BEPS CbC: Getting Ready for the New SOX?
- The OECD's BEPS Project calls for unprecedented transparency in reporting financial information and multinational companies need to pay close attention to developments
- Country-by-country reporting would require companies to provide detailed financial reports that break down income and taxes paid in a format that would be shared with other countries of operation
- Companies may need to reassess transfer pricing strategies, invest in new systems, and hire staff to comply with the new rules
A few years ago, the OECD embarked on a multiyear effort to create an international tax framework that closes perceived gaps in international tax rules. This includes combating base erosion and profit shifting (BEPS) to ensure companies pay their “fair share” of taxes. Many of the BEPS Project’s action items are expected to be finalized later this year.
Regardless of whether the United States gets on board with the effort, U.S. companies will be affected, since the proposed requirements would result in significant new costs and compliance burdens. A transformation is coming; multinational companies need to be prepared for a new global tax environment.
What Is BEPS?
The BEPS Project, which was requested by the G20, could lead to sweeping changes to U.S. corporate tax laws and related treaties. The process of eliminating base erosion and profit shifting addresses the issue of perceived lost revenue as a result of comprehensive corporate tax planning. The OECD’s July 2013 report to G20 finance ministers and central bank governors noted that concerns surround “international tax planning designed to shift profits in ways that erode the taxable base of developed and developing countries to locations where they are subject to a more favourable tax treatment.”
The OECD’s subsequent action plan set forth a strategy consisting of 15 actions to eliminate BEPS. A key component of the BEPS initiative is the release of comprehensive financial information to assist tax administrators in identifying and assessing tax risks. Finance ministers endorsed the plan in 2013 and the OECD has been rolling out its deliverables over the past two years. More than 60 countries have been involved in the effort, including the U.S.
Country-by-Country (CbC) Reporting
The G8 directed the OECD to develop a template for country-by-country reporting “focusing on high level information on the global allocation of profits and taxes paid” for the purpose of promoting transparency; this will likely turn into an unprecedented level of public disclosure of tax information. CbC reporting would require companies to provide detailed financial reports that break down income and taxes paid in a format that would beshared with the other countries in which the companies conduct business. The goal is to help countries value business operations within their borders.
Over the last year, the OECD released a report on transfer pricing documentation with a template for CbC reports,implementation guidance, and model legislation for countries wishing to adopt the new BEPS rules.
The template requires companies to describe the business activities of entities within each country and report financial information relating to the global allocation of income, aggregated by country, including
- profit before tax;
- income tax paid;
- number of employees; and
- tangible assets other than cash or cash equivalents.
In its implementation guidance, the OECD recommends that all companies, with the exception of those with revenue under 750 million euros, file their initial annual report for fiscal years that begin on or after January 1, 2016. Companies would have one year to file the report, with the first CbC reports due at the end of 2017 for those on a calendar year. A parent company would file the report in its country of residence; however, mechanismswould be in place in the event that country does not require CbC reporting or participate in the BEPS Project. The report would then be shared with tax administrators in other countries provided certain conditions are met.
The implementation package released in June outlines model legislation that countries can use to adopt the new rules as well as relevant agreements for sharing the CbC reports. Although Senate Finance Committee Chairman Orrin Hatch (R-UT) and House Ways and Means Committee Chairman Paul Ryan (R-WI) have expressed concerns with the BEPS Project, the Treasury Department appears to believe it has the authority to collect the information required in CbC reports.
Can Companies Wait and See What Happens?
If the project is a success, detailed financial information will be available in a shareable and standardized format for the first time. The cost of compliance in preparing the reports will no doubt be burdensome and require additional resources. Concerns around confidentiality are also on the minds of tax professionals—even with the OECD requiring certain safeguards before a country can receive CbC reports, companies are understandably wary that releasing sensitive information will yield more challenges by tax authorities.
While many have suggested that the U.S. won’t adopt BEPS-related legislation, U.S. companies still need to prepare for coming changes. As noted by Manal Corwin, a former Treasury official, if the U.S. does not adopt the standard, “the implication of that for U.S. multinationals is: if they have business operations in other jurisdictions who do adopt, and those jurisdictions can’t get the report from the U.S. government, then they will be faced with the requirement to provide the C-by-C report directly to the government, each of the governments in which they’re operating.”
It has become clear over the last few months that this effort is moving forward and it will have a huge impact on U.S. multinationals—even if the U.S. does nothing. Many companies are already preparing for the “BEPS tax storm.” With changes coming, companies may need to reassess transfer pricing strategies, invest in new systems, and hire staff to comply with the new rules. Multinational companies need to watch developments closely to determine how the various action items and implementation will affect them.