For over a year now, there has been a strong political will to increase greatly transparency over corporate financial transactions. We mentioned this in an article last November that can be seen here.
Several amendments from members of the European Parliament (MEPs) requesting the introduction of some country by country reporting provisions have been added to the original proposal from the European Commission on non-financial reporting (environmental, social and employee matters) for large companies.
Country by country reporting measures for the extractive industries only were first introduced in 2011 and adopted in June 2013 (see here).
In December 2013, the Legal Affairs Committee (JURI) of the European Parliament finally adopted a reasonable draft report on non-financial information disclosure. The proposed amendments calling for immediate country by country reporting were not supported, but the idea remained in the pipeline.
The text adopted by the JURI Committee is calling the Commission to consider for the review of the Directive in 2018 the introduction for all large companies of financial disclosure on profit, or loss before tax, tax on profit or loss and public subsidies received in every country they operate. The final vote just took place during the last plenary session of the European Parliament on 15 April 2014.
Why such a trend? Two protagonists can be identified.
First, the member states of the European Union. Because of budget issues and sensitive public opinions, country by country reporting is partly connected with the fight against tax evasion. In the European Council conclusions from May 2013 (see page 8, point i), EU member states explicitly call for country by country reporting measures in the Directive on Non-Financial Reporting.
Second, NGOs are lobbying really hard to put financial transparency on the top of MEPs’ agendas, encouraging them to introduce amendments in several different EU draft laws.
Indeed, as a highly political issue, country by country reporting has also been considered in the Anti-Money Laundering Directive which has also received amendments from MEPs to include “aggressive tax planning” disclosures (see amendment 113 in the following document). Those were just adopted on 11 March 2014 by the European Parliament during a plenary session in Strasbourg (see amendment 12 in the final version).
What does it mean for risk managers and their companies?
Pressure for financial transparency can be now considered as a regulatory risk for several reasons. The possible full implementation of country by country reporting provisions for large companies and for every sector of activity will have an internal cost in terms of time and resources. It could also take unprepared firms by surprise and lead to possible fines for some cases.
But two to three years from now, we can expect country by country reporting to become a reputation risk. Again, unprepared or unaware organisations could face a risk of public naming and shaming for some lack of scrupulous country by country financial disclosure. Several companies have already suffered negative media coverage after being singled out for “aggressive tax planning”.
Risk managers must be aware of the possible impact of such financial transparency over their corporate structure and so need to be knowledgeable about the financial flows of their organisation. They should regularly inform their upper management (board, C-suite, audit committees…) of the possible consequences of such new regulation on competiveness and also reputation.
There is still time to adjust and adapt to comply with the future financial transparency standards. Here, risk managers have a role to play as an early warning function.
Recently, the OECD, with 34 members from all continents also led the charge with an initiative on country by country reporting and a consultation earlier this year. Interestingly, the OECD document shows on page 15 what could be a country-by-country reporting template model.
By being leader in financial transparency, European companies could also suffer temporarily from a competitive disadvantage compared to other regions of the world with less stringent regulations on the matter. Public authorities must think globally on this issue.