HM Treasury has issued guidance and draft legislation on country by country reporting.
Unfortunately, it's completely and utterly useless. Here's why. The Regulations require the following to be given by country:
Name, nature of activities and geographic location
Geographic location by country? You what? Well, I suppose if you insist...
For most groups, which operate via subsidiaries, this is going to be a very boring disclosure, with the geographic location being the same as the country itself.
Number of employees
This should be fairly unproblematic. Hooray!
Here's where the problems start. Government wants institutions to use 'turnover' as used in the reporting entity's financial statements. So they've told companies what they want all the columns to add up to. But they've given no guidance at all about how to split the revenue between countries.
This does matter. If you define it by destination, then you can split the turnover fairly easily without having any bits left over. Because all sales in turnover will be to third party customers, and each of those is in a country. Of course, customers of digital shops can lie about their country, but the impact is unlikely to be too material.
Unfortunately, tax on companies isn't based on destination. It's based on source. And sometimes the source and destination can be in different countries (think Amazon).
Also accounting systems don't necessarily split the GAAP revenue figure by customer's location. Because as far as the subsidiaries are concerned, a lot of their sales may be to other group companies. These are eliminated on consolidation.
So perhaps we should base the revenue split on source? Unfortunately, this isn't trivial either, for the same reasons. And I imagine they really want to avoid having a giant 'consolidation adjustment' column which makes the sums work more easily.
Profit or loss before tax
This suffers from exactly the same problems as above, but a thousand times worse. This is because profits get realised in subsidiaries that get eliminated on consolidation. I've explained this before here. Also there can be situations where there are no profits in the subsidiary but there is a profit on consolidation. Suppose a group company sold an item it had bought from another group company the year before, making no profit or loss on that transaction. For group purposes, there is a profit. But where should this profit be recorded in the country by country analysis? It's not fair to say it's in the selling company's country, because we know it made no profit/loss there. Would we record it in the supplying company's country, even though that sale took place last year? Would we record it in its own 'consolidation adjustment' line?
This is precisely the sort of issue that the guidance should help us resolve. But it remains silent. It's completely useless.
There's a further problem in respect of associates. Associates are companies that aren't controlled, but which the reporting entity can exercise significant influence over. The group's share of post-tax profit is reported as a single component of operating profit. So the group profit or loss before tax includes its share of the associate's post-tax profit. It's a mess.
Incidentally, how are associates meant to be accounted for under country by country reporting? Should its sales be analysed out? Really, we should be told. There's more on associate accounting here.
Whatever you do, you're going to end up with either a 'consolidation adjustment' column or you're going to have to allocate the consolidation adjustments to countries in an arbitrary way. The guidance needs to tell us which it is to be.
Corporation tax paid
Corporation tax paid is a line in the cash flow statement. And you should know which country got what. But, as we noted above, you can get tax payments without group profits and group profits without tax payments. So the figures aren't going to mean much to anyone.
Also, some tax payments are made in the year after the corresponding profits were earned and reported. So there's a further disconnect between financial reporting and tax. This disclosure isn't going to be very helpful to users. It's a private disclosure for now, but it'll cause all sorts of misunderstanding if it's made public.
Public subsidies received
Is it by the country of the recipient or the country that granted the subsidy?
If a group negotiates a preferential tax rate, is that considered a public subsidy?
If a government somewhere decides to pay above the commercial rate for a contract (eg Britain's recent power deal) is that considered a public subsidy?
We need a lot more guidance than what's here. And fast.
If companies are going to be able to fulfil their responsibilities, they're going to need a lot more help than is currently provided by government. Otherwise, auditors will be unable to assure the information and the public and government won't be able to make use of what's provided to them.
It really is very urgent that better, more detailed guidance is provided. Government would be advised to convene a working party of experts to sort this before it becomes a very real problem.
Ironically, these are exactly the sorts of problems that I've been highlighting for years. But country by country reporting zealots wouldn't listen. Now we're having to clean up the mess that their incompetence and obstinacy has caused.