Earlier this month the OECD presented the final package of measures for reform of international tax rules, stating that annual revenue losses from base erosion and profit shifting (BEPS) are conservatively estimated at up to $240 billion, about 10% of global corporate income tax revenues. Once these measures are agreed, the OECD’s focus will shift to designing and putting in place a framework to support their implementation.
An obvious concern is the extent to which multinationals are prepared for country-by-country reporting, a key factor in determining exactly where profits are made.
The chair of the International Chamber of Commerce commission on taxation, Christian Kaeser, says multinationals will be able to deliver on country-by-country reporting if required, although he also warns that it is unclear whether countries will be prepared to make the best use of the enormous amount of data that will be generated and collected.
According to Kaeser, the data could end up largely unanalysed, leaving taxpayers with an unnecessary administrative cost to bear.
Joe Harpaz, head of the Onesource corporate market for the tax & accounting business at Thomson Reuters, refers to a recent survey conducted by his company, in which a quarter of corporate-tax and transfer-pricing directors said their companies would fail to meet the first deadline proposed in the BEPS action plan (December 31 2017).
Harpaz says: “This is important because these are the people who will be responsible for actually reporting country-by-country financial data. The most significant BEPS action item suggests that companies should file detailed tax reports in every country where they do business. They have never had to do that before – previously, companies had to show only the transaction flow from one country to another. Now the full details of each company’s tax payments to each country will be available globally in a standardized, shareable template.”
According to Harpaz, the administrative challenges associated with collecting transaction-level data and reporting it on a country-by-country basis are significant. He says: “Companies will not only need to report this information accurately across every jurisdiction in which they operate; they will also need to incorporate ongoing tax law changes and other variables into their revenue forecasts on a forward-looking basis. It is a huge undertaking.”
However, the Financial Transparency Coalition is of the view that any serious chief financial officer would be aware of the information required for country-by-country reporting. Its lead EU advocate, Koen Roovers, says: “The job of tax planners in transnational corporations is precisely to assess this kind of information. That said, getting the global overview of a large transnational corporation could be challenging, so it might be wise for corporations not to waste any more time and to start the internal process to prepare themselves.”
Roovers adds that in the wake of the fourth Capital Requirements Directive implementation, his organization heard from bankers that the reporting obligations caused them to greatly improve their internal communication, suggesting that companies should not fear the BEPS reporting requirement.
Multinationals are well positioned to meet new reporting requirements – it is a question of how the financials they maintain internally are consolidated and reported to authorities. That is the view of Liz Confalone, policy counsel at Global Financial Integrity, a Washington DC think-tank.
“They also use financial reporting software and the software industry will be quick to provide products that make the transition as painless as possible,” she says. “Whatever changes need to be made to internal systems to enable multinationals to meet their new reporting obligations, they are certainly up to the task.”
Markus Meinzer, senior analyst at Tax Justice Network, agrees that country-by-country reporting requires information that all companies already have – for example, where they have subsidiaries, operations, employees and assets, where they pay taxes, etc.
“Otherwise, it would be impossible for them to make business decisions, report profits or engage in tax planning,” he says. “Even if they do not have the information in the required format, it is unlikely that companies operating in more than one country would have difficulties producing such a report, let alone those with a turnover in the hundreds of millions of dollars.”
Meinzer adds that a 2014 PwC survey found that 59% of CEOs of large companies are in favour of mandatory rules for public country-by-country reporting. “Those companies which claim not to be ready are likely to be those which for some other reason may be reluctant to release the data,” he says.