Country-by-Country Confusion: Narrow BEPS Queries Abound
Global governments battling tax avoidance increasingly are pushing multinational corporations for a bigger picture of how and where they pay taxes, leading to increasingly narrow questions from company tax officers.
“We have a number of entities that are disregarded for U.S. tax purposes. When I fill out the country-by-country form, how do I tackle that issue?” a panel observer asked tax attorneys at the American Bar Association’s 27th Annual Philadelphia Tax Conference Nov. 3.
When reporting taxes for the company’s Netherlands-based entity, she asked, “do I fill out the Dutch taxes paid? What about U.S. taxes paid on that Dutch income? Should that be attributed to the U.S. company that owns them? Or do I just ignore it all together?”
Such detailed questions about country-by-country reporting, the Master File, and local reporting requirements dominated a panel discussion on the Organization for Economic Cooperation and Development’s project to combat base erosion and profit shifting.
“Footnotes,” was the advice from panelist Peter Barnes, of counsel in the international tax group at Caplin & Drysdale Chartered in Washington. “I think you’re going to have to flag it on the form.”
The U.S. and 18 other countries have adopted country-by-country reporting, and 14 more are in draft stages of adopting it, Barnes said. BEPS country-by-country reporting requirements apply to multinational enterprises with aggregate annual income of 750 million euros ($833 million), meaning that about 4,000 companies globally—including 2,000 U.S. companies—would be affected.
Expect Follow-Up Questions
While many countries are being lenient now about how companies should fill out their country-by-country report, the expectation is that many will follow up with requests later about how to reconcile the country-by-country reports with local tax information, Barnes said.
Lincoln Terzian, an international tax practice partner at Grant Thornton’s Manhattan office, agreed that many countries will likely seek clarification after the country-by-country form is filed.
“Recognize there’s going to be further questions and reconciliation effort” from many of the countries, he said.
Taxpayers have many complicated questions around country-by-country reporting that have yet to be answered, said panelist Serge Huysmans, an international tax partner for Ernst & Young LLP in New York. For example, how are hybrid entities treated? How are branches treated? “Countries are taking a different view to this, and since we don’t have the rules yet, we can’t answer these questions,” he said.
Many companies also are raising questions about the Master File, a single document that lays out an overview of the company’s businesses, transfer pricing policies, and agreements with tax authorities, said panel chair Elizabeth Galvin, a partner with Ernst & Young in Philadelphia.
For example, it is still unclear whether companies will be able to create different master files for different regions. “I think there are different interpretations of whether we can file more than one master file,” she said.
There also are unanswered questions about what will need to be in every county’s local file, Barnes said. “Mexico will ask for this, Germany will ask for that, Austria won’t ask for anything but will expect something,” he said.
Some companies that may not have reporting requirements in certain countries because their business activities there fall below certain thresholds may come under new scrutiny from local tax authorities due to disclosures in the Master File, Terzian said. That may require more local documentation, he said. “Remember, you want everything to reconcile.”
Companies are also wondering about confidentiality and how much information about their business they will have to publicly disclose.
Europe is already floating proposals about disclosure requirements, EY’s Huysmans said. “Get ready. These things are likely to become public.”
The disclosures could be a big change for private companies that aren’t used to having their business practices revealed to the public, said panelist Paul B. Nolan, vice president for tax and government relations at global spice company McCormick & Co. Inc.
“If you’re a publicly traded company, you’re used to public disclosure,” he said. For private companies, on the other hand, “this could be a little bit of a shock to the system.”