2015-Issue 5 — In a development that is sure to have been a big surprise to many, a U.S. Treasury Department attorney-advisor speaking at a recent conference announced that the United States will adopt country-by-country (CbC) reporting for multinational groups. While few details have emerged, the U.S. CbC template will likely be similar to the one developed by the Organization for Economic Cooperation and Development (OECD) as part of its Base Erosion and Profit Shifting (BEPS) initiative. This surprise announcement comes at a time when other Treasury and IRS officials have indicated concerns about CbC implementation, including the confidentiality of U.S. taxpayer information, the potential misuse of CbC information by other tax authorities, and budget constraints which could limit the IRS’ ability to process, analyze and share the reported information. Nonetheless, the announcement indicates that the U.S. is moving forward with CbC, and sooner than most expected. The resulting administrative burdens and implications for transfer pricing are significant.
What is Known
While we await further details, an outline of the U.S. approach has emerged. It appears that the U.S. will follow the OECD’s filing threshold, requiring reporting for multinational groups with over €750 million (approximately US$ 840 million) in consolidated worldwide revenue. We expect the U.S. CbC template to require substantially the same information as the OECD’s published template, which requires disclosure of revenues, profits, income taxes paid, stated capital and accumulated earnings, number of employees, and tangible assets other than cash or cash equivalents, by tax jurisdiction. And again, while details are unknown, last Thursday’s announcement revealed that Treasury hopes to implement CbC reporting relatively quickly, with the first reports due by December 2017. Guidance from the OECD has indicated that CbC reporting be required for fiscal years commencing after January 1, 2016, a date that will be here sooner than many may like to admit.
Further, if current OECD recommendations are followed, it is anticipated that the obligation to file CbC reporting will fall to the ultimate parent company of a multinational group. Therefore, it is likely that several thousand U.S.-based multinationals will be affected. In addition, U.S. subsidiaries of multinationals parented in any territory already committed to CbC (e.g. the U.K. or Spain) will also have to supply the relevant information.
Alvarez & Marsal Taxand Says
CbC reporting represents a sizable additional requirement to traditional transfer pricing documentation for U.S. multinationals. It is an area of serious concern given the amount and sensitivity of data required. Although the details of CbC reporting are still unclear, U.S.-based multinationals should begin to plan for its eventuality. For many, the administrative burden will require the commitment of considerable resources globally. And, despite a number of software solutions that seek to automate the necessary information-gathering, CbC reporting must be done in conjunction with a well-thought out, well-executed, and well-documented global transfer pricing policy. No longer can transfer pricing implementation and documentation be a localized function.
Further, while transparency may be a stated aim of CbC, it also cannot be ignored that these reports will serve as a fundamental tool in tax audit risk assessment. The global overview provided by these reports may highlight transfer pricing mismatches across a groups’ global profile, or entities with seemingly elevated profits without significant substance. Careful consideration of existing structures will now have to be paid, so that challenges from the IRS, or from other tax authorities committed to CbC, can be anticipated and mitigated.
Alvarez & Marsal Taxand has prepared a detailed discussion regarding BEPS and CbC reporting in several recent editions of Tax Adviser Weekly.
Kieran Taylor and Andrew Scripps contributed to this article
The information contained herein is of a general nature and based on authorities that are subject to change. Readers are reminded that they should not consider this publication to be a recommendation to undertake any tax position, nor consider the information contained herein to be complete. Before any item or treatment is reported or excluded from reporting on tax returns, financial statements or any other document, for any reason, readers should thoroughly evaluate their specific facts and circumstances, and obtain the advice and assistance of qualified tax advisors. The information reported in this publication may not continue to apply to a reader's situation as a result of changing laws and associated authoritative literature, and readers are reminded to consult with their tax or other professional advisors before determining if any information contained herein remains applicable to their facts and circumstances.
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