What it means
A group with operations in many countries can arrange its internal transactions so that profits appear in places with low tax. Country-by-country reporting, usually shortened to CbCR, gives tax authorities a single view of where the group's revenue, profit, staff and assets really are.
The report was introduced as part of the international programme against base erosion and profit shifting developed by the OECD, a club of mainly advanced economies. It applies to groups whose consolidated revenue is above a threshold, commonly set at 750 million euros, so only the largest multinationals are affected.
For each country, the group typically reports revenue, profit before tax, income tax paid, income tax accrued, stated capital, accumulated earnings, number of employees and tangible assets other than cash. It also lists every group entity and its main business activity.
The report is normally filed by the ultimate parent and shared between tax authorities under information exchange agreements. Authorities use the data for risk assessment.
A country where the group reports large profits and low tax but few staff or assets stands out and may prompt a closer look at the transfer pricing, which is the pricing of transactions between group companies. For the business, the practical burden is gathering consistent data from every subsidiary and ensuring it matches the consolidated accounts.
Finance and tax teams must agree definitions early, because inconsistent numbers can invite questions and consume a great deal of management time. Some rules go further, requiring parts of the report to be published, and investors increasingly read these disclosures as part of their assessment of tax risk and reputation.
The detail of who must file, what is filed and what is made public varies by country, so groups should check the local rules and keep track of changes.
In practice
Real-world examples
Example 1
A global consumer goods group files a country-by-country report showing 12,000 employees and $3,000,000,000 of revenue in its home country, but also $400,000,000 of profit in a small low-tax territory with 15 staff. Tax authorities request an explanation of the arrangement. The group must show what functions and risks that territory really performs.
Example 2
A technology multinational reviews its report before filing and finds that its Irish subsidiary and its Singapore subsidiary use different definitions of revenue. The tax team aligns them so that the totals agree to the consolidated accounts.
Example 3
An investor in a listed group reads the public version of its tax report. She compares the group's tax paid in each country with the profit it reports there, and flags a gap as a reputational risk. She raises the point with the company's board at the next shareholder meeting.
Think of it
Imagine a large grocery chain with fifty stores. Instead of only showing the total profit for the whole company at the end of the year, Country-by-Country Reporting is like forcing the manager to tape a transparent receipt to the front window of every single store, showing exactly how much money that specific shop earned, how many staff it paid, and how much local tax it handed over.
Formula
Calculation
Effective tax rate in a country = income tax paid or accrued / profit before tax
A group reports in two countries. In Country A, profit before tax is $8,000,000 and tax is $1,600,000, so the effective tax rate is $1,600,000 / $8,000,000 = 20%. In Country B, profit before tax is $5,000,000 and tax is $250,000, so the effective rate is $250,000 / $5,000,000 = 5%. A tax authority would ask why Country B, which has about 38% of the group's profit ($5,000,000 / $13,000,000), is taxed at such a low rate.Case study
Seen in the real world
Zephyrine Global is an illustrative, fictional manufacturing group with subsidiaries in 22 countries and consolidated revenue well above the filing threshold. The tax director prepared its first country-by-country report by collecting data from each local finance team.
The review found that a licensing subsidiary in a low-tax country earned 30% of the group's profit while employing only 6 people. The director could explain the structure, but the figures would draw attention, so the team prepared documentation on how the royalties were priced.
When a tax authority asked questions, the supporting file was ready. In this illustrative case, preparing the report early gave the group time to fix weaknesses instead of defending them under pressure.
Watch out
Common mistakes
- Assuming that only the finance team is involved, when data has to come from many local entities and must match the consolidated accounts.
- Leaving the report until the filing deadline, which gives no time to spot and explain unusual figures.
- Assuming the report is itself an assessment of tax, when it is a risk assessment tool, and tax authorities may still ask questions about the numbers.
Questions
People also ask
Who has to file a country-by-country report?
Generally the ultimate parent of a multinational group above the revenue threshold, although local rules can require other group entities to file in some cases. Smaller groups usually fall outside the requirement.
Is the report public?
In most places it is shared only between tax authorities, but some jurisdictions require public disclosure of some or all of the information.
What is the link with transfer pricing?
The report gives authorities the broad picture, and transfer pricing documentation then explains whether prices between group companies are fair.