REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL General assessment of economic consequences of country-by-country disclosure requirements set out in Article 89 of Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013
Date: 2014-10-30
Institutions: European Commission
Subjects: administrative transparency, closing of accounts, credit institution, economic consequence, economic stabilisation, financial management, investment company, management audit













EUR-Lex - 52014DC0676 - EN











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52014DC0676

REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL General assessment of economic consequences of country-by-country disclosure requirements set out in Article 89 of Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 /* COM/2014/0676 final */









REPORT FROM THE
COMMISSION TO THE EUROPEAN PARLIAMENT AND
THE COUNCIL
General
assessment of economic consequences of country-by-country disclosure requirements
set out in Article 89 of Directive 2013/36/EU of the European Parliament and of
the Council of 26 June 2013  

I.                 
Introduction

Directive 2013/36/EU[1]
("CRD") introduces in its Article 89 a new country-by-country public
reporting obligation ("CBCR") for banks and
investment firms ("institutions"). Institutions
will have to report annually, for each country in which they have an
establishment, data on (a) their name(s), activities, geographical location,
(b) turnover, (c) staff numbers, (d) profit or loss before tax, (e) tax on
profit or loss and (f) public subsidies received.
Institutions are required to report the
data under a), b) and c) as from 1 July 2014.  For the data under d), e)
and f) a special arrangement is foreseen: in an initial phase
only 14 of the most important European institutions[2]
("EU G-SIIs") had to report these data, on a confidential basis, to
the Commission. The deadline for this initial confidential reporting was 1 July
2014 and was respected by all 14 EU G-SIIs. In the next phase, i.e. as from 1
January 2015 all institutions that fall within the scope of Article 89 (“reporting
institutions”) are required to disclose all information set out in Article 89,
unless the Commission decides to defer the CBCR obligations.  
Article 89 requires that the Commission report
to the European Parliament and to the Council by 31 December 2014 on the potential
negative economic consequences of the public disclosure of the
country-by-country information. The Commission, after consulting EBA, EIOPA and
ESMA, as appropriate, is requested to conduct a general assessment as regards
such consequences including the impact on competitiveness, investment and
credit availability and the stability of the financial system. Pursuant to
Article 89, in the event that significant negative effects are identified, the
Commission shall consider proposing to amend the CBCR obligations, and may
decide to defer those obligations.  
The key objective of this report is thus
to provide the Commission's assessment of whether CBCR leads to significant
negative economic effects.
The Commission awarded, through an open
call for tender[3],
a study to an external contractor on the potential positive and negative
consequences of CBCR. The study by the external contractor included a
stakeholder survey[4]
and an econometric analysis ("the econometric analysis")[5]. The
Commission consulted EBA, EIOPA and ESMA. It also directly consulted with
stakeholders, including inter alia the 14 EU G-SIIs[6] and
several civil society organisations interested in the matter. The Commission
organised a public consultation[7] and an outreach
event[8].
All stakeholders were thus given ample opportunity to provide their views. On
this basis, the Commission conducted its assessment of the possible economic
effects of CBCR. 

II.              
Context

Recital (52) of CRD explains that
"Increased transparency regarding the activities of institutions, and in
particular regarding profits made, taxes paid and subsidies received, is
essential for regaining the trust of citizens of the Union in the financial
sector. Mandatory reporting in that area can therefore be seen as an important element
of the corporate responsibility of institutions towards stakeholders and
society." CBCR will help stakeholders to get a better understanding of
groups' structures, their activities and geographical presence. In addition
CBCR should help understanding of whether taxes are being paid where the actual
business activity takes place. Disclosure and transparency are seen as key
regulatory tools which help to ensure that firms effectively implement their
obligations and are accountable for the business strategies which they adopt. 
The new CBCR obligations must be seen
against the background of the recent financial crisis, in which unprecedented
levels of public support were necessary in order to restore financial stability
and the trust of citizens in the financial sector was heavily affected. This
led to strong demands for banks to show greater accountability and increased
transparency in their relations with the public. 
Independently from the financial crisis,
there are increasing calls on companies to take responsibility for their impact
on society and the contribution that businesses make in the form of taxation is
increasingly seen as part of corporate social responsibility. This has increased
demand for more transparency in the tax affairs of large enterprises in
particular where they have significant cross-border activities. 

III.          
Assessment
of economic effects of CBCR

Most stakeholders expect that CBCR will have
some positive impact on the transparency and accountability of, and on public
confidence in the European financial sector.[9]  Nevertheless,
various stakeholder groups consider that additional guidance on the exact
contents of the items to be reported would improve transparency and
consistency, would alleviate the risks of the data being misunderstood and
limit the administrative burden.
Below the potential economic
consequences of CBCR, in particular on competitiveness, investment, credit
availability and the stability of the financial system are examined. The
findings reflect the feedback received from stakeholders as part of the surveys
conducted by the Commission and by the external contractor, the public
consultation and the outreach event, as well as the results of the econometric analysis.

A.              
Impact
on competitiveness

The majority of stakeholders consider
that there will be no negative impact on the competitiveness of reporting
institutions.[10]
Nevertheless, some submit that, given the absence of a global level playing
field, reporting institutions will be disadvantaged compared to institutions not
bound by CBCR because they will face additional administrative burden and cost,
because they will be confronted with public scrutiny over their data and
because they will need to disclose more specific business information than
their non-reporting competitors. These stakeholders, which are a minority,
believe that CBCR will have a negative impact on competitiveness, even though
they generally do not expect this negative impact to be strong.
Others expect that CBCR will have a
positive impact on the competitiveness of reporting institutions. It is suggested
that the increased transparency and accountability resulting from CBCR will
encourage reporting institutions better to consider a range of risks resulting
from their internal organisation and activities. In this way, better
transparency would serve not only to reveal possible problems, but also to
prevent them. It would thus have the potential of reducing risks from scandals
that would be damaging for the institution's reputation and investor and customer
trust and can contribute to restoring public confidence in the financial
services sector in the EU. They also consider that CBCR can attract investors
and customers that value the increased transparency, which in turn can result
in competitive advantage for reporting institutions. 
The cost for compliance with CBCR is
likely to be inherently proportional to the size and multi-national dimension
of the business of the reporting institution. Reporting institutions,
especially multinational groups, are likely to already have in place
sophisticated systems for data collection. The cost of compliance with CBCR is
not expected to be significant.[11]

The information disclosed under CBCR
does not appear to be commercially confidential. The level of information disclosed
under CBCR is not sufficient for interested parties to get a detailed
understanding of the commercial strategies of the reporting institutions. At
least 3 EU G-SIIs have already voluntarily published CBCR data, seemingly
without concerns about revealing commercial confidential information or other
competitive effects. 
The results of the econometric analysis suggest
that an improvement in disclosure quality, which is a key objective of CBCR, is
associated with a reduction of the ability of reporting institutions to mask
their true performance (earnings management). The study finds that a one point
increase in the level of disclosure (in a composite indicator of scale 0-52)
decreases the probability of managing earnings by 3.5% for the sample of banks
in the study.[12]

Although the econometric analysis does
not capture the impacts on competitiveness directly, a review of the literature
suggests that greater levels of disclosure could enable banks to become more
competitive (for example because it would reduce the information asymmetry
problem, facilitate the allocation of resources and increase trust). Overall
the study suggests that CBCR is unlikely to lead to adverse effects on
competition.
Some stakeholders expect that the CBCR
disclosure obligations will affect the effective tax rate of banks. CBCR in
itself is not a tax measure but a transparency and corporate responsibility
measure. It will have no direct effect on the tax rate imposed on reporting
institutions. Any increase in effective taxation would only be an indirect
result. It is very difficult to predict the likelihood of a possible increase
of (effective) tax rates indirectly resulting from CBCR. This would depend on
various factors such as the institution’s current approach to tax matters, the
response by authorities to the disclosure of the information on all the tax
payments on a country-by-country basis and the public response to the published
CBCR data. Even if a reporting institution would change its tax approach, it
would still be difficult to determine whether this was an indirect effect of
CBCR, or would rather result from other developments in this area. Such an
increase could possibly also have a positive effect on competition, in the
sense that it could contribute to improving the level playing field for smaller
institutions which do not operate cross border. More in general, the overall economic
impact of any increase of effective tax rate would be very difficult to measure
and would depend on different outcomes.[13]
While on the negative side a reduction in the economic activity of the
reporting entity could be expected, there are likely to be counterbalancing factors
such as the availability of additional receipts for government spending which
could provide benefits to society and the wider economy, and an increase in public
confidence.

B.              
Impact
on investment 

Stakeholders were asked about the
effects of CBCR on investment in and by reporting institutions.[14] 
With respect to the first question,
namely the effect of CBCR on investment in reporting institutions, a majority
of stakeholders expect that there will be no impact. They consider that
investment decisions are based on factors other than the data to be disclosed
under Article 89 and that investment decisions are driven by potential economic
benefits rather than disclosure driven. It is also noted that institutions
applying for funding on the capital markets have already to provide more detailed
information than is required by Article 89.
There is however some concern that in
individual cases an institutions' attractiveness in the capital market would be
negatively affected if  disclosures are misunderstood and/or perceived
negatively by the public. Also, some stakeholders submit that the introduction
of CBCR could create level playing field concerns and that the additional
disclosure requirements could decrease the attractiveness of the EU as a
location for investment (due to the associated administrative burden and cost).
However, most stakeholders agree that CBCR will not affect the willingness of
reporting institutions to remain in the EU.
Some stakeholders expect a positive
effect on investment in reporting institutions. They argue that there is a
growing global demand from investors for more transparent and more reliable (or
more comprehensive) data on the companies they invest in. The disclosure would
provide investors with a stronger basis for making sound investment decisions
and would increase their ability to hold banks to account. Transparency,
including CBCR, would help investors to identify risk factors and financial
irregularities and would lead to better risk management by institutions. It
would thus lead to increased stability in the banking sector, making it more
interesting for investment. Finally, it is argued that investors are
increasingly considering factors such as sustainability and transparency in
investment decisions and that disclosure may attract more investment from
socially responsible investors. 
With respect to the second question, namely
the effect of CBCR on investments made by reporting institutions, the vast
majority of stakeholders consider that there would be no impact.
The results of the econometric analysis suggest
that CBCR is unlikely to have a negative impact on investment. On the contrary,
it is found that one additional point in the disclosure index decreases
effective cost of equity capital by 0.2% points. Therefore, the improvement in
disclosure quality, as perceived by capital markets as a result of CBCR, could
lead to a lower cost of equity capital for banks. This may translate into lower
lending rates and enable firms to invest more in their business and expand.[15] 
Also the literature review suggests that
improvements in overall disclosure are associated with better firm outcomes in
capital markets such as lower cost of equity, due to lower asymmetric
information and lower agency costs. A reduction in the cost of equity has been
linked with greater investment both of the financial and non-financial sector.

C.              
Impact
on credit availability

Stakeholders were asked about the
effects of CBCR on the provision of credit to reporting institutions and by
reporting institutions.[16]
With respect to the first question, namely
the effects of CBCR on the provision of credit to reporting institutions, a large
majority of stakeholders consider that there will be no impact. 
A small minority of stakeholders are
concerned that there could be a negative impact. It is argued that the
disclosures could be misunderstood and lead to negative sentiment. In particular
with respect to the information on public subsidies, one stakeholder argues
that this could lead to a perception of a bank being “propped up”, leading to
increased costs of wholesale funding. 
Others expect a positive impact. Very
much in line with the comments on impact on investment, it is argued that increased
transparency could improve confidence in reporting institutions, that it would lead
to a better understanding of company risk and therefore better risk management
and lower levels of risk in the longer term. 
With respect to the second question, namely
the effects of CBCR on the provision of credit by reporting institutions, stakeholders
broadly agree that CBCR will have impact neither on the provision of credit by
reporting institutions, nor on the price or quality of credit available to
businesses and households.
The econometric results suggest that
CBCR is unlikely to have any negative impact on banks’ ability to access
capital markets. On the contrary, the results suggest that one additional point
in the disclosure index decreases effective cost of equity capital by 0.2%
points. Therefore, the improvement in disclosure quality as a result of CBCR
could even have a small impact on reducing banks’ cost of equity capital, and
these benefits could be passed on to non-financial sector firms and households
in the form of lower lending rates.[17]

The literature review suggests that
lower borrowing rates for banks can also lead to increased credit availability
as banks, with protection from bigger margins, are more willing to increase
lending supply. 

D.              
Impact
on the stability of the financial system

Most stakeholders[18] agree
that CBCR will have no impact on the stability of the financial system. They
indicate that, even if there is a potential for volatility in individual
businesses, this would not affect the sector as a whole. They also note that
volatility is due to a number of causes and that it would not be possible to
identify volatility arising solely from Article 89 disclosures. One noted that
there may be some risk of the disclosures affecting the perception of the
sector, but still did not expect a noticeable impact.
Only a small minority of stakeholders
disagree and mention for example that interbank lending may be impacted if
detailed information on a bank's tax position is made available or point to a
risk of public misunderstanding of the data due to inconsistent application and
varying interpretations. These stakeholders do not argue however that the
negative impact would be strong. 
A few stakeholders instead expect a
positive impact, commenting inter alia that increased disclosure would enable
investors and other stakeholders to get a better understanding of how the
financial sector is operating as well as of its patterns of ownership, would lead
to a better management of risks and sustainability, and would increase confidence
and reduce market volatility. 
The results of the econometric analysis
suggest that an increase in disclosure quality could have a positive impact on
accounting quality. The results suggest that an increase in disclosure score by
1 increases the accuracy of analyst forecasts’ by 0.49 % points[19] and
decreases the probability of managing
earnings by 3.5%[20].
This means that following the implementation of CBCR, the information provided
by financial institutions could become more informative for external
stakeholders, and better reflect the true economic condition of the
institution. This could result in lower volatility and increased financial
stability. 
Also, the literature review suggests
that bank disclosures can have a positive impact on financial stability as they
can alleviate problems of asymmetric information, facilitate the monitoring of
the institutions and improve governance.

E.              
Assessment

Since the CBCR provisions have not yet
fully entered into force, this assessment is essentially a forward looking
exercise focussed – as required by Article 89 of Directive 2013/36/EU – on
determining whether CBCR is expected to have significant negative economic
effects. 
CBCR is expected by stakeholders to have
some positive impact on transparency and accountability of, and on the public
confidence in the European financial sector. Nevertheless, it is suggested that
transparency would benefit from additional guidance on the exact contents of
the items to be reported and from a consistent implementation in the Member States.
The balance of opinions among stakeholders
is that CBCR will have no significant impact on competitiveness, investment,
credit availability or the stability of the financial system. Opponents mostly
refer to a risk of public misunderstanding of the data and to an increased
administrative burden. Supporters of CBCR point to a number of positive effects:
investors will be able to make more informed investment decisions and be more
able to hold banks to account. CBCR will lead to better risk management by
reporting institutions, thus reducing the risk of scandals and increasing
stability in the financial sector. CBCR will attract investors and customers
that value the increased transparency and in general lead to increased trust in
the European financial sector. 
The results of the econometric analysis
suggest that improved disclosure quality – which is a key objective of CBCR –
would lead to a number of positive outcomes. Greater disclosure quality can
lead to a reduction of the cost of equity capital which may be passed on to
businesses and households in the form of lower lending rates and thus benefit
credit availability and investment. It can also lead to a reduction in the
ability of reporting institutions to mask their true performance (earnings
management) and an increased accounting quality which could result in greater
competitiveness and increased financial stability.
It is the assessment of the Commission, notably
based on the results of the study and the views expressed by the stakeholders,
that, at this stage, the public country-by-country reporting of information
under Article 89 of Directive 2013/36/EU is not expected to have significant
negative economic impact, in particular on competitiveness, investment, credit
availability or the stability of the financial system. 
On the contrary, it seems that there
could be some limited positive impact. The feedback from stakeholders and
analysis of the first set of confidential disclosures suggest that the
beneficial effects of Article 89 could be increased by addressing some elements
related to the implementation of that provision. 

IV.          
Conclusion

At this stage, the public
country-by-country reporting of information under Article 89 of Directive
2013/36/EU is not expected to have significant negative economic impact, in
particular on competitiveness, investment, credit availability or the stability
of the financial system. On the contrary, it seems that there could be some limited
positive impact; however the beneficial effects of Article 89 could be increased
by addressing some elements related to the implementation of that provision. 
The Commission considers that, as no
significant negative effects have been identified in relation to the public
country-by-country reporting of information, the obligations under Article 89 of
Directive 2013/36/EU should not be deferred and should apply, as foreseen, in
full from 1 January 2015 onwards. 
[1] Directive
2013/36/EU of the European Parliament and of the Council of 26 June 2013 on
access to the activity of credit institutions and the prudential supervision of
credit institutions and investment firms, amending Directive 2002/87/EC and
repealing Directives 2006/48/EC and 2006/49/EC. OJ L 176, 27.6.2013, p. 338.
[2] The
so-called global systematically important institutions authorised within the
Union, as identified internationally, Financial Stability Board
Update of group of global systemically important banks 1 November 2012; http://www.financialstabilityboard.org/publications/r_121031ac.pdf. 

[3]
Tender Ref MARKT/2013/205/F.
[4] A range of
stakeholders were consulted including civil society organisations, governments,
regulators, banks and trade associations.
[5] The study of the
external contractor can be consulted at : http://ec.europa.eu/internal_market/company/modern/corporate_governance_in_financial_institutions_en.htm
[6] A
summary of the consultation with the 14 EU G-SIIs can be consulted at: http://ec.europa.eu/internal_market/company/modern/corporate_governance_in_financial_institutions_en.htm
[7] The
contributions can be consulted at: http://ec.europa.eu/internal_market/consultations/2014/country-by-country-crd4/contributions_en.htm
[8] The outreach event
was held on 2 October 2014. The participants represented the different
stakeholder groups. A summary of the discussion can be consulted at: http://ec.europa.eu/internal_market/company/modern/corporate_governance_in_financial_institutions_en.htm#240711

[9] See the summary of
discussion at the outreach event, the responses to the public consultation and
the report of the external contractor, pages 87, 91, 145-147. 
[10] See the summary of the
discussion at the outreach event, the responses to the public consultation, the
summary of the responses to the G-SIIs consultation and the report of the external
contractor, page 139.
[11] For more details, see
the report of the external contractor, page 97 and the summary of the responses
to the G-SIIs consultation.
[12] Report of the
external contractor, pages 73-83 and 84-85.
[13] For more details, see
the report of the external contractor pages 93-96.
[14] See the summary of
the discussion at the outreach event, the responses to the public consultation,
the summary of the responses to the G-SIIs consultation and the report of the external
contractor, pages 140-141.
[15] Report of the
external contractor, pages 46-55 and 84-85.
[16] See the summary of the
discussion at the outreach event, the responses to the public consultation, the
summary of the responses to the G-SIIs consultation and the report of the external
contractor, pages 142-143.
[17] Report of the
external contractor, pages 46-55 and 84-85.
[18] See the summary of the
discussion at the outreach event, the responses to the public consultation, the
summary of the responses to the G-SIIs consultation and the report of the
external contractor, page 144.
[19] Report of the
external contractor, pages 64-72 and 84-85.
[20] Report of the
external contractor, pages 73-83 and 84-85.