Shining the spotlight on Country-by-Country Reporting

With the introduction of public Country-by-Country Reporting (CbCR) and BEPS Pillar Two, is it time to re-think the approach to CbCR?

Revisiting CbCR - Public CbCR & Pillar Two

The progressive move towards greater tax transparency has been driven by both political and public pressure to ensure that multinational enterprises (MNEs) pay sufficient tax in each jurisdiction they operate in. The receipt of Country-by-Country Reporting (CbCR) data has enabled tax authorities to gain a better understanding of large MNE’s tax footprints. With the increasing focus on public perception and challenge, governments are introducing a requirement for MNEs to publish their CbCR data, most notably in the EU and Australia. Additionally, MNEs subject to the OECD’s BEPS Pillar Two rules now need to use their CbCR data to test if they meet the conditions of a transitional safe harbour. This will further increase the focus and scrutiny around the CbCR data and MNEs will be required to produce ‘Qualified CbCR’ to meet the safe harbour tests.

Public CbCR in a nutshell

The EU public Country-by-Country (CbC) Reporting Directive (the Directive) entered into force on 21 December 2021 and required EU Member States to transpose the Directive into domestic legislation by 22 June 2023, for application for accounting periods on or after 22 June 2024. Member states were able to adopt the rules early, which Romania has done and therefore Public CbCR in Romania will be applicable from 1 January 2023.

Australian Public CbCR will apply from 1 July 2024 and will be applicable to every MNE that has an Australian presence (entity or permanent establishment) no matter its size.

BEPS Pillar Two and ‘Qualified CbCR’ in a nutshell

In order to rely on the data to meet the tests for the transitional safe harbours under BEPS Pillar Two, the data must be taken from a ‘qualified CbCR’. Qualified CbCR is the financial reporting framework developed by the OECD to ensure MNEs are taking a consistent approach to CbCR data and reporting. A qualified CbCR is:

  • Required to determine qualification for some BEPS Pillar Two safe harbour provisions​;

  • Filed using unadjusted Consolidated Financial Statements of the ultimate parent entity or separate financial statements of each Constituent Entity provided​; and

  • Prepared under an authorised accounting standard (Qualified Financial Statement).

What next?

Groups will be subject to public CbCR if they have a qualifying presence in one of the jurisdictions they operate in, so they will need to monitor the legislation as it comes into force in each jurisdiction. The EU Directive is a minimum standard and therefore individual jurisdictions may introduce more rigorous requirements. The Australian Public CbCR is in the consultation stage and therefore there may be additional revisions to the proposed rules. 

MNEs seeking to rely on the safe harbours under Pillar Two should confirm that their CbCR meets the definition of a Qualified CbCR.

Groups should consider the following:

  • The impact of public CbCR legislation on the Group’s compliance processes;

  • Stakeholder management required for the publication of the CbCR data;

  • Whether the CbCR data in its current form meets the criteria of ‘qualified CbCR’;

  • Whether the existing process and governance model around the gathering of data, preparation of the report, and publication are sufficient; and

  • How would the man on the street interpret the public CbCR data? What additional narrative is required to accompany and provide context to the published data?

KPMG will continue to monitor these legislative developments. Please contact the authors or your usual KPMG in the UK contact if there are any points you would like to discuss further.