As Base Erosion and Profit Shifting (BEPS) becomes closer to a reality for multinationals everywhere, many are finding that they are underprepared to meet its requirements, particularly regarding BEPS Action Item 13, which deals with transfer pricing documentation and Country-by-Country Reporting.
Perhaps this is because the idea of standardizing international tax has been viewed as ambitious. Perhaps it is because the creation of the BEPS framework has played out as a slow drip rather than a ﬂood. Perhaps it is because of lagging regulations to outline requirements, particularly those in the US.
For whatever reason, many companies have only recently realized that the clock is ticking and that they are on the ropes. Multinationals need the whole story behind the hefty new reporting requirements that BEPS will create.
US vs Everybody
Already, US corporations have vastly different questions about BEPS reporting requirements than do companies in other parts of the world.
Lawmakers in the US have signaled that any legislation that obeys the BEPS framework will apply to taxpayers with fiscal years beginning on or after July 1, 2016, pushing reporting in many cases into 2018. The rest of the world is largely a year ahead of this time frame, forecasting BEPS-compliant tax reporting for fiscal years beginning Jan. 1, 2016 with filings in 2017.
For companies, that extra year would cause far more problems than it would solve. Many countries that have adopted regulations are requiring multinationals doing business within their borders to report in one of three ways: The company can file with its home country or, if it does not, with that country’s domestic tax authority or a competent authority with which they have an electronic exchange-of-information agreement. Filing with a home country is the far easier option. Both OECD and US final regulations mention the ability for
an MNE to voluntarily file a CbC report with the ultimate parent jurisdiction which has not adopted CbC reporting. This development may reduce the number of local CbC reports that a US-based MNE will need to file. However, because the US decided not to participate in the Multilateral Competent Authority Agreement on the Exchange of Country-by-Country Reports like many other countries, they will need to have bilateral competent authority agreements as well as have a tax treaty or tax information exchange agreement with
each individual country requiring exchange. Thus, depending on the jurisdictions in which the US-based MNE has constituent entities, it may still end up with multiple CbC filings.
If a company elected not to voluntarily file, the result of this would be, in a word, madness.
Picture a US corporation that does business in 50 other countries. Lacking a home country
filing mechanism, that corporation will have to file with some subset of these 50, by picking a surrogate filing parent in a country with legislation, determining which countries of the 50 that “surrogate country” has electronic exchange-of- information agreements with, and filing discretely with the others. This is not as easy as it sounds, as countries have different regulations and views on confidentiality related to filings.
Many US companies, including Thomson Reuters ONESOURCE® users I have talked to directly, simply do not know how they would handle this scenario if it were to become reality. Some expect US lawmakers or the Treasury will be able to negotiate accommodations with other countries. “Waiting to see,” however, doesn’t strike me as much of an action plan, and US companies are currently deep in the scenario-planning phase of sorting this out.
One explanation for lawmakers’ slow movement has to do with the fact that US companies have concerns about the confidentiality of the information that BEPS mandates the disclosure of.
There is nothing in the BEPS framework that says information regarding how a company does business globally is kept confidential. In fact, some proposals include the public disclosure of tax-related information. In the spirit of erring on the side of caution, multinationals should at the least anticipate the possibility that data collected under the BEPS framework will be disclosed to other countries or to the public.
Furthermore, the BEPS framework calls for the creation of a narrative that lays out the full scope of an organization’s global tax strategy and the logic that underpins it. This narrative – the “master file” – is what regulators use to ensure there is sound reasoning behind how a company’s money moves around the globe. This master file in particular, and much of the rationale for BEPS more generally, is a direct consequence of the aggressive tax strategies that many companies have in place today. While these strategies follow the form of the law, many tax authorities feel that they do not reﬂect its intent.
US companies that would rather not have this information available to the public might welcome an opportunity for domestic lawmakers or regulators to act on their behalf, and to make confidentiality more of a priority in sharing with other countries.
The data challenge
Assuaging the doubt about Country-by-Country Reporting and the confidentiality of information still does not close the circle for tax departments preparing for BEPS compliance. There is a massive logistical challenge to address as well regarding data.
Companies are not fully mindful of how difficult it will be when they go to pull the information required. BEPS is not just one more report to file. Despite the information-sharing agreement binding between many countries, there are bound to be outliers: countries that certain multinationals do business in that are not covered by those agreements or other treaties. Consequently, those countries will necessitate additional reporting – and each country will have different rules, submission criteria and currencies.
From what I have heard and seen, the companies that have performed pilots of the actual filing process that is anticipated under BEPS have found it is, like virtually every other large-scale data process, tremendously difficult at its onset. Enterprise Resource Planning (ERP) systems and other essential sets of data may not be structured to be able to talk to each other. Many different data sets will need to be defined, gathered, restructured in a consistent way and validated. Only then will the data be truly useful from a global tax compliance perspective.
The rationale behind BEPS is to force multinational companies to comply with both the letter of the law as well as its intent, and to ensure that the creation of value falls in line on a geographical basis with tax expenditures. The bright side of this ambitious project is that companies that have historically obeyed the best tax practices will eventually obtain an
advantage while those that have used tax avoidance as a crutch will falter.
But in the meantime, there is a lot of uncertainty and confusion.
How can you stay prepared in light of new Country-by-Country Reporting requirements? View our BEPS research and technology solutions.