International Tax Update: Country-by-Country Reporting
On December 5, 2016, the Organization for Economic Co-operation and Development (“OECD”) added guidance on how countries can implement its country-by-country (“CbC”) reporting program, known as “Action 13.” Large companies, which will soon need to submit a new type of tax report, known as a country-by-country report (“CbCR”), have been scrambling to collect and organize the data needed to complete the CbCR. Information to be included in the CbCR—namely a country-by-country reconciliation of global revenues, profits, income tax paid and employee headcount—has never before been required in tax reports. As a result, taxpayers and tax authorities alike are preparing for the initial filing of the CbCRs. Citing practical concerns, the OECD encouraged tax authorities to soften the first deadline associated with the CbCR regime.
Action 13 called for CbCRs to be submitted for fiscal years beginning on or after January 1, 2016. However, this recommendation was not mandatory, so some countries chose to implement Action 13 at later dates. For example, the first fiscal years for which the U.S. will require CbCRs begin on or after June 30, 2016. In Switzerland, the first CbCRs will cover fiscal years starting on or after January 1, 2018. Thus, different countries have different deadlines for the initial filing of CbCRs, but most have followed the OECD’s January 1, 2016, recommended start date.
The OECD was interested in reducing taxpayer compliance costs. Therefore, Action 13 specifies that only one CbCR should be prepared and submitted. Under Action 13, the global headquarters of a multinational enterprise (“MNE”) group will submit the CbCR to the tax authority in which it is domiciled. For example, if a U.S.-based company with locations in 40 countries is preparing a CbCR, rather than each subsidiary of the group preparing its own CbCR, the U.S. parent will submit the CbCR to the IRS, with information shown in U.S. dollars and under U.S. GAAP. If a foreign tax authority wishes to audit the local subsidiary of the U.S. company, it can obtain the CbCR from the IRS through an automatic exchange of information mechanism. This mechanism will enable tax authorities from approximately 50 countries to exchange CbCRs.
Because the Action 13 deadlines vary from country to country, some foreign subsidiaries will be subject to CbC reporting, even though the parent is not subject to CbC reporting until the following year. For example, the Irish subsidiary of a U.S. company may be required to submit a CbCR to the Revenue Commissioners, even though its U.S. parent is not required to submit a CbCR to the IRS until the following year. To promote consistency, many countries, including the U.S., will allow “optional filing” of the CbCR. Thus, a U.S. company may choose to file a CbCR with IRS, even if it is not required to under U.S. law, in order to comply with the tax rules in place where its foreign subsidiaries operate.
For those companies headquartered in jurisdictions that cannot accommodate optional filing, a “surrogate parent” can be selected. This surrogate parent will submit the CbCR to its local tax authority for the gap year. In the following year (and generally all subsequent years), the parent company will submit the CbCR to its domestic tax authority. Thus, companies subject to CbC reporting will generally only file one CbCR, filing in the jurisdiction where the parent is located. However, if a company files a CbCR with a government that does not execute an international agreement with the government where the company has a subsidiary, or if that government fails to effectively participate in the automatic exchange of information program, then filing multiple CbCRs may be required.
Many tax authorities required the subsidiaries of MNE groups operating in their jurisdiction to file a notice that identifies the name and location of the Reporting Entity (the entity that files the CbCR) by December 31, 2016. However, the mechanics of the automatic information exchange are still being developed, and policy makers are in the process of enacting CbCR legislation. Further, countries will need to enter formal agreements with each other for the automatic exchange of CbCRs. Given the dynamic environment, many observers anticipate that MNE groups will wish to revise their Reporting Entity selections in 2017.
Monitor Ongoing Developments
In its additional guidance, the OECD encouraged tax authorities to allow MNE groups to submit revised Reporting Entity notifications when the actual CbCR is filed. The OECD notes that such transitional relief would not frustrate the policy intention of Action 13, and MNE groups should not be subject to penalty for revising their Reporting Entity selections.
With so many moving parts, staying abreast of the CbC reporting requirements can seem like a full-time job. It is important for taxpayers to closely monitor their CbC reporting obligations in all jurisdictions in which they do business. The first year of filing CbCR will present challenges for both taxpayers and tax authorities, and it is anticipated that additional guidance will be issued in future years.