Country-by-country reporting requires tax authorities to raise their game too

20 October 2015

Rebecca Reading

True to its intent to lead the way in the reform of the international tax system, the UK has issued draft legislation that will implement country-by-country reporting. A key step in the bid to increase transparency, the rules will apply from 1 January 2016 and will mean that the largest (£586m or greater consolidated revenues) UK-owned companies will have to disclose to HMRC key facts about their activities and tax bills in the countries in which they operate. This data will then be shared with other countries’ tax authorities, giving them a much clearer picture of what is going on cross-border. The report will not be made public, however.

Although initially a compliance burden for multinationals, it will soon be the tax authorities that have to raise their game and deliver on information-sharing. The OECD approach is meant to be even-handed, in that if some countries increase their tax base, then others will get less – it is not just about stopping profits falling through the cracks. Groups will expect the taxman to play fair and use the shared information in a constructive way. This is a significant cultural change and a major challenge for international cooperation, an area where on the ground tax administrations do not have a great track record.

The OECD believes that improved transparency is the first stage towards addressing flaws in the international tax system, but a more joined up tax authority approach could have other consequences. As and when other countries implement country-by-country reporting, small UK subsidiaries of multinationals may find that HMRC has a clearer picture of the overall tax position than they do. Subsidiaries should be prepared for greater scrutiny from spirited tax inspectors in possession of more information.

This will be the first of the BEPS actions to be implemented by the UK, although we can probably expect more in the Autumn Statement at the end of November.

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