In recent years, tax authorities across the globe have adopted a number of OECD-led initiatives aimed at curbing the ability of multinational enterprises to engage in so-called Base Erosion and Profit Shifting (BEPS) (i.e., the artificial shifting of profits, for tax purposes, to low or no-tax jurisdictions). The OECD has achieved considerable buy-in from tax authorities, touting the need to update the international tax rules, which have (it maintains) largely failed to keep up with the dual phenomena of globalization and increasingly digital economies. Country-by-country (CbC) reporting has played a key role in its effort.
U.S. Treasury regulations require that U.S. multinational enterprises (MNEs) provide country-by-country (CbC) reporting. Annual CbC reporting on Form 8975 largely implements the OECD’ country-by-country reporting requirements aimed at addressing base erosion and profit shifting.
What is Country-by-Country (CbC) reporting?
On February 4, 2022, the Organization for Economic Cooperation and Development (“OECD”) issued model rules for nexus and revenue sourcing under Pillar One of the international tax agreement (the so-called “two-pillar solution”) signed last year by 137 countries, including the United States. As explained previously, Pillar One would allocate taxing rights over 25% of the residual profit of the most profitable MNEs to the countries where goods or services are used or consumed. The OECD anticipates that countries that are parties to the two-pillar solution will enact laws substantially similar to the model rules, while taking into account various requirements peculiar to their constitutional and legal systems.
The model rules would require that each transaction be categorized according to its “ordinary or predominant character,” based on the transaction’s substance rather than its legal form. The categories anticipated by the model rules include revenues from the sale of:
On February 11, 2020, the OECD issued its final Transfer Pricing Guidance on Financial Transactions in a 46 page document which the OECD widely disseminated and which can be found on the OECD website. The report builds on the discussion contained in the non-consensus Discussion Draft on Financial Transactions published in July 2018 (“2018 Discussion Draft”). As the guidance is final, it will likely be heavily relied upon by many tax authorities when scrutinizing financial transactions.
The guidance contains five sections:
1. Interaction With Guidance In Section D.1 of Chapter 1
2. Treasury function
3. Financial Guarantees
4. Captive Insurance
5. Risk-Free And Risk-Adjusted Rates of Return
On February 13 the OECD issued a public consultation document requesting input on two pillars developed to address concerns about taxing the digital economy.(1) Pillar 1 deals with profit attributable to the jurisdiction of the customer or user (the market jurisdiction), while pillar 2 addresses base erosion and profit shifting.
Three options are proposed under pillar 1: the user participation proposal, the marketing intangibles proposal, and the significant economic presence proposal.(2)
In July 2015 then-House Ways and Means Committee members Richard E. Neal, D-Mass., and Charles W. Boustany Jr. released a discussion draft of the Innovation Promotion Act of 2015 (IPA 2015), designed to encourage the generation of intangible income in the United States.(3) A key component of the proposed legislation was to define intangible income to which a tax deduction would apply — so-called innovation box income and thus produce a lower effective tax rate on intangible income. IPA 2015 defined the profit attributable to non-marketing intangible income as the ratio of five-year cumulative research and development expenses to five-year cumulative total operating expenses.(4) The proposal reflected concepts similar to the BEPS action 5 definition of non-harmful tax incentive regimes for intellectual property.
This article tries to match the pillar 1 discussion with the guiding principles previously established under the OECD’s BEPS project. It introduces an expanded version of IPA 2015 as a potential way to reach consensus on the allocation of marketing income under pillar 1 and to address concerns that some local tax laws may constitute export subsidies under the WTO rules.
The Platform for Collaboration on Tax – a joint initiative of the IMF, OECD, UN and World Bank Group – has undertaken, at the request of the G20, the development of a series of “toolkit” reports to help guide developing countries in the implementation of policy options for issues in international taxation of greatest relevance to these countries. One such issue identified by developing countries themselves is the taxation of offshore indirect transfers of assets. Though an important area of international tax policy, no unifying principle has been adopted by individual countries on how to treat these transactions. This issue is, though, addressed in both main double taxation model treaties, of the OECD and the UN. Countries now follow very different approaches in their domestic law—and many treaties now in effect do not include the relevant model treaty provisions.
Ministers and senior officials from Kazakhstan, Peru and the United Arab Emirates have signed the BEPS Multilateral Convention bringing the total number of signatories to 79 and the number of covered jurisdictions to 81. This Convention updates the existing network of bilateral tax treaties and reduces opportunities for tax avoidance by multinational enterprises. Estonia intends to sign the MLI on 29 June. The signatures this week come a few days before the Convention enters into force on 1 July 2018 for five of the jurisdictions that signed last year.
The Convention is the first multilateral treaty of its kind, allowing jurisdictions to integrate results from the OECD/G20 BEPS Project into their existing networks of bilateral tax treaties. The OECD/G20 BEPS Project delivers solutions for governments to close the gaps in existing international rules that allow corporate profits to “disappear” or be artificially shifted to low or no tax environments, where companies have little or no economic activity.
Fair Tax Competition: The country should not have harmful tax regimes, which go against the principles of the EU’s Code of Conduct or OECD’s Forum on Harmful Tax Practices. Those that choose to have no or zero-rate corporate taxation should ensure that this does not encourage artificial offshore structures without real economic activity. In the context of the screening process, the Code of Conduct Group invited each jurisdiction where concerns were identified to commit to address such concerns. The large majority of jurisdictions have decided to introduce the relevant changes in their tax legislation in order to comply with the EU screening criteria. The following jurisdictions are committed to addressing the concerns relating to economic substance by 2018: Bermuda; Cayman Islands; Guernsey; Isle of Man; Jersey; and Vanuatu.
More than 200 global tax and economic crime experts have identified key areas for international action following the fifth OECD Forum on Tax and Crime, in London. In a week dominated by media coverage of offshore issues, the Forum brought experts on tax, customs, anti-corruption, anti-money laundering, policing, and prosecution together to agree priorities for action.
The Forum is the latest in a series of OECD-led events and an important opportunity for the international community to strengthen collaboration in tackling these global issues.
Claudia María Amelia Teresa Cooper Fort, Minister of Economy and Finance of Peru, signed the Multilateral Convention on Mutual Administrative Assistance in Tax Matters in the presence of the Deputy Director of the OECD’s Centre for Tax Policy and Administration, Grace Perez-Navarro.
A further step was taken to implement Country-by-Country Reporting in accordance with the BEPS Action 13 minimum standard, through activation of automatic exchange relationships under the Multilateral Competent Authority Agreement on the Exchange of CbC Reports (“the CbC MCAA”).
Over 1000 automatic exchange relationships have now been established among jurisdictions committed to exchanging CbC Reports as of mid-2018, including those between EU Member States under EU Council Directive 2016/881/EU.
The Platform for Collaboration on Tax – a joint initiative of the IMF, OECD, UN and World Bank Group – is seeking public feedback on a draft toolkit designed to help developing countries tackle the complexities of taxing offshore indirect transfers of assets, a practice by which some multinational corporations try to minimise their tax liability. Read More