The Treasury Department and the Internal Revenue Service have finalized a rule requiring U.S. parent companies of large multinational public and private companies to provide financial data to the IRS on a country-by-country basis.
The information is supposed to provide tax authorities around the world with the ability to identify where companies might be shifting their profits into tax havens, a sign of possible tax avoidance that may provoke further investigation.
The new rule puts in place a commitment made last year by the U.S. to adopt country-by-country reporting, along with other countries that are part of the Organization for Economic Cooperation and Development. U.S. multinational companies will report the financial information to the IRS, and in turn the federal government will make the information available to tax authorities in other countries where the multinational has subsidiaries.
The move is part of the OECD’s Base Erosion and Profit Shifting, or BEPS, initiative to discourage multinational companies from artificially moving profits to low-tax countries. The Treasury and the IRS made some adjustments in the final regulations to take into account criticisms of the originally proposed regulations.
“We understood that Treasury and IRS were willing to consider ways to address the gap year issue caused by the effective date,” said Arlene Fitzpatrick, a principal in Ernst Young’s National Tax Department in Washington, D.C., in a statement. “Many were concerned about the potential cost and administrative burden associated with possibly having to file in multiple jurisdictions. The fact that Treasury is willing to accept voluntary filing for taxpayers in 2016, together with the guidance released today by the OECD regarding voluntary filing during the transition period, is helpful.”
The OECD issued the transfer pricing and country-by-country reporting, also known as CbCR, in a report last year known as Action 13, part of the 15-point BEPS Action Plan.
“In general, the final regulations apply for taxable years beginning on or after June 30, 2016, so taxpayers should not wait to begin their preparation for the new requirements,” said EY National Tax Department executive director Karen Kirwan. “Developing the reporting process requires careful consideration and inclusion of stakeholders beyond the tax compliance function. Also, most taxpayers will want to keep the country-by-country reporting requirement in the context of the larger focus of the Action 13, which includes the master file and local file as well. All three pieces must fit together to create the picture of the company. Any information in the CbCR should fit the narrative of the master file and the local file.”
Activist groups were also pleased with the issuance of the final rule, but said it does not go far enough in making the information available to outsiders such as journalists. “Treasury and the IRS should be lauded for wasting no time implementing rules to meet our international obligations and take the next crucial step in efforts to address the damaging effects of tax evasion and avoidance,” said Heather Lowe, legal counsel and director of government affairs for the advocacy group Global Financial Intergrity, who organized a comment submitted by the Financial Accountability and Corporate Transparency (FACT) Coalition on the proposed rule earlier this year.
“We’re pleased that the IRS heeded calls by civil society to remove the proposed national security exception from the final rule,” she added. “However, by failing to make the information public, the IRS dismissed strong arguments that Congress should have access to the information to ensure they are crafting effective tax laws as they look to reform the U.S. tax code. Furthermore, researchers, journalists and concerned citizens could have been instrumental in analyzing the information and generating alternative policy recommendations to help the U.S., and other governments, grapple with the serious problems of global tax evasion and avoidance and their negative impact on poverty and inequality worldwide.”
“The United States should be pushing the envelope on corporate transparency standards instead of being carried by the international tide,” said GFI president Raymond Baker in a statement. “The rule is an encouraging first step but begs the question, how long will it take us to get where we need to be?”
The FACT Coalition suggested the SEC could move to make the information more widely accessible. “Unfortunately, the rule does not make this information public,” said FACT Coalition executive director Gary Kalman. “Looking forward, the Securities and Exchange Commission could at least fix that for publicly traded companies and has started to ask important questions on this topic. But the new rules are an important beginning. In a global economy, it is impossible to have a fair and honest tax system without knowing the most basic information about where profits are made and taxes are paid. The Treasury Department has put forth important and commonsense rules to begin to address the easy gaming of the tax code.”