Country-by-country (CbC) reports are required under BEPS Action 13. They detail a multinational corporation’s aggregate data on the global allocation of income, profit, taxes paid and economic activity among the tax jurisdictions in which it operates. The report is shared with tax administrations for use in high-level transfer pricing and BEPS risk assessments. Tax administrations around the world are using CbC reports to better understand the risks posed to their jurisdictions, and the OECD is building pilot programs that aim to provide greater tax certainty to multinational enterprises (MNEs) by using the CbC reports as guidance.1
As of March 2020, 90 tax jurisdictions have a law that introduces a CbC reporting obligation, and over 2,400 relationships are in place that allow for the exchange of the reports across taxable jurisdictions.2 In the U.S., the CbC reports for MNEs are exchanged under bilateral competent authority arrangements negotiated between the U.S. Competent Authority and foreign tax administrations.3 To satisfy the requirements of this report, the parent entity of a U.S. MNE group that has annual revenue for the preceding reporting period in excess of $850 million must file IRS Form 8975 and Schedule A.4 Currently, CbC reports are not disclosed to the public.
With CbC reporting now widely adopted around the world, leaders in several countries are pushing to extend its effectiveness. On March 6, 2020, the U.S. Congress sent a bicameral letter regarding multinational corporations’ CbC reporting to the OECD. The effort was led by U.S. Senator Chris Van Hollen and members from the House of Representatives, Cynthia Axne and Lloyd Doggett. The letter, which urges the OECD to strengthen its CbC reporting requirements, was signed by 30 other Democrats in both the House and the Senate. According to the signing members of Congress, action would make “the tax system fairer for working families by ensuring that multinational corporations are paying their fair share” of taxes.5
A few weeks earlier, new legislation that would require more transparency for U.S. MNEs was introduced by Cynthia Axne in the House of Representatives. This proposed legislation, the Disclosure of Tax Havens and Offshoring Act, would amend the Securities Exchange Act of 1934 by directing the U.S. Securities and Exchange Commission (SEC) to mandate that disclosures of CbC financial reports be publicly available. CbC report submission is required for multinational enterprises generating over $850 million in annual revenue.6 According to Representative Axne, passing this bill would ultimately provide valuable information on how companies are shifting profits and offshoring jobs. “Shining a light on these practices will help investors and the public understand the risks that public corporations are taking to try and squeeze out extra profits,” she argued during the bill’s announcement in Iowa.7
Senators Van Hollen, Amy Klobuchar and Tammy Duckworth had introduced a two-part companion bill in the Senate in May 2019. The Removing Incentives for Outsourcing Act, led by Senator Klobuchar, works to eliminate the use of excess foreign tax credits to shelter U.S. profits in foreign tax havens, and the Disclosure of Tax Havens and Offshoring Act, led by Senator Van Hollen and cosponsored by Senator Sheldon Whitehouse, is the Senate mirror of the bill introduced by Representative Axne.8
Congress’ call for public access is not unique among world legislative bodies. The European Union (EU) Competitiveness Council (COMPET) meeting on November 28, 2019 included a vote on whether tax and financial information contained in the CbC reports should be made public. The vote centered on amending the Accounting Directive 2013/34/EU and, much like the U.S. proposal, would have required in-scope MNEs or standalone undertakings with total consolidated revenue over €750 million in each of the past two years to disclose tax-related information, including income taxes paid to each member state. The proposal did not get the necessary support of 16 member states—only 14 voted in favor of the proposed changes—so the amendment was not passed into law. However, details of the proposal could be revised and put forward for COMPET to vote on a second time.9
Multinational corporations have already begun speaking out against these proposals. Many argue that public CbC reports will be used by industry competitors to gain insight into valuable business practices, thereby removing competitive advantages that were gained by diversifying their tax structures. “It’s not just reputational risk, but wider business competitiveness. Public CbC reporting offers tax information on EU-based companies, including insights into [tax] structures,” said one head of tax at a multinational manufacturing company before the November 28 EU COMPET vote.10 Additionally, without additional context, the public disclosure of a CbC report may unnecessarily or wrongfully paint taxpayers in a negative light, even when those companies are following the arm’s length standard and reporting appropriate amounts of income in each country. Misinterpretation of the data contained in the CbC report or insufficient context related to the data contained within are concerns for multinational taxpayers globally as they try to mitigate any reputational damage. With public disclosure of the CbC report, both compliance fees associated with the CbC report and fees related to public relations risk mitigation are likely to increase.
It is important for taxpayers to prepare for a scenario in which CbC reports become public, and to understand what impact it may have on their businesses. It is recommended that taxpayers work with advisors to proactively prepare the CbC report in order to identify risks from audit and public relations standpoints.
Taxpayers and advisors should stay informed and continue to monitor the progress of the proposed public disclosure of CbC reports. While there is no guarantee that a requirement to publicly disclose CbC reports will be implemented in the U.S. or other countries, taxpayers should understand the implications and potential issues should new legislation be put in place. The introduction of proposed legislation signals that governments and taxing authorities are working to improve transparency into MNEs, and scrutiny on companies’ tax and transfer pricing policies will only continue to increase in the months and years ahead.
Sarah Stauner, Vice President in Duff & Phelps' Transfer Pricing practice, is a contributing author.
Read Transfer Pricing Times – First Quarter 2020
Sources
1.http://www.oecd.org/tax/beps/beps-actions/action13/
2.IBID.
3.https://www.irs.gov/businesses/international-businesses/country-by-country-reporting
4.https://www.irs.gov/forms-pubs/about-form-8975
5.https://www.vanhollen.senate.gov/news/press-releases/van-hollen-axne-and-doggett-lead-bicameral-letter-urging-the-oecd-to-require-more-transparent-tax-reporting
6.https://tax.thomsonreuters.com/news/house-democrat-introduces-bill-requiring-country-by-country-reporting/
7.https://axne.house.gov/media/press-releases/rep-cindy-axne-raygun-founder-mike-draper-unveil-new-legislation-hold
8.https://www.vanhollen.senate.gov/news/press-releases/van-hollen-klobuchar-duckworth-introduce-legislation-to-keep-jobs-in-the-united-states
9.https://www.internationaltaxreview.com/article/b1j7hkz9m2y67b/public-cbcr-fails-to-move-forward-in-eu-council
10.https://www.internationaltaxreview.com/article/b1j7hkz9m2y67b/public-cbcr-fails-to-move-forward-in-eu-council
