The European Union's new country-by-country tax reporting requirements contain fundamental flaws that could inflate revenue figures, distort profit calculations, and confuse investors trying to understand multinational tax practices, according to a new analysis from the Tax Foundation. The report, published in July 2026, warns that the rules' treatment of related-party transactions and dividend payments diverges sharply from standard accounting practices, creating what even the Wall Street Journal has described as figures "difficult for investors and the public to understand." The core problem lies in the directive's technical requirements, which force companies to include internal transactions that conventional accounting explicitly eliminates.
The EU rules under Article 48c require companies to disclose 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. But the directive specifies 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." These requirements contradict normal accounting procedures used under frameworks like IFRS and US GAAP, which eliminate intragroup sales for consolidated reporting because they don't represent transactions with external customers. The report illustrates the problem with an automotive company example: if one business unit designs vehicles, another sets up production lines, a third acquires parts, another assembles, and a final unit sells finished cars, each internal transaction creates revenue for one entity and costs for another. Under the EU rules, all those internal exchanges get counted as revenue, even though the money is "simply moving from one pocket to another within the same multinational entity."
The treatment of dividends creates additional distortions that could make profits appear to exceed revenues in some jurisdictions. The report notes that the EU rules clearly exclude related-party dividends from revenue calculations, but "the directive's own definitions contain no similar exclusion for the purposes of calculating profit or net income." Academic accountants Jennifer Blouin and Leslie Robinson showed in a 2025 Journal of Public Economics article how estimates of profit shifting "can be greatly inflated when the data on multinational activities double-counts related-party dividends." The confusion deepens because the directive allows companies to use either its own reporting basis or OECD country-by-country reporting instructions, which have been progressively patched to fix the dividend issue while the EU has not. This means "the same line item may not be comparable from one company's disclosure to the next," the report states. On the tax side, the prohibition on including deferred taxes or uncertain tax provisions means the disclosed tax figures will differ from what companies report in their financial statements, and single-year cash tax payments can include one-time events like audit settlements or refunds that don't reflect ongoing tax rates.
The Tax Foundation's analysis emphasizes that effective tax rate calculations based on these disclosures will combine flawed measures of both taxes and profits, with revenue and profits inflated in different ways while tax measures are deflated or volatile. A 2008 study by academic accountants Scott Dyreng, Michelle Hanlon, and Edward L. Maydew found that single-year effective tax rates based on cash taxes are volatile and poor predictors of a company's long-run tax rate, meaning conclusions about corporate tax practices "should therefore rest on several years of aggregate data, not a one-year snapshot." The report concludes that any assessments of multinational taxation levels using the EU disclosures "should be interpreted with a clear understanding of the caveats and limitations." Tax Foundation will host a webinar on the topic with other experts on July 29, 2026, as these new disclosure requirements take effect and companies begin publishing data that may confuse as much as it clarifies.