EU Company Tax Disclosures | Tax Transparency Requirements
Lately The Wall Street Journal the story on the new international EU taxTaxes are mandatory payments or charges that local, state, and national governments collect from individuals or businesses to pay for general government services, goods, and services. reporting requirements have warned of future confusion. The data, the authors wrote, may double-count revenues, provide false information, and contain other figures that are “difficult for investors and the public to understand.”
What causes this potential confusion? The rules themselves.
Article 48c of the EU laws he writes what must be included in the information: basic company information, number of employees, revenue, profit or loss before tax, accumulated income tax, income tax paid on cash, and accumulated income.
Although these concepts are correct in the accounting framework, the details in the disclosure requirements create confusion.
The rules specify that “income shall include transactions with related parties” and taxes “shall relate only to the activities of a business in the relevant financial year and shall not include deferred taxes or provisions for uncertain tax liabilities.” As we will see, these details about income and taxes are problematic.
Tax and Profit Issues
The point of combining the income from related parties in the total income is that it creates an estimate of the company’s income. Many multinational companies have dozens, if not hundreds, of business units that perform different functions. In some cases, one business unit may supply goods or services to a part of the company’s internal supply chain before the company sells the products to end customers.
Imagine a car manufacturing company that has a business unit to manufacture cars, another unit to set up the production line, a third one to get parts and materials, another one to assemble, and finally a business unit that sells the finished cars to customers. Even in this simple example, different business units will interact frequently with each other. Each transaction will generate revenue for one entity and cost for another.
Standard accounting methods require companies to eliminate these transactions before reporting total income to the public and shareholders to avoid giving the audience a false impression of how much money the company is making. For example, accounting standards including IFRS and US GAAP eliminate intercompany sales for consolidated reporting because they do not represent transactions with external customers.
EU legislation goes in the opposite direction. The revenue numbers reported under the EU regulation will certainly include revenue from sales to final customers, but will also include revenue when money moves from one pocket to another within the same international group.
Another confusing issue is how to treat the distribution of related parties. If a company earns profits and pays dividends to its parent, the appropriate remedy for consolidated accounts would be to ignore the profits earned at the subsidiary level and attribute the profits to the parent.
EU rules make it clear that for revenue purposes, related dividends should be deducted. However, the provisions of the directive itself do not contain similar exceptions for purposes of calculating interest or accrual of income.
This will be important for how the data is interpreted and used for future research. In a 2025 article for Journal of Social Economicsacademic accountants Jennifer Blouin and Leslie Robinson show how to estimate change interestProfit shifting is when multinational companies reduce their tax burden by moving their profits from high tax countries to low tax and tax havens. can be greatly improved when data on the performance of many countries count the share of the two parties. Their research focuses on US government data on international activity rather than on these new data, but makes the same observation: underestimating the perception of civil society can overestimate tax evasion or profit shifting.
A further complication is that the directive defines the basis of its own reporting in article 48c(2), but also authorizes in 48c (3) that Member States “shall allow” the use of the OECD international reporting directive as adopted in Council Regulation 2011/16/EU instead of the meaning of the directive. The OECD model originally had a similar flaw, the dividend was deducted from revenue but not clearly from profit. But the OECD continues to standardize this definition, while the EU does not. Reports prepared according to the OECD system will therefore use different profit ratios than reports prepared under the directive’s definition, and the same line item may not be comparable from one company’s statement to the next.
The effects of double counting can lead to profits exceeding revenues in some areas, especially in holding company structures. This can happen because the distribution of income from related parties is included in the profits but is excluded from the income.
Taking the issues of revenue and profit together, the measures are very different from the accounting standards. Even more important, the profit margin is different from which the tax regulations will declare as taxable profit.
Tax Accounting Problems
Tax laws also complicate the picture. Under accrual accounting, a company’s income tax statement combines current taxes, deferred taxes, and provisions for uncertain tax positions. EU law specifically prohibits the latter. This means the amount of tax that companies declare will differ from the amount of tax reported in their financial statements.
Readers of the reports can also focus on the level of corporate income taxes to be disclosed. Income tax revenue describes the actual amount of tax paid in a year. This may include special payments for a given year, such as someone else’s adjustment lookA tax audit is when the Internal Revenue Service (IRS) or another agency or local revenue agency conducts a routine audit of financial statements to ensure an individual or company has correctly reported and paid their taxes. The choice may be at random, or because of the usual deductions or income reported on the tax return. from the previous year or refunds due to overpayments already made. A year’s cash flow should not be used to make decisions about tax avoidance.
A helpful academic paper on this topic is 2008 study by academic accountants Scott Dyreng, Michelle Hanlon, and Edward L. Maydew. They test the question of whether lower one-year effective tax rates relative to income taxes can predict lower long-term effective tax rates.
The answer is no. They found that one-year rates do not change and cannot predict long-term corporate tax rates. Conclusions about long-term corporate tax rates should be based on aggregate data over several years, not a single-year picture of the efficiency rate relative to income tax rates.
Put It Together
Effective tax rates, by definition, combine tax rates and profits. However, the EU’s national public data is flawed in measuring taxes and profits. Revenues and profits are increased in different ways, and tax levels are reduced or inconsistent depending on the levels that will be used to understand the field for business taxes.
Any decision about the level of taxation that many countries pay according to the EU information, therefore, should be interpreted with a clear understanding of its understanding and limitations.
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