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December 7, 2015

The growing issue of international corporate tax avoidance, also known as Base Erosion and Profit Shifting (BEPS), has received significant media and public attention. In an effort to offer clear and tangible solutions for governments and corporates around the world, the Organization of Economic Co-Operation and Development (OECD) released its final BEPS Action Plan in October 2015. This development featured Country-by-Country (CbC) reporting recommendations to provide an international standard for multinational corporations to share pertinent information with tax authorities. However, individual tax authority responses to the recommendations and their implementation have varied around the world. Taxand has recently released its third global legislative snapshot, detailing the responses to the BEPS program in local jurisdictions, including proposed legislative updates. This is available here.

Alvarez & Marsal Taxand Managing Director Marc Alms and Director Kieran Taylor were recently featured in Bloomberg BNA analyzing the evolving landscape of the implementation of these reporting measures by country, as well as the resulting political implications, particularly in the United States and European Union.

As the U.S. has not implemented CbC reporting to date, American corporations have not yet been mandated to share their financial data with the Treasury Department. However, as Marc and Kieran explain, U.S.-based multinationals with operations in other countries that have implemented the reporting rules will in fact be required to provide CbC reports in those jurisdictions, leading to some uncertainty and confusion for these companies. Further, the EU parliament has recently approved a special report calling for public CbC disclosure at an EU-wide level.

Marc and Kieran caution, however, that the U.S.’s involvement in CbC reporting is imminent, and acting now to gather resources will ensure a smoother transition for American corporations once the mandate arrives. Companies should begin preparing by following a few key steps to avoid being stressed for resources down the road.

  • Companies should identify practical solutions for complying with the CbC mandates that work within their existing IT and accounting systems.
  • Companies should examine transfer pricing information, compliance documentation and accounting systems.
  • Companies should be cognizant of potential future public disclosure of such information and misinformation by the media in an attempt to expose what are perceived as corporate tax avoiders.

Continue reading below for Marc and Kieran’s insights on the CbC reporting approaches of the U.S. and EU from Bloomberg BNA.

The publication of BEPS recommendations has been met with resistance from within the United States, particularly with regard to Country-by-Country Reporting. However, the determination of other G8 economies to proceed with implementation may give U.S.-based multinationals little choice but to comply and may leave the IRS out in the cold.

On October 5, 2015, the Organization for Cooperation and Development (OECD) published its final package of the Base Erosion and Profit Shifting (BEPS) Action Plan deliverables, including Country-by-Country (CbC) Reporting recommendations in Action 13. The CbC initiative was originally prompted by the Group of Eight (G8) countries’ request for a standardized template for multinationals to share ‘‘high level information on the global allocation of profits and taxes paid’’[1] with tax authorities. The OECD’s framework comprises a template that companies will share with tax authorities, providing financial data on operations by jurisdiction. Companies above the reporting threshold (generally those with revenues above 750 million euros) may be compelled to share data—by jurisdiction—in the following categories: revenue, earnings before tax, cash tax, current tax, stated capital and accumulated earnings, employee headcount and tangible assets, among others.

Although many members of both the G8 and OECD have indicated acceptance of the OECD’s basic template, approaches taken by tax authorities around the world have vastly differed as to the urgency and severity of implementation. This article explores political themes behind CbC reporting, further discussing how two significant bodies—the U.S. and the EU—have leveraged their divergent starting points to reach a blurred consensus.

I. The Political Climate behind CbC Initiatives

Pressure has grown to act on perceived problems with the international tax regime in recent years, primarily from within the EU, where authorities, the public and the media have accused member nations of gaming differences in tax rates to lure major employers into their jurisdictions. This topic has received significant media scrutiny and developed into a galvanizing political issue.[2] In post-recession Europe, the political climate has been ripe for tax reform as fiscal challenges led to austerity measures in many regions, prompting taxpayers and politicians to seek additional sources of revenue for the shrinking public sector. International tax law was pulled firmly into the spotlight as the tax planning strategies of large multinationals made headlines. Some countries—such as the UK with its ‘‘Google Tax’’—began to act unilaterally with stop-gap measures occasionally in line with BEPS, but often far in excess of BEPS recommendations from the OECD. As such, it is unsurprising the first-movers on CbC reporting are by and large the expected European nations.

The U.S., while not an early leader in the BEPS measures, has become involved as the European-led initiatives power forward. The U.S. Treasury Department was initially the main representative of U.S. interests within BEPS-related discussions, and the Treasury had shown early indications that the U.S. was progressing towards implementing CbC reporting requirements. However, the U.S. Congress has begun to question the Treasury’s legal authority to implement CbC reporting,[3] while also questioning the strategic outcome of allowing foreign governments to collect such information on U.S. multinationals. In response, leaders of the Senate Finance Committee and House Ways and Means Committee have recently drafted a letter to the Treasury and Internal Revenue Service explaining their reservations and asking for a memo on the Treasury Department’s legal authority to act regarding this issue.

Further, the business community in the U.S. has provided significant negative feedback on the proposed BEPS rules, showing concerns about implementation of country-by-country reporting, and in particular the proposed sharing of strategically sensitive business information. The community echoes the fears of the U.S. Congress that this sensitive information may be accidentally released or used by competitors or others to gain unfair commercial advantages. This general trend away from BEPS initiatives and towards the protection of corporate interests sits in marked contrast to a tide of public aggression towards perceived U.S. domestic tax ‘‘avoiders,’’ similar to that seen in European public opinion.

II. Widespread Implementation of Country-by-Country Reporting

Taxand has recently published its third ‘‘BEPS Snapshot,’’ summarizing legislative and proposed legislative adoption of BEPS initiatives across major global economies. Fourteen nations (including nations in Asia, the Americas, Europe and Africa) have responded that their local governments are either moving forward with CbC legislation and / or the BEPS framework more widely. The typical adoption mechanism used by territories has closely followed that recommended by the OECD, including CbC reporting strategy, thresholds for reporting requirements and intended content.

The EU has not stayed quiet on these issues, causing such consternation at a local member-state level. Numerous measures have been proposed and initiated, including limited early adoption of what is now known as CbC reporting. In 2013, the EU announced an Accounting Directive (2013/36/EU or CRD IV) requiring qualifying institutions to report taxes paid and other financial information on a country-by-country basis. On July 8, 2015, the European Parliament approved a proposal to extend this Accounting Directive to apply to all large multinationals.[4]

Were this proposal to be approved by the European Council, and ultimately become EU legislation, the proposal would take CbC reporting outside the specific concern of the largest multinationals and apply the burden of reporting to every ‘‘large’’ multinational within the EU (defined as exceeding two of: (1) balance sheet total of 20 million euros, (2) net turnover of 40 million euros, and (3) average number of employees during the fiscal year of 250 or more). Not only does this significantly increase the remit of CbC reporting drastically beyond those companies intended by the OECD, it also removes a fundamental concept of the original CbC proposals—that of confidentiality. Under the EU proposals, CbC reporting would become subject to public disclosure. Suddenly relatively small enterprises may face judgement by media, forced to defend why certain of their territories pay less than an apparent ‘‘fair’’ share of tax.

The European Commission justifies the proposed public disclosure by stating that it would create a

‘‘level-playing field’’, ‘‘place companies under closer public scrutiny and create more awareness of their tax practices’’ and ‘‘deter aggressive tax planning’’.[5] The U.S. Treasury Department has stated that if a breach occurs it would result in suspension of information shared by the U.S.[6]

Ironically (considering the levels of dissention), the implementation of CbC requirements by European or other non-U.S. taxing authorities would still require U.S. multinationals to prepare and disseminate CbC information (regardless of whether the U.S. ultimately adopts such CbC legislation) if the multinational has a presence in a territory that has adopted the legislation. Further, this information is intended to be shared further through bilateral or multilateral tax treaties. In its initial attempts to entertain discussions of U.S. adoption, the U.S. Treasury is likely hoping to abrogate a situation of asymmetric information—early European adopters receiving access to this information, and the U.S. needlessly left without.

III. Conclusion

CbC requirements are no longer a potential future concern. CbC reporting is here, already legislated in numerous territories with many more to come. Multinationals with a presence in such territories will have to comply with the CbC rules. Despite this, the U.S. remains skeptical regarding its ability to enforce BEPS recommendations and any associated safeguards, and further whether there is even political desire to do so.[7] Unfortunately for the U.S., and for U.S.-based multinationals, this delay is irrelevant. The U.S. will ultimately adopt CbC reporting. Not doing so will not delay the filing requirements of multinationals, it will simply delay the IRS’ ability to access the data. While this blurred consensus may be more through obligation than intention, the result remains the same—an ever-increasing number of multinationals will soon be reporting CbC.

This article was originally published in Bloomberg BNA.

 

[1] White House Press Office Communique

[2] Senate Finance Committee International Tax Reform Working Group: Final Report July 7th, 2015 p. 9

[3] "Congress Girds For A Showdown Over Global Tax Plan", Forbes.com (retrieved June 11, 2015)

[4] Defined as ‘‘large undertakings’’, namely those multinationals exceeding two of: (1) balance sheet total of 20 million euros, (2) net turnover of 40 million euros, and (3) average number of employees during the fiscal year of 250 or more.

[6] See comments of Robert Stack, Deputy Assistant Secretary for International Tax Affairs, U.S. Treasury Department, in U.S. Treasury’s Stack, McDonald reflect on draft guidance for country-by-country reporting under OECD BEPS Action 13, 23 Transfer Pricing Rep. 1579 (Apr. 16, 2015)

[7] The Tax Adviser AICPA BEPS Country-by-Country Reporting: the Practical Impact for Corporate Tax Departments