strategy, total Australian tax contribution and dealings with international related parties that have a material impact on the Australian’s taxable income.
2.5 EU’s Capital Requirements Directive IV: Article 89
The public CbCR proposed by the EC isn’t the first of its kind. In 2013 the EC, under CRD IV: Article 89, has introduced globally the first and only sector wide mandatory public CbCR. The reporting is compulsory for all credit institution (e.g. banks) and investment firms that are located or active in the EU.
Article 89’s objectives
During the inauguration of CRD IV, the vice president of the EC described the purpose of CbCR required by article 89 as "Country-by-country reporting would allow stakeholders to gain a better understanding of the structures of financial groups, their activities and geographical presence and help to understand whether taxes are being paid where the actual business activity takes place. Mandatory country-by-country reporting is an important element of the corporate responsibility of institutions towards stakeholders and society and will help to restore trust in the banking sector. Today's report shows that the reporting obligations under CRD IV are not expected to have a significant negative economic impact, including on competitiveness, investment, credit availability or the stability of the financial system." 52
The CRD IV is part of a broad regulation and supervision framework of the EU’s banking sector, following on the previously introduced Basel II-IV and CRD I-III. All of these have been
51 List of companies and their reports that have currently disclosed tax information following the TTC can be found on:
http://taxboard.gov.au/current-activities/transparency-code-register/
52 EC. (2013). European Commission assesses economic consequences of country-by-country reporting requirements set out in
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introduced by the EU in the wake of the financial crisis. As most of the public and politicians blamed the financial market for the crises of 2009, the EU was forced to increase public trust and prevent potential future crises.
Article 89’s information disclosure
To increase transparency of the financial sector’s tax affairs, CRD IV, Directive 2013/36/EU, includes article 89. Under this article, all financial institutions and investment firms, which are regulated under CRD IV, are obligated to disclose annually, specifically to Member State and to the third countries in which it has an establishment, the following information on a consolidated basis:53
a) Name(s), nature of activities and geographical location; b) Turnover;
c) Number of employees on a full-time equivalent basis; d) Profit or loss before tax;
e) Tax on profit or loss; f) Public subsidies received.
Under the directive, all the above listed items are required to be publicly disclosed as of 1 January 2015. The items should be published as part of an annex to the consolidated financial statement of the institution. Contrary to the requirements from BEPS’s action plan 13, article 89 presents no actual template for the publication. As a result, each institution has to decide on its own approach to the publication.
CRD IV CbCR vs. OECD’s CbCR
As the capital requirement directive has mainly been created to restore public’s trust in the financial market, it differs from OECD’s CbCR. Under the capital directive, corporations need to disclose their CbCRs publicly, but they do not need to separately disclose revenues with third parties and related parties and are not required to disclose stated capital, accumulated earnings and tangible assets other than cash and cash equivalents. In addition, the capital requirement directive requires the disclosure of public subsidies received. This last requirement originates from fact that the directive has been implemented to help increase public trust in the financial sector. One of used tools was to require disclosure of the subsidies the companies receive from the government.
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2.6 Extractive Industries Transparency Initiative
The final method discussed in this paper is the Extractive Industries Transparency Initiative (EITI). The push for more transparency in the global extractive sector began in 1999 after a high-profile scandal involving British Petroleum and an Angola’s state-owned oil company, which involved the embezzlement of a large amount of state funds by the Angolan political elites.54 The scandal has led to the formation of the Publish What You Pay initiative in 2002,
which started lobbying for more transparency in the extractive industries.55
EITI’s objectives
The initiative was first launched by the UK’s Prime Minister Tony Blair at the World Summit on Sustainable Development in Johannesburg in 2002. It has been developed to “increase transparency over payments and revenues in the extractives sector in countries heavily dependent on these resources”.56 Its implementation was deemed necessary as high levels of
corruption in the recourse dependent countries led to uneven distribution of wealth made by the sector.57
EITI’s information disclosure
Each country with an extractive sector that wishes to participate is free to do so, as the initiative works on a voluntary basis. It consists of a multi-stakeholder group (MSG) that includes governments, companies, investors, civil society organizations and partner organizations. Each country that joins the initiative is responsible for creating its own MSG that will oversee the process and will create specific standards for the country. Once a country joins all the companies and all government agencies that make or receive payments within the extractive sector are required to comply with the approved standards. The EITI’s International Secretariat, currently located in Norway, is responsible for the global application of the standards as well as the intake of new countries.
The version of the standards published in 2016 consists out the following 6 requirements:
1. Oversight is to be provided by the created MSG, including on Government, companies involved in the industry and the civic society.58
2. A legal and institutional framework has to be placed, including the allocation of contracts and licenses. Under this requirement the government is required to present
54 Global Witness. (1999). A Crude Awakening.
55 TUAC. (2016). The Case for Making Country-by-Country Reporting Public. p.9 56 UK Government. (2003). Statement of Principles and Agreed Actions. 57 EITI. (2018). Factsheet as of February 2018.
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an overview of the local legal framework and fiscal regime as well as a description of how licenses are allocated and is required to publicly disclose their registry. As of 2020 beneficial ownership is required to be disclosed as well.59
3. The country should disclose an overview of the local extractive industry, including exploration.
4. The most important requirement for this thesis is requirement 4 concerning revenue collection. This requires the companies and the government to publicly disclose all payments, above the agreed materiality, that have taken place between the extractive industry and the government. All the payments will also be subject to independent reconciliation and include 60:
i. The host government’s production entitlement (such as oil profit) ii. National state-owned company production entitlement
iii. Profit taxes iv. Royalties
v. Dividends
vi. Bonuses, such as signature, discovery and production bonuses
vii. License fees, rental fees, entry fees and other considerations for licenses and/or concessions
viii. Any other significant payments and material benefit to government
5. Disclosure of how revenues from the industry are used by the government in its budget.
6. Disclosure of material social expenditures by the companies. EITI’s implementation
As mentioned, the initiative is completely voluntary and it relies on the local government and the MSGs to implement the reporting requirement and to what extent. In terms of practical implementation, the companies report requested information to the government using a relevant template. Before the government publicly discloses the final reports, the submitted information needs to be analyzed and reviewed by an independent third party. As of today, 51 countries, out of which 31 are fully compliant, have implemented the EITI reporting with an average of $ 6.2 billion per country disclosed in the latest reports.61 In addition, the initiative is
supported by over 90 world’s biggest oil, gas and mining companies. The turmoil surrounding
59 EITI International Secretariat. (2016). The EITI Standard 2016. Pp.17-21. 60 EITI International Secretariat. (2016). The EITI Standard 2016. P. 23. 61 EITI International Secretariat. (2018). Progress report 2018. P.1.
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the financial crisis has also increased the number of jurisdictions which implemented EITI as mandatory for its extractive sectors.
EITI vs. OECD’s CbCR
EITI differs from the OECD’s CbCR. Its main focus is to tackle corruption that takes place in the extractive industry around the world. To win contracts for extraditing minerals in certain countries, where corruption is common, companies tend to make payments to the government figures. EITI tries to prevent this by requiring companies to publicly disclose material payments made to the governments instead of just disclosing the total value of revenues and taxes paid by a corporation as required under the OECD’s CbCR.
2.7 Other alternative methods
The methods that have been discussed in this paper have been chosen due to their innovative ways of tackling tax avoidance. Public EC is relevant as it is seen as an extension or even an improvement of the current OECD’s CbCR system. The EU’s Capital Requirement Directive IV was the first directive that included public mandatory CbCR for a specific sector, therefore provides us with data required for the analysis part of this paper. EITI has been selected due to its alternative nature of increasing tax transparency. Unlike CbCR it requires a disclosure of all material payments disaggregated per country. TTC was selected as it was the first voluntary, nationwide method. In addition, TTC is also relevant as it requires MNEs to disclose their official tax policies and the tax impact of involvement with foreign related parties.
Dodd-Frank act and Canada’s Extractive sector transparency measures act have deliberately not been chosen due to their significant overlap with EITI. In addition, CRD IV, EITI and TTC are public and have been implemented for some time. This has given researchers time and data to analyze and publish studies about their effects.
Other relevant methods that have been considered are the Common Reporting Standard (CRS) and public tax returns. CRS is an information standard for automatic exchange of tax information between tax authorities.62 It has been developed and launched by the OECD in
2014. Although CRS is a great tool in fighting tax avoidance and tax evasion it currently only exchanged information about personal account balances and capital gains such as dividends and interests. Due to being developed for tackling personal tax evasion and not tax avoidance of MNEs CRS is not relevant for this paper.
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Publicly available tax returns are currently available in Sweden, Denmark, Norway and Finland. Most countries of these countries make the information available on request and with limited amount of data. Although highly relevant, publicly available tax returns will not be discussed in this paper as their broad nationwide implementation does currently not seem realistic due to confidentiality concerns.
2.8 Sub-conclusion
In chapter two of this thesis the sub question 1 ‘What is OECD’s country-by-country reporting and what are the alternative methods?’ has been answered. Section 2.1 described tax avoidance and the issues that surround corporate tax transparency. Tax avoidance is accepted and considered legal. However, it is seen as ‘aggressive’ when the letter of the law is knowingly interpreted in bad faith in order to obtain a tax advantage by possibly violating the spirit of the law. MNEs engage in tax avoidance in order to increase their profits and lower their effective tax rates. Tax transparency under the current financial reporting is limited. The main reason for this is the fact that the current financial standards are set up to produce relevant reports for the managers, investors and shareholders and not designed for the benefit of local tax administrations. Because the reports are consolidated and aggregated, they lack a clear overview per jurisdiction.
In 2015, the OECD has come up with their final BEPS report. Action plan 13 of the report has been developed to increase corporate tax transparency by requiring companies to disclose a master file, local file and CbCR for each jurisdiction in which they are active. The EC has made OECD’s CbCR part of the law and requires all MNEs located in the EU or with operations in the EU, with total consolidated revenue equal to or higher than € 750 million, to file a country-by-country report. The report consists of tax information disaggregated per jurisdiction, is to be presented for each company’s fiscal year ending after 1 January 2016 and is to be filed in the Member state in which the ultimate parent entity of the MNE is residing. The reports are automatically exchanged between Member states as of 30 June 2018.
The EC is trying to increase corporate tax transparency even further by proposing an amendment of the accounting directive 2013/34/EU that would require all MNEs located in the EU or with operations in the EU and with total consolidated revenue equal to or higher than € 750 million to disclose CbCR as part of their public financial statements. Due to ongoing debate by the Member states, the actual implementation of the amendment is unclear.
Australia is tackling the void of corporate tax transparency by introducing Tax Transparency Code alongside OECD’s CbCR. Compared to the OECD’s CbCR, the initiative is voluntarily and encourages corporations to disclose their companies’ tax strategy, total Australian tax
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contribution and dealings with international related parties that have a material impact on the Australian’s taxable income. TTC’s objectives are to improve existing tax transparency measures, to encourage voluntary increase of tax transparency within the corporate sector and to enhance the community’s understanding and involvement in Australia’s corporate tax law. By making the code voluntary ATO believes that corporations’ management themselves will be more active in making the companies more tax transparent.
Before the introduction of OECD’s CbCR and EC’s public CbCR the EC has already required all credit institution (e.g. banks) and investment firms that are located or active in the EU to publicly disclose CbCR as part of their consolidated financial statements. This requirement has been introduced in 2013 under the Capital Requirements Directive (CRD) IV article 89. The directive has been mandated to increase transparency and public’s trust in the financial sector, which deteriorated significantly after the financial crisis.
The final method presented in this chapter was the Extractive Industries Transparency Initiative. The initiative has been proposed to tackle corruption and low transparency in the global extractive industry. Being the oldest implemented transparency initiative discussed in this paper, it requires governments and companies, active in extractive industries in countries where EITI has been introduced, to publicly disclose information about material payments that have taken place between the extractive industry and the government. The initiative is voluntary and it depends on the government of each country whether it wishes to implement it. However once implemented by the competent authorities the reporting becomes mandatory for the entire extractive sector of the country.
In the next chapter, criteria will be introduced which will be used to analyzed each of the discussed methods.
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3. Criteria
This chapter describes criteria which will be used to analyze each of the methods mentioned in the previous chapter. Currently no clear list of criteria for analyzing CbCR and its effect on preventing tax avoidance has been introduced by any published papers. To still be able to analyze and compare the available methods this paper creates criteria based on a review of the literature and the discussion surrounding CbCR. Firstly, subchapter 3.1 will introduce effectiveness. This criterion tests each methods effect on tax transparency perceived by tax authorities and the public. The next subchapter 3.2 will discuss confidentiality. Confidentiality is essential as disclosing sensitive information to the public can result in loss of competitiveness and reputational damage. Final criterion, feasibility, will be discussed in subchapter 3.3. This criterion describes the potential compliance costs and required adjustments of the reporting systems due to the implementation of the methods. The chapter ends with a sub conclusion.
Criteria which are relevant but will not be discussed in this paper are effect on governments’ tax income and effect on public tax moral. Effect on governments’ income will not be discussed in this paper as the literature required for the analysis is not available. Mainly empirical research is missing. Effect on public tax moral will also not be discussed due to lack of presence in the academic discussion.
3.1 Effectiveness
According to the OECD the overall aim of BEPS measures is “to close gaps in international tax rules that allow multinational enterprises to legally but artificially shift profits to low or no-tax jurisdictions”.63 In other words, the main goal of the BEPS measures is to prevent tax
avoidance. As mentioned in the previous chapter, according to the OECD, CbCR’s part in reaching this goal is increasing tax transparency.
3.1.1 Tax transparency and the tax authorities
Tax transparency is essential for the tax authorities in order to be able to asses potential tax risks and fairly tax the tax payer.64 In their paper 65, Blouin et al (2012) concluded that when a
company engages in tax avoidance behavior their financial corporate tax transparency decreases. This suggests that by implementing a tax transparency improving measure, such as CbCR, tax authorities should be able to more effectively spot signs off tax avoidance and
63 OECD. (2015). Policy briefing BEPS update no.3.
64 Murphy, R. (2012). Country-by-country Reporting: Accounting for globalization locally. Pp. 6-7.
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be able to tax profits where the actual economic activities take place. On the other hand, the MNEs should feel less likely to engage in tax avoidance activities due to the fact that tax avoidance behavior will be harder to hide.
Although the methods, mentioned in the previous chapter, have different objectives they share a main goal of increase of tax transparency. Therefore, the effectiveness of the methods will be measured by their effect on increase tax transparency as perceived by the tax authorities. This includes analyzing the quality of the information that becomes available to them and the methods usefulness in assessing potential tax risks.
3.1.2 Tax transparency and the public
The improvement of tax transparency is not just crucial for the tax authorities to be able to asses potential tax risks but also for the decision-making process of all interested parties in the business of a MNE, social groups, employees and the broad public.66 Introduction of
publicly available CbCR can lead to additional supervision by the public which can lead to future discoveries of tax avoidance hence improving the corporate tax system.67
Under this criterion the effectiveness of the methods will be measured by their effect on increase of tax transparency as viewed by the public. This includes the quality of the information that becomes available to the public and its usefulness in discovering tax avoidance.
3.2 Confidentiality
The next criterion which will be used to analyze the methods is confidentiality. When a corporation discloses any type of information outside of its company, business confidentiality plays an important role. Concerning CbCR, corporations fear that disclosing the reports publicly will have negative effect on their competitiveness and might lead to reputational damage.68
3.2.1 Competitiveness
According to the critics 69 concerns surrounding loss of competitiveness boil down to
requirement of disclosing information that could include trade secrets and other commercially
66 Murphy, R. (2012). Country-by-country Reporting: Accounting for globalization locally. Pp. 36-37. 67 TUAC. (2016). The Case for Making Country-by-Country Reporting Public. Pp. 6-7.
68 TUAC. (2016). The Case for Making Country-by-Country Reporting Public. Pp. 6-7.
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sensitive information. Allegedly, public disclosure of sensitive information can be used by the competitors to gain an unfair advantage.
To determine whether these arguments are true, under this criterion confidentially will be measured by analyzing each method’s effect on corporations’ competitiveness. The effect will be analyzed by researching literature available on this topic.
3.2.2 Corporation’s reputation
Another argument in the discussion surrounding confidentiality is the fear that disclosing sensitive information to the public can lead to reputational damage.70 The main concerns are
that misinterpretations can lead to unfair accusations which can have negative impact on company’s reputation. Impact on reputation is of importance as for some corporations their brand and reputation are crucial for their survival.
To determine whether these arguments are true, under this criterion confidentially will be measured by analyzing each method’s effect on corporations’ reputation. The effect will be analyzed by researching literature available on this topic.
3.3 Feasibility
For the methods to be successful in achieving their purpose, they need to be practical when implemented into the ‘real’ world. Additional mandatory reports often require the corporation as well as the governments to implement new administrative systems, adjust existing reporting and training of staff. Furthermore, if the reports become too expensive and complex to prepare their eventual added value becomes negative.
Some argue that the costs of implementation of CbCR requirement will be significant and that the required information is not always available.71 To analyze whether these arguments are
correct, under this criterion the methods will be tested for feasibility by analyzing the impact on the corporations and the government. The items that will be tested under this criterion include the potential costs of implementation of each method and the potential adjustments of the financial reporting systems required in order to obtain the needed information.
3.4 Sub-conclusion
In chapter 3 of this thesis the sub question 2 ‘Which criteria are relevant to test how good each method is in preventing tax avoidance?’ has been answered. These criteria are effectiveness,
70 TUAC. (2016). The Case for Making Country-by-Country Reporting Public, P.9
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confidentiality and feasibility. Under effectiveness, the methods will be tested for their effect on tax transparency as perceived by the public and the tax authorities. Under criterion confidentially, the effect of the disclosed information on competitiveness and reputation of the corporations will be analyzed. Final criterion will be feasibility. This criterion will be used to determine what the additional cost and adjustments of reporting systems will be required for the governments as well as the corporations due to implementation of the new methods.
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4. Analysis
In this chapter the methods described in chapter 2 will be analyzed using the criteria mentioned in the chapter 3. The sub question that will be essential in this chapter is: Based on the chosen criteria, which model prevents tax avoidance the most?
Firstly, subchapter 4.1 will analyze OECD’s CbCR. The next subchapter 4.2 will discuss the public CbCR proposed by the EC. In the next subchapter 4.3, Australia’s tax transparency code will be analyzed. Subchapter 4.4 will discuss EU’s Capital requirement directive IV: Article 89 and finally in subchapter 4.5 EITI will be analyzed. The chapter ends with a sub-conclusion which will summarize the analyses of the methods.
4.1 OECD’s Country-by-Country Reporting
To analyze OECD’s CbCR this subchapter is separated into parts in accordance with the criteria.
Effectiveness for the tax authorities
To determine whether the OECD’s CbCR is effective in tackling tax avoidance through the increase of tax transparency perceived by the tax authorities, the literature on this subject will be thoroughly analyzed in this paragraph.
The main objective of action plan 13, as mentioned in subchapter 2.2, is to give the tax authorities insight in the company’s decision-making process while setting up its transfer prices and to asses transfer price risks. In addition, it provides the tax authorities with CbCR. As discusses CbCR improves tax transparency on multiple occasions.
The greatest improvement of tax transparency due to the implementation of CbCR is the information that becomes available to the local tax authorities. Until the implementation, the only tax information that the tax authorities had available was the local tax return of the subsidiary or permanent establishment residing in the country in question and the global consolidated financial statements. As mentioned in chapter 2 the financial statements do not provide tax authorities with the required information in order to determine whether a company engages in tax avoidance behavior due to the lack of geographical transparency. The same holds for the local tax return of a subsidiary of a MNE as it gives a limited view of the complex global supply chain of a corporation. CbCR on the other hand, presents the tax authorities with the opportunity to obtain a total picture of corporations’ operations, tax information about all subsidiaries including subsidiaries located in tax heavens, countries that currently do not tax corporations profit hence do not require to a tax return and countries with whom an information
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exchange agreement is not in place.72 This is due to the fact that the parent company has to
include all of its subsidiaries in the report.73 The tax authorities of Member state will be able to
obtain this information even if the parent company doesn’t reside in its country by using the multilateral competent authority agreement which requires member state to automatically exchange information with other Member states.74 The information gives the tax authorities an
overview of how much taxes a MNE pays in each jurisdiction and where it declares its profits. It also provides them with the opportunity to effectively asses potential tax risks and to determine whether a MNE pays a ‘fair’ share of taxes.75 According to Fued et al. 76, increase
of scrutiny and available information for the tax authorities, decreases the incentive of the tax payer to engage in tax avoidance activities.
Although the OECD’s CbCR presents the tax authorities with information that they never had an access to before, the critics have concerns about the effectiveness in increase of tax transparency of the final version of the initiative. Firstly, compared to the 2014 version of the CbCR proposal, the OECD has decided not to require a disclosure of intercompany interest, royalties and other payments. This choice is remarkable as the theory suggests that IP licensing arrangements and intercompany debt financing seem to be most used tools of tax avoidance.77 Another requirement missing compared to the 2014 version is withholding tax.
Critics condemned the exclusion of withholding tax because it can be used to identify potential tax avoidance such as treaty shopping.78
Contradicting the draft version of 2014, the final version also includes a consistency breach that has a negative effect on the usefulness of the reports. Under the final action plan 13 corporations can use multiple sources for the data used to prepare the reports. The corporations can choose between statutory or regulatory financial statements as well as internal management accounts. The only known restriction is that the used source needs to remain the same from year to year. The corporation have been allowed to do so after an extended discussion with the OECD.79 By doing so the OECD has tried to help the MNEs
comply with the new reports while allowing them to use existing available data. The choice however has created a leeway for manipulation of data sources as well as worsening of comparability of the information. The corporations for example will be able to choose data that in the long run can help them hide tax avoidance practices. In addition, the comparability of
72 Murphy, R. (2012). Country-by-country Reporting: Accounting for globalization locally. Pp. 60-63. 73 Murphy, R. (2012). Country-by-country Reporting: Accounting for globalization locally. Pp. 60-63. 74 EC. (2016). Country by country reporting.
75 OECD. (2017). Country-by-Country Reporting: Handbook on Effective Tax Risk Assessment. Pp. 15-16. 76 Fung, A., Graham, M. and Weil, D. (2007), Full Disclosure: The Perils and Promise of Transparency.
77 Bartelsman, E., J., & Beetsma, R., M. (2003). Why pay more? Corporate tax avoidance through transfer pricing in OECD
countries, or, EC. (2016). Estimating corporate profit shifting with firm-level panel data: time trends and industrial heterogeneity.
78 OECD. (2014). Discussion Draft on Transfer Pricing Documentation and CbC Reporting see the submission Christian Aid. 79 OECD. (2014). Discussion Draft on Transfer Pricing Documentation and CbC Reporting see the submission of A3F
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corporations’ data will worsen as comparing CbCRs of MNEs, that used different data sources to prepare them, leads to inconsistencies.
Another concern for the effectivity of the final CbCR version is that the action plans need to be implemented on a large scale and in as many countries as possible to obtain maximum amount of information. However according to the literature 80 developing countries will not be able to
take full advantage of the reports as their tax administrations lack the required networks and access to bilateral tax ties and tax information exchange agreements (TIEA). In case the parent company doesn’t reside in the country itself or a country with which the developing country has a TIEA the tax administrations will not be able to excess the required information in order to access the potential tax risks.
Furthermore, the critics 81 of CbCR argue that the incentive will not be successful in preventing
profit shifting as the schemes that the MNEs use to shift profit are not necessarily illegal and are within the letter of the law. Part of the conclusion of their paper, they advise to rather change the national and international tax laws as the existing loopholes seem to be the main obstacle of preventing tax avoidance.
Finally, the critics argue that by implementing a € 750 million threshold only 10-15% of all the MNEs will be required to file a CbCR.82 This will be providing MNE’s with a revenue below the
threshold with an unfair advantage and will not restrict them from engaging in tax avoidance.
Even though, OECD’s CbCR has a lower requirement standard when compared to the draft version of 2014, the data that has become available to the tax authorities can still be described as effective in increasing tax transparency perceived by the tax authorities. It also has to be noted that the exclusion of the mentioned items and the threshold can be readjusted in the future when the initiative will be revised.83 In addition, every jurisdiction has the option to
evaluate and modify the template in order to obtain more information. The information obtained can be used to adopt national and international tax laws to improve the fight against tax avoidance.
80 TUAC. (2016). The G20/OECD Base Erosion and Profit Shifting Package - Assessment by the TUAC Secretariat. P. 36. 81 Evers, M., Meier, I. and Spengel, C. (2014). Transparency in Financial Reporting: Is Country-by-Country reporting suitable to
combat international profit shifting? P. 2.
82 TUAC. (2016). The G20/OECD Base Erosion and Profit Shifting Package - Assessment by the TUAC Secretariat. P. 2. 83 OECD. (2017). Country-by-Country Reporting: Handbook on Effective Tax Risk Assessment. OECD.
