The obligation to report country-by-country tax information to all jurisdictions is on the immediate horizon. The impact on multinationals will be profound, with significant implications for the tax compliance and reporting functions, transfer pricing policies and oversight, tax audits and controversies, and reputational risk.
In July 2013, the OECD/G20 released a 15-point action plan focused on addressing the perceived profit shifting behaviors of multinational enterprises that contribute to erosion of the tax bases of countries. This initiative, the Base Erosion and Profit Shifting (BEPS) project, is on schedule to produce final recommendations on all 15 items by the end of this year. Many countries are poised to adopt the OECD recommendations immediately. Increased transparency and reporting regarding the tax structures and transfer pricing practices of multinationals is a central theme of the recommendations.
In particular, under Action 13 (released in February), multinationals will be required to provide, in a single country-by-country (C-by-C) report, detailed information about their operations in every jurisdiction in which they operate. The information required will include related and unrelated party revenue, profit and loss before tax, income taxes paid, capital, employees, and assets — for each and every jurisdiction. Multinationals will also be called on to file a “Master File” providing additional information about their global transfer pricing, tax rulings, value chains, and operating structures.
The implementation guidelines issued by the OECD provide that the new reporting rules should apply to all multinationals with more than €750 million (approximately $840 million) in revenue. The first reports would relate to fiscal years beginning on or after January 1, 2016, with the report due one year later. (The first C-by-C report for multinationals with fiscal years ending December 31, 2016, would be due by December 31, 2017.) In general, the head company of a multinational group would be expected to prepare the C-by-C report for the entire group and file it with its residence jurisdiction. The residence jurisdiction would then share the report with other countries on an automatic basis. Several countries already have signaled their intent to adopt the OECD recommendations and implementation guidelines, including the U.K., Spain and the United States (the U.S. Treasury Department has indicated its plans to require the C-by-C report consistent with the OECD's recommendations). Because it is a single report, as long as one country requires the report, a multinational will have to gather the same information for all countries in which it operates.
The proposed reporting requirements may pose significant costs and compliance burdens, including new technologies and systems to gather and report the data in the required format. In addition, multinationals will need to understand and evaluate the possibility of increased audit scrutiny or controversy, particularly regarding transfer pricing practices.
Against this background, it will be crucial that tax considerations are integrated effectively into multinationals' overall business strategies and operational decisions. How can audit committees of multinationals assess their company's readiness for the C-by-C reporting? Here are a few areas of possible focus:
• What systems and process changes will be required to comply with the new documentation requirements? Is the data required to be reported readily available in our systems or will it require systems changes?
• Have we reassessed our transfer pricing strategies and identified those that are likely to be challenged? Is it clear what transfer pricing methodology each business unit uses? Do we need to modify any transfer pricing arrangements?
• Do we have an effective communications plan to explain and interpret the country-by-country data and defend our transfer pricing strategies? For example, some tax authorities may tend to focus on the “tangibles,” such as numbers of employees in specific locations, and may find it difficult to assess the comparative value and profit generated by small numbers of highly senior or expert staff.
• How will the country-by-country information be used, and who will have access to it? The implementation guidelines contain a list of recommended conditions for a country obtaining and using the C-by-C report, including both confidentiality and appropriate use protections, but these are merely “recommended.”