OECD Issues Final BEPS Proposal; No Response from Congress Yet
Final recommendations about how multinational companies should be allowed to shift profits among different tax jurisdictions were issued this month, and the U.S. Congress has not yet indicated whether it will consider legislation in response to the proposals. Issued by the Organisation for Economic Cooperation and Development (OECD) on October 5, the 2015 final reports on the G20/OECD Base Erosion and Profit Shifting (BEPS) Project recommend changes to domestic laws, the OECD Model Tax Convention and the OECD Transfer Pricing Guidelines. In addition, the final reports propose to accelerate the incorporation of recommended treaty changes into existing bilateral treaties for interested countries.
Congress has not been directly involved in the BEPS process, however the release of the final reports and subsequent actions by other nations may create a motivation to act that has not been evident to date. But certain key lawmakers have raised specific concerns during the BEPS process.
For example, Senate Finance Committee Chairman Orrin Hatch (R-Utah) and House Ways and Means Committee Chairman Paul Ryan (R-Wis.) sent a letter in June to Jack Lew, secretary of the U.S. Department of the Treasury, reminding him to keep Congress informed on the details of the BEPS project to ensure that the United States gets a good outcome from the process. In the letter, Sen. Hatch and Rep. Ryan emphasized that no matter what the Treasury agrees to in the BEPS discussion, taxwriting authority remains with Congress and that U.S. efforts will not be hamstrung by the OECD.
The letter also called into question some of the negotiations surrounding the issue of country-by-country information reporting, noting that the lawmakers are troubled by the prospect that foreign governments might be able to obtain companies’ “master files”—which they contend will contain sensitive and nonpublic information—with little assurance of confidentiality or the express need for the information. The letter also questioned the ability of Treasury and the Internal Revenue Service (IRS) to implement country-by-country reporting and some other actions related to transfer pricing from the BEPS project.
Further, the letter requested that Treasury and the IRS supply the taxwriting committees with the legal basis for the IRS collecting the information and agreeing to allow foreign governments to directly collect such information from U.S. multinationals. Sen. Hatch and Rep. Ryan cautioned that if a legal basis was not provided Congress would “consider whether to take action to prevent the collection of the [country-by-country] and master file information.” A follow-up letter to Treasury was sent in August that further questioned whether the administration has the authority to require country-by-country reporting.
U.S. Patent Box and International Tax Reform
Although Congress currently appears unlikely to pursue a specific legislative response to the BEPS project, the expectation that the final recommendations would include nexus-related limitations on patent box regimes has led to calls by some taxwriters for the development of a U.S. patent box. Specifically, some lawmakers have been concerned that the anticipated changes under BEPS would create incentives for domestic businesses to redirect their research and development spending and other activities overseas to take advantage of other countries’ regimes.
House Ways and Means Committee members Charles Boustany (R-La.) and Richard Neal (D-Mass.) released a discussion draft proposal in July for a so-called innovation box that would, among other things, provide corporations an effective tax rate as low as roughly 10% on certain income generated from patents and a broad range of other intellectual property. That proposal was expected to be part of a more expansive international tax reform plan being developed by Rep. Ryan that also would move the U.S. toward a territorial tax system, impose a deemed repatriation levy on previously untaxed foreign-source income of U.S. multinationals and use certain one-time revenue generated from the reform provisions to pay for a long-term extension of the Highway Trust Fund. (For additional discussion, see Innovation boxes, international tax reform, and infrastructure spending: The pillars of this fall’s legislative debate.)
Rep. Ryan has been working with Senate Finance Committee members Charles Schumer (D-N.Y.) and Rob Portman (R-Ohio) in an effort to craft his proposal in a way that would win support in the Senate. (Sens. Schumer and Portman co-chaired the Finance Committee’s working group on international tax reform and generally support the concept of an innovation box and a shift to territoriality.) However, recent disagreements between Rep. Ryan and Sen. Schumer over the level of highway funding to be included in the package have led to a stalemate that appears to have diminished the prospects for action on international tax reform in the near term. Nonetheless, Rep. Ryan contended in a statement issued October 5 that the release of the BEPS report underscores the urgency for Congress to reform the U.S. international tax rules.
