A Material Concern: The Investor Case for Public Country-by-Country Tax Reporting

Investors are in the business of being in the know—and right now, there is a lot to know in global markets. Global governments seeking to tackle existential threats like climate change and the global Covid-19 pandemic, are engaging in previously unthinkable multilateral and unilateral efforts to crack down on profit shifting tax practices by MNEs seeking to reduce their tax liability. The same existential threats are impacting international supply chains and global markets, which are also continually being revolutionized by technological advancements that are crumbling historical business practices and eroding international boundaries. At the same time, political forces all over the world are pushing back on more global and more democratic institutions, in a way that is creating geopolitical risk.

Patchwork progress through voluntary reporting standards like the Global Reporting Initiative and shareholder proposals at individual companies are not enough to satisfy investors’ demonstrated need for information. The problem remains that, due to inadequate SEC disclosure rules, there is very little public information regarding any of the monumental headwinds investors face as they try to navigate their investment decisions—making it all the more difficult to be “in the know.”

FACT’s latest report, “A Material Concern: The Investor Case for Public Country-by-Country Tax Reporting,” explores how public country-by-country reporting (PCbCR) efforts have matured and, in doing so, shown their increasingly apparent usefulness to investors. PCbCR would require companies to publicly list information on business activities, employees, revenues, profits, and tax on a jurisdiction-by-jurisdiction basis. This information, which many multinationals already report to the IRS would improve securities analysis, providing a more complete picture of material risks relating to free cash flows, corporate governance and operational practices, and geopolitical risks, among other benefits.

It is time for the SEC to heed growing investor calls and international reporting trends, and to promulgate PCbCR rules in the United States.

Given the authority already vested in the SEC to determine accounting disclosure rules for publicly listed companies, FACT recommends the following:

  1. The SEC should exercise its clear rulemaking authority under sections 12(b) and 13(b) of the Securities Exchange Act of 1934 to require PCbCR to be filed under Regulation S-X for identified filers.
  2. The SEC PCbCR rule should require disaggregated information regarding related party revenues, third party revenues, net profit (loss), tangible assets, employee head count, corporate income cash taxes paid, and corporate income tax accrued, among other key items detailed in Annex IV of this report, on a jurisdiction-by-jurisdiction basis.
  3. The SEC PCbCR rules should apply to all industries and jurisdictions, and PCbCR disclosure should be required pursuant to uniform standards for all applicable filers so that investors have access to data that is comparable and most useful in securities analysis.
  4. PCbCR information should be presented with such additional disclosure as filers deem necessary to explain their tax contributions and their strategic operations, provided such disclosure does not otherwise violate any requirements under Rule 10b-5 or similar.
  5. The SEC should also signal to the Financial Accounting Standards Board (FASB) that FASB should accelerate its U.S. generally accepted accounting principles (GAAP) tax disaggregation guidance project and make clear that greater country-by-country tax disaggregation should apply to all publicly filing companies, in a manner that supports and compliments the SEC’s PCbCR rulemaking.