EU Company Tax Disclosures | Tax Transparency Requirements

A recent Wall Street Journal article on the EU’s new country-by-country taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. reporting requirements warns of confusion in the near future. The disclosures, the authors write, could double-count revenue, produce anomalies, and contain other figures “difficult for investors and the public to understand.”

What’s causing this potential confusion? The rules themselves.

Article 48c of the EU’s rules prescribes what must be included in the disclosures: basic company information, number of employees, revenues, profit or loss before taxes, income tax accrued, income tax paid on a cash basis, and accumulated earnings.

Though these concepts are standard in financial accounting frameworks, the details in the disclosure requirements are driving the confusion.

The rules specify that “revenues shall include transactions with related parties” and that taxes “shall relate only to the activities of an undertaking in the relevant financial year and shall not include deferred taxes or provisions for uncertain tax liabilities.” As we will see, these details regarding revenue and taxes are problematic.

Revenue and Profit Issues

The issue with including revenue from related parties in overall revenue is that it creates an inflated picture of a company’s revenue. Many multinational companies have dozens, if not hundreds, of business units performing different functions. In some cases, one business unit may be providing goods or services to a different part of the company’s internal supply chain before the company sells things to final customers.

Think of an automotive company that has a business unit for designing vehicles, another entity for setting up production lines, a third that acquires parts and materials, another for assembly, and finally a business unit that sells the finished cars to customers. Even in this simplified example, the different business units will be transacting regularly with each other. Each transaction will create revenue for one entity and costs for another.

Normal accounting procedures require companies to eliminate these transactions before reporting total revenues to the public and shareholders to avoid giving audiences an incorrect view of how much money the company is making. For instance, accounting standards including IFRS and US GAAP eliminate intragroup sales for consolidated reporting because they do not represent transactions with external customers.

The EU rules go in the opposite direction. The revenue numbers reported under the EU standard will certainly include revenue from sales to final customers, but they will also include revenues when the money is simply moving from one pocket to another within the same multinational entity.

Another confounding issue is the treatment of related-party dividends. If a subsidiary earns a profit and pays a dividend to its parent, the appropriate treatment for consolidated accounts would be to ignore the profit at the subsidiary level and attribute the profit to the parent.

The EU rules are clear that for revenue purposes, related-party dividends should be excluded. However, the directive’s own definitions contain no similar exclusion for the purposes of calculating profit or net income.

This will be critically important to how the data is interpreted and used for future analysis. In a 2025 article for the Journal of Public Economics, academic accountants Jennifer Blouin and Leslie Robinson show how estimates of profit shiftingProfit shifting is when multinational companies reduce their tax burden by moving the location of their profits from high-tax countries to low-tax jurisdictions and tax havens. can be greatly inflated when the data on multinational activities double-counts related-party dividends. Their analysis focuses on US government data on multinational activities rather than on these new disclosures, but it analyzes the same issue: that failure to account for intragroup dividends can materially overstate measured tax avoidance or profit shifting.

An added complication is that the directive defines its own reporting basis in article 48c(2), but also allows in 48c(3) that Member States “shall permit” the use of OECD country-by-country reporting instructions as adopted in Council Directive 2011/16/EU instead of the directive’s own definitions. The OECD template originally had the same flaw, that dividends were excluded from revenue but not clearly from profit. But the OECD has progressively patched that definition, while the EU has not. Reports prepared on the OECD basis will therefore treat dividends in profit differently than reports prepared under the directive’s own definitions, and the same line item may not be comparable from one company’s disclosure to the next.

Anomalies driven by the double-counting of intragroup dividends could lead to profits exceeding revenues in some jurisdictions, especially in holding company structures. This can occur because dividend income from related parties is included in profits but excluded from revenues.

Taking the revenue and profit issues together, the measures differ substantially from standard accounting concepts. Even more importantly, the profit measure is very different from what tax rules would define as taxable profits.

Tax Accounting Troubles

The rules for tax also complicate the picture. Under standard accounting, a company’s reported income tax expense combines current taxes, deferred taxes, and provisions for uncertain tax positions. The EU rules specifically forbid the latter two. This means the tax figure companies disclose will differ from the tax expense reported in their financial statements.

Readers of the reports may also focus on the cash tax measure that companies will disclose. Cash tax expense reveals the actual amount of taxes paid in a year. This can include payments that are unique to a given year, like the settlement of an auditA tax audit is when the Internal Revenue Service (IRS) or a state or local revenue agency conducts a formal investigation of financial information to verify an individual or corporation has accurately reported and paid their taxes. Selection can be at random, or due to unusual deductions or income reported on a tax return. from a past year or a refund due to a prior overpayment. Single-year cash taxes should not be used to draw conclusions about tax avoidance.

A helpful academic paper on this topic is the 2008 study from academic accountants Scott Dyreng, Michelle Hanlon, and Edward L. Maydew. They test the question of whether single-year low effective tax rates based on cash taxes can predict long-run low effective tax rates.

The answer is no. They find single-year rates are volatile and are poor predictors of a company’s long-run tax rate. Conclusions about a company’s long-run tax rate should therefore rest on several years of aggregate data, not a one-year snapshot of effective rates based on cash tax expense.

Putting It Together

Effective tax rates, by definition, combine measures of taxes and profits. However, the EU public country-by-country data has flaws in measuring both taxes and profits. Revenue and profits are inflated in different ways, and tax measures are deflated or volatile relative to measures that would be useful for understanding the landscape for business taxation.

Any conclusions about the level of taxation paid by multinationals based on the EU disclosures, therefore, should be interpreted with a clear understanding of the caveats and limitations.

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