The Internal Revenue Service has issued final regulations from the U.S. Treasury requiring a new, country-by-country filing from global entities to sort out where they earn their profits and how much they pay in taxes. The requirement applies to the ultimate parent entity of any multinational company that generates $850 million or more in revenue.
“Businesses were very anxious to have the final version of the regulations,” says Manal Corwin, head of the international tax practice at KPMG. “The sooner they get the information about what the U.S. regulations look like, the sooner they can prepare all of the internal processes that need to be in place to have all the information and do all the reporting.”
Any astute compliance officer might wonder why tax departments are so eager for a new filing meant to produce greater transparency around where a company earns its money and where it pays taxes. After all, global companies often pursue tax planning strategies to assure their taxable income is generated in the lowest-taxing jurisdictions possible to minimize the overall tax expense. Do they really want that plotted out in full tabular detail to the IRS?
Apparently so, tax experts say, because the unpleasant alternative is to face that same filing requirement in any number of other countries that are adopting similar filings. Better to do it once for the IRS than to do it multiple times in other countries, which may not provide the same information sharing policies and data safeguards that the United States pledges to its taxpayers.
It’s all part of a carefully coordinated global effort to pull the curtain on companies that engage in aggressive offshoring of profits to no-tax or low-tax jurisdictions. The Organisation for Economic Co-operation and Development and the Group of Twenty (G20) nations are bringing together dozens of countries through their Base Erosion and Profit Shifting project to modernize and coordinate tax rules.
“There’s both a risk and a strategic opportunity in terms of how you present the data. It will require some thought as you move data from one spreadsheet to another.”
Boris Nemirov, Global Transfer Pricing Technology Leader, Deloitte
One of the specific recommendations is to require comparable reporting of country-by-country financial metrics so that tax authorities in different countries can share information with one another. It enables them to compare notes, essentially.
“This will provide data aggregated by jurisdiction showing about 10 different items of financial information,” says Boris Nemirov, global transfer pricing technology leader at Deloitte, not to mention information on where a company’s entities are located and how they operate. “It will be an unprecedented view of where a company has earned revenue, earned profits, and paid taxes.”
By having many countries adopt essentially the same country-by-country reporting requirements, tax authorities will be able to engage in better risk assessments of taxpayers in their jurisdictions, says Marc Alms, managing director at tax services firm Alvarez, & Marsal Taxand. “This will give tax authorities a quick sense of whether this is something they want to investigate further,” he says.
The U.S. regulations follow fairly closely the recommendation of the OECD, says Nemirov. Where there are differences, they are focused on effective dates and the revenue threshold for reporting in the United States compared with what other countries are requiring. U.S. regulations are intended to make a provision for gaps between U.S. and other country requirements so that companies are not caught between different requirements in different countries.
PREPPING FOR BEPS
Partly due to lack of clarity and guidance from American tax authorities, U.S.-based multinationals are lagging behind their European counterparts in terms of preparation for BEPS. According to a new report from Thomson Reuters:
* Compared to other regions, the U.S. spends the least amount of time preparing for BEPS; 50% of U.S.-based multinationals report spending 2 hours or less per week preparing for BEPS.
* 64 percent of U.S. multinationals are proactively taking steps to prepare for BEPS, compared to 75 percent of European respondents.
* 71 percent of U.S. respondents said their company has not yet provided more resources to help their department prepare for BEPS implementation.
* 83 percent said documentation and country-by-country reporting for transfer pricing, related to BEPS Action Item 13, has required the biggest operational changes.
Source: Thomson Reuters
For calendar-year public companies, the filing takes effect for the 2017 tax year, so filings would begin with the typical September 2018 tax filing, assuming routine extensions, says Alms. Separate guidance is expected that will allow companies to voluntarily file even earlier to coordinate with effective dates in other countries that are earlier than that in the United States. That would spare companies from filing separately in countries that have earlier effective dates.
Now that the requirement is final, companies facing the filing requirement need to take stock of their operations and their information to determine what they need to do to comply. “If you look at the form, on the surface it looks pretty easy,” says Karen Kirwan, executive director in international tax services at EY. “But we have found as we are working with companies as they begin to gather the information, it’s not as easy as it looks.”
The country-by-country reporting represents the third prong in a framework for transfer pricing documentation, says Kirwan. Transfer pricing represents the prices companies charge for good and services among related entities within a single enterprise. Tax authorities study it carefully for signs that companies are using it to escape otherwise legitimate tax liabilities.
Companies are accustomed to the master file, which provides a high-level view of a company’s business operations and its transfer pricing policies and the local file, which provides information to support intercompany transactions. “The country-by-country reporting is something that’s completely new and different,” says Kirwan. “It’s something companies have never done before so they have to figure it out.”
The first step, says Nemirov, is to take stock of all the legal entities that roll up into a consolidated parent entity to determine what is in scope of the new filing requirement. “The next step is to start thinking about the data,” he says. The regulations give companies some flexibility in terms of whether they report data from the bottom up or the top down, he says. “There are advantages and disadvantages of each approach.”
Then companies need to think about any adjustments that need to be made, says Nemirov, which might be warranted to map data into account items as defined in the guidance. “There’s both a risk and a strategic opportunity in terms of how you present the data,” he says. “That will require some thought as you move data from one spreadsheet to another.
Companies would be wise to conduct a dry run of pulling and assembling the numbers to see how the reports will look, says Corwin. “See if it looks accurate,” she says. “For some companies the data will reveal aspects of the business they will want to address before reporting.”
While the data is meant for use by tax authorities only, companies should keep in mind that leaks into the public domain are not impossible. “Evaluate reports with that in mind,” says Corwin. “What would be the implications if that were to become public?”