Navigating change: Steer your company through the effects of country-by-country reporting

Country-by-country reporting (CbCR) has gained significant prominence in recent years, particularly with the introduction of two key developments — the OECD’s Pillar Two Transitional CbCR Safe Harbor (CbCR Safe Harbor) and the growing requirements for public disclosure of the CbCR in many jurisdictions (e.g., Public CbCR). As a result, companies now are facing heightened demands for information and need to navigate these reporting frameworks effectively. To achieve this, it is crucial for companies to understand the complexities involved and develop a well-prepared and proactive strategy. Below is a high-level summary of each regime and actionable steps that companies can take to help ensure compliance and alignment with CbCR requirements.

CbCR Safe Harbor

The CbCR Safe Harbor allows multinational enterprises (MNEs) to reduce their obligations under the Pillar Two global minimum tax rules. It has a mechanical approach that requires a high level of accuracy and reliability of the CbCR data. The CbCR Safe Harbor can significantly reduce the compliance burden and the tax liability for MNEs under Pillar Two. When applicable, it reduces the Pillar Two top-up tax to zero for a particular jurisdiction, simplifies the calculation and generally eliminates the need for a full Pillar Two calculation under the model rules.

To comply with the CbCR Safe Harbor, MNEs should establish robust processes to prevent errors or inconsistencies in their CbCR. Failing to do so could result in disqualification from the CbCR Safe Harbor, with significant consequences under the “once out, always out” policy. Additionally, it may lead to tax authorities initiating audits or inquiries. There are also potential knock-on effects arising from routine transfer pricing compliance. For instance, the most recent OECD guidance, released in December 2023, imposes limitations on reflecting post-year-end transfer pricing adjustments on the CbCR.

Public CbCR

Public CbCR is a proposal to require MNEs to disclose their CbCR data to the public, rather than only to the tax authorities, to enhance transparency and accountability. The European Union (EU) has adopted a directive requiring all MNEs with consolidated revenues exceeding EUR 750 million and operations in the EU to disclose annually certain income tax information on a country-by-country basis to the public. Most of the 27 EU member states have transposed the directive into local legislation. While the EU directive applies to financial years beginning on or after June 22, 2024, the exact timing of the reporting obligation depends on individual member states’ implementation, as well as the individual fiscal year ends of different companies. Other countries, such as Australia, also are developing their own Public CbCR regimes.

Public CbCR poses additional challenges and risks for MNEs, such as:

• The potential exposure of sensitive or confidential information, such as business strategies, market shares or intellectual property, to competitors, customers, suppliers or regulators.
• The potential reputational damage or public reaction, especially from civil society groups, media or politicians, if the CbCR data reveals a perceived mismatch between the profits and taxes paid in different jurisdictions, or a low overall effective tax rate, regardless of the legal and economic reasons behind it.
• The potential increase in tax controversy and double taxation, since Public CbCR data could be used by tax authorities or other stakeholders to challenge or question companies’ transfer pricing or tax positions, or to impose additional reporting or documentation requirements.
• The potential inconsistency or complexity of complying with different Public CbCR regimes, as countries may have different rules or standards on the scope, format, content or timing of the Public CbCR disclosure, or on the reconciliation or explanation of any differences between the public and the confidential CbCR data.

Actions companies should be taking now

Here are five suggested actions to help drive your company’s CbCR strategy:

1. Understand the implications of CbCR: Whether disclosed as part of an obligation or in pursuit of an optional safe harbor, CbCR now has far-reaching implications for tax compliance and public, shareholder and media relations. Cross-coordination between tax and other relevant divisions in the company that handle legal, public communications and investor relations is important to achieve a coordinated and consistent approach.
2. Evaluate the CbCR Safe Harbor: The CbCR Safe Harbor requires a high level of accuracy and reliability of the CbCR data generally above and beyond CbCR for local tax compliance purposes. Evaluating this mechanism can significantly reduce the compliance burden and the Pillar Two top-up tax liability for MNEs. For a deeper discussion of the CbCR Safe Harbor and the specific criteria, please consult our prior blog post.
3. Prepare for Public CbCR: Public CbCR is already in effect for many jurisdictions and will require MNEs to disclose their CbCR data to the public, rather than only to the tax authorities, raising a whole new set of reputational and optics issues. Preparing for this change can help MNEs navigate the potential challenges and risks associated with Public CbCR. PwC has an EU Public CbCR tracker that helps track the latest developments, as well as a publication with an example overview of a 10-step plan. Companies should, however, do their own due diligence and consult with their tax professionals to determine the timing and requirements associated with their specific reporting obligations, since this is not a static space.
4. Protect sensitive information: Public CbCR poses the risk of exposing sensitive or confidential information, such as business strategies, market shares or intellectual property, to competitors, customers, suppliers or regulators. It is important for MNEs to have strategies in place to manage and protect this information.
5. Consult with professionals: As MNEs navigate these changes, it is important to stay informed and prepared. Consulting with a tax professional can help MNEs understand how these changes may impact their business and develop a proactive strategy to navigate them.

As MNEs navigate these changes, it is essential to stay informed and be prepared. For more insights on global tax developments, continue to follow TP Blogs and consider consulting with a tax professional to understand how these changes may impact your business.

To hear the authors discuss this issue live, listen to our TP Talks podcast, CbCR: The evolving landscape.

For more on the Pillar Two and CbCR Safe Harbor, please listen to Cross-Border Tax Talks, Pillar Two Safe Harbors: The CbCR journey, with David Ernick, a Principal in the Transfer Pricing Practice in Washington, DC and co-author of this article.