In 2015, the Organisation for Economic Co-operation and Development (OECD) launched country-by-country (CBC) reporting. At the time, there was widespread concern that taxpayer data would be used for other purposes and ultimately made public. This concern is about to become a reality.
Public disclosure of CBC reports, or similar tax data, is also not far away. The European Union (EU) approved its public CBC reporting directive in 2021. For most multinationals, the first period subject to reporting is likely to be 2025, though, depending on the group's specific footprint within the EU, it could be as early as 2023. Other non-EU jurisdictions are following a similar path. Most notably, Australia's 2022-2023 budget included a provision for public CBC reporting that applies to periods beginning on or after July 1, 2023. In March 2023, the Financial Accounting Standards Board in the United States published a proposed Accounting Standards Update addressing requests for companies to provide detailed breakdowns of the income taxes they pay globally.
What does this mean for U.S. multinationals, and how can a board ensure their company is prepared?
Set your processes now. Boards and stakeholders alike should be aware that most U.S. multinationals will be required to produce public tax disclosures. The EU directive requires groups to disclose their corporate income tax for each EU country and any country on the EU gray/blacklist, as well as an aggregate corporate tax figure for non-EU countries — data that should already be available in a company's CBC report. Groups should review their processes for gathering and reporting this data —knowing it will be disclosed publicly. Automation can make processes for gathering this data more reliable and efficient. For tax departments with less developed technology teams, partnering with tech-savvy parts of your business or an advisor may be a useful first step.
Build the landscape. The new reporting requirements mandate only that multinationals disclose the amount of income taxes they pay. But it may also be important to report more than just corporate income tax data to provide a more complete picture of their tax contributions. Reconfiguring or building the systems to collect this additional non-income tax data might take a company time, but as more stakeholders — including the board — demand greater transparency, this upfront investment may save money and time in the long run. It will be vital to consider how a company's information is collected, centralized and communicated to the board, as well as other stakeholders.
Determine your story. How a company presents its data externally is critical. What messages will a journalist or member of the public take away from the information disclosed? Some companies are using focus groups to understand how their tax story reads to the public and then reframing the information they will disclose to ensure they are telling the right story. Gathering total tax contribution data gives companies the opportunity to tell a wider and more complete story. For example, in countries where the company pays less corporate income tax, they may pay significant payroll or sales taxes. Lastly, tax departments should connect with their sustainability counterparts to determine if it is time to include tax in annual corporate citizenship or sustainability reports.
There is a lot to consider in the tax transparency and compliance space. And the list is only getting longer. As senior leaders, boards and other stakeholders consider their approach to tax transparency in light of the Pillar 2 safe harbor and mandatory public disclosure, it may be a good time to look more holistically at data and invest in partnerships that make reporting more efficient and your narrative most authentic.
Jessie Coleman is transfer pricing principal, Washington national tax, economic & valuation services, at KPMG US.
Alistair Pepper is managing director, Washington national tax, economic & valuation services, at KPMG US.
John DerOhanesian is managing director, Washington national tax, international tax, at KPMG US.