Base Erosion and Profit Shifting

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Country-by-country reporting (“CBCR”) is one of the OECD BEPS deliverables (under Action 13). It is expected to be a significant tool used by tax authorities’ auditors in evaluating a multinational group’s transfer pricing policies. CBCR will present significant challenges to multinationals groups’ internal tax departments, as the tax departments must reconcile public financial reports to their legal entities’ books and accounts and to local tax returns and country-by-country template reports. CBCR is also expected to be used by journalists and politicians to challenge the tax positions of multinational groups, where information can be accessed publicly.

On December 21st, 2015 the IRS proposed Country-by-Country (“CbC”) reporting rules requiring certain U.S. multinational companies to provide extensive information about business operations (including their revenue, number of employees, taxes paid or withheld, etc.) that may be shared with other taxing authorities under Information Exchange Agreements. The exchange of information is reciprocal; the IRS will expect to receive information regarding the operations of foreign multinational companies conducting business in the United States. This information may be used by the IRS or another country’s competent authority as a basis for making inquiries into potential tax avoidance arrangements. Unsurprisingly, the proposed regulations (and the OECD model on which these rules are based) have garnered criticism among some members of Congress and commentators. The key concerns are confidentiality and the potential for misuse of the information by competent authorities, which are heightened by the unprecedented amount and nature of the information to be disclosed. For a more detailed discussion of the proposed regulations, the confidentiality concerns and the potential concerns about how competent authorities might use such information, please continue reading.