Country-by-country reporting – latest developments from the European Commission

March 5, 2012

On 25 October 2011, the European Commission (EC) presented a package of measures that contains a new set of requirements to publicly report taxes, royalties and bonuses paid to a host government and will have a significant compliance impact on both public and private companies active in the oil, gas, mining and logging sectors.

In recent years, there have been calls to impose additional transparency requirements on large companies related to their activities around the world.

The arguments put forth are that such rules increase the level of transparency on profits made and taxes paid by multinational companies in developing countries, and thus help the countries to correct the levels of tax revenue.

It would further allow countries to effectively monitor corruption and make tax evasion or aggressive tax avoidance more difficult.

The idea of country-by-country (CBC) reporting was taken up by the OECD in 2010, when it announced that it would publish guidelines regarding the disclosure of profits made by companies and the taxes they pay in every country in which they operate.

In September 2010, the EC agreed with the European Parliament to evaluate the feasibility of requiring companies to disclose key financial information regarding their activities in third-world countries in their annual financial reports.

The EC conducted a public consultation in order to obtain stakeholders’ views on possible additional disclosure requirements.

The overall result of the consultation illustrated a negative perception of the proposed requirements, with a majority of respondents expressing strong concerns about additional accounting requirements.

In addition, the opinions of different public authorities were split, with a number of accounting standard-setters and national economy ministries voicing their concerns.

Despite the negative responses, the EC has proposed amending the European accounting and transparency directives to improve transparency and sustainable business among multinationals.

EC’s proposal on CBC reporting

The EC proposes the introduction of a system of CBC reporting through the revision of the Accounting Directives (78/660/EEC and 83/349/EEC) that currently regulate the information provided in the financial statements of all limited liability companies incorporated under the law of an EU Member State.

In order to ensure a level playing field between companies, the CBC requirement would also be incorporated in the Transparency Directive (2004/109/EC), which includes all companies listed on EU regulated markets, even if registered in a third country.

The proposed reporting system would require companies operating in the EU that are active in the oil, gas, mining or logging sectors to publicly report detailed financial information for every country in which they operate.

The following types of payments would be reported:

  • Production entitlements
  • Taxes on profits
  • Royalties
  • Dividends
  • Signature, discovery and production bonuses
  • License fees, rental fees, entry fees and other considerations for licenses and/or concessions
  • Other direct benefits to the government concerned


According to the EC, the objective of the proposal is to respond to international developments, in particular the Dodd- Frank Act in the United States.

The EU proposals are broadly similar to the Dodd- Frank Act requirements, but go further in two respects:

  1. First, they include the EU logging industry in addition to the oil, gas and mining industries.
  2. Second, they would apply to large unlisted (i.e., private) companies, in addition to listed companies, while the US rules are restricted to listed extractive companies only.

The EC justifies its proposal by saying it will improve transparency of payments made to governments all over the world by the extractive and logging industries.

It further argues that by requiring disclosure of payments at a project level, where those payments had been attributed to a specific project and where material, local communities would have clear visibility into what governments were being paid by EU multinationals in return for the right to exploit local oil and gas fields, mineral deposits and forests.

This would also allow these communities to hold the governments more accountable for how the money had been spent locally, providing civil society with a way to assess whether contracts entered into between the government and extractive and logging companies had delivered adequate value to society and government.

The EC states that the proposal is well balanced because, on one hand, it targets only companies with activities in industries that are generally associated with a great source of wealth in resourcerich developing countries and, on the other hand, it targets both listed and large non-listed companies, thus creating a level playing field in the EU.

The proposed CBC reporting system for oil, gas, mining and logging companies, however, imposes new obligations to report, which will notably increase costs and administrative burdens.

In addition, such disclosure requirements may put EU businesses at a competitive disadvantage compared with companies that do not have to disclose what can be classed as commercially sensitive information.

As a consequence, it is possible that EU multinational enterprises (MNEs) could lose business opportunities to non-EU competitors and investors could be deterred from investing in EU-listed companies, to the detriment of the EU economy.

It can also be argued that even if the information requested for CBC compliance is accurately provided, it will not necessarily change the underlying behavior of the host country at hand.

It is also questionable whether it is the role of the EC to enforce transparency in foreign countries by imposing additional reporting requirements on EU multinationals.

In some countries, in fact, it is illegal, according to the local law, to report details of what may have been paid to governments as royalties, bonuses or taxes and businesses trying to satisfy the EU requirements would commit an offense in the host country.

The proposal therefore includes a very limited exemption from reporting for such cases.

But it still remains to be seen if this exemption can be reasonably applied in practice without being abused or raising further complications.


In summary, the intention to improve transparency by requiring increased disclosure of information is understandable, but the method proposed by the EC contains many risks.

It is further questionable whether the proposal will provide the impact it is designed to produce, particularly as most of the information is already available to tax authorities.

The existing Transparency Directive (through the review of a company’s country risk exposure in the management report), the Accounting Directives (identification of subsidiaries, jointly controlled entities and associates) and IFRS 8, Operating Segments (information by geographical area), provide transparency in this area.

In addition, over recent years many multinational companies have published extensive information on a voluntary basis.

Given this, it could be argued that the primary purpose of financial reporting — to provide useful information to investors — should not be surpassed by other objectives.

Next steps in the development of the proposal

The proposals to revise the Accounting Directives and the Transparency Directive will now be passed to the European Parliament and the EU’s Council of Ministers for adoption.

At a higher level, the proposals may well represent an opening move in a longer-term strategy to widen CBC reporting to companies in all sectors.

Businesses in the targeted oil, gas, mining and logging sectors should consider the impact these proposals will have on their business and watch closely for further development.

Many adjustments may occur between now and the time these changes are eventually implemented. It is therefore essential that businesses engage with the EC at an early stage to ensure that an outcome is reached that is agreeable for all parties concerned.


  • Christopher Sanger, +44 207 951 0150,

This article was first published in the Ernst & Young Global Tax Policy and Controversy Briefing which can be accessed using the link below:

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