The European Union’s new country‑by‑country reporting rules (Article 48c of Directive 2021/2101) require multinational enterprises to disclose basic company data, employee numbers, revenues, profit or loss before tax, income tax accrued, cash‑basis income tax paid, and accumulated earnings. While the intent is to increase transparency, several technical choices in the directive are likely to generate double‑counting, anomalies, and figures that are difficult for investors and the public to interpret.
Revenue and Profit Issues
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Inclusion of related‑party transactions – The directive mandates that “revenues shall include transactions with related parties.” This means intra‑group sales—such as a subsidiary selling components to another part of the same multinational—are counted as revenue, inflating the top line compared with standard consolidated reporting under IFRS or US GAAP, which eliminate intragroup sales.
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Treatment of related‑party dividends – While the directive excludes related‑party dividends from revenue, it does not provide a parallel exclusion for profit calculations. Consequently, dividend income from subsidiaries can be added to profit while the corresponding revenue is omitted, potentially producing profit figures that exceed revenues, especially in holding‑company structures.
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Inconsistent reporting bases – Article 48c(2) defines a specific reporting basis, but Article 48c(3) allows Member States to “permit” the use of the OECD country‑by‑country template (Council Directive 2011/16/EU). The OECD template originally shared the same dividend exclusion flaw, though it has been progressively corrected. EU disclosures that follow the OECD template may therefore treat dividends differently from those that use the EU‑defined basis, reducing comparability across companies.
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Impact on profit‑shifting estimates – Academic research (Blouin & Robinson, Journal of Public Economics, 2025) shows that double‑counting intragroup dividends can substantially overstate profit‑shifting measures. Although the study examined US government data, the same mechanism applies to the EU disclosures, risking inflated assessments of tax avoidance.
Tax Accounting Troubles
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Exclusion of deferred taxes and provisions – Standard income‑tax expense combines current taxes, deferred taxes, and provisions for uncertain tax positions. The EU rules explicitly forbid inclusion of deferred taxes and provisions, so the disclosed tax figure will be lower than the tax expense shown in financial statements.
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Cash‑basis tax focus – Companies will also report cash tax paid, which captures actual payments in a given year, including one‑off items such as audit settlements or refunds. Single‑year cash tax rates are volatile and have been shown (Dyreng, Hanlon & Maydew, 2008) to be poor predictors of long‑run effective tax rates. Relying on a single year’s cash tax data can therefore mislead analyses of tax avoidance.
Implications
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Effective tax rate distortion – Effective tax rates combine profit and tax measures. Because the EU disclosures inflate profits (through dividend treatment) and deflate tax figures (by omitting deferred taxes and provisions), calculated effective tax rates may appear lower than the rates that would be derived from standard accounting data.
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Interpretation caveats – Any assessment of multinational taxation based on the EU country‑by‑country data should account for:
- Potential double‑counting of intragroup revenues and dividends,
- Variability introduced by cash‑basis tax reporting, and
- Inconsistencies arising from the optional use of the OECD template.
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Need for multi‑year analysis – Given the volatility of cash tax figures, analysts should aggregate data over several years rather than drawing conclusions from a single reporting period.
In summary, while the EU’s country‑by‑country disclosure regime aims to shed light on multinational tax practices, its current design introduces significant measurement challenges that can obscure rather than clarify the true tax burden of global enterprises.
Source article: taxfoundation.org
