Country-by-Country Plan May Be Project’s Greatest Legacy

The OECD’s final report on Action 13 under the base erosion and profit shifting project—which calls for countries to adopt a country-by-country reporting template, master file and local file—has the potential to be one of its “greatest legacies.”

Marlies de Ruiter, head of the Organization for Economic Cooperation and Development’s division on tax treaties, transfer pricing and financial transactions, told Bloomberg BNA Oct. 2 in an embargoed interview that “this is the key outcome of the BEPS project.”

De Ruiter said country-by-country reporting “is a huge accomplishment that will help governments. It has a very important deterrent effect on various aggressive structures because country-by-country reporting will expose them quite significantly.”

Robert Stack, deputy assistant secretary for international tax affairs at the Treasury Department, told Bloomberg BNA Oct. 3 that the country-by-country aspect of the BEPS project has the potential to be “one of the project’s greatest legacies.”

The final Action 13 report, released Oct. 5, revises the standards for transfer pricing documentation incorporating a master file, a local file and a template for country-by-country reporting of revenue, profits, taxes paid and specific measures of economic activity.

There are no significant changes to the previously released guidance.

New Tax Authority Tool

“I believe that companies will tailor their activities—perhaps more than they have in the past—in light of the fact that they need to report the place of profit and taxes, to their tax authorities, which information will then be passed among tax authorities,” Stack said.

However, Stack said, “We won’t know for quite some time whether this type of reporting actually has an impact on either the behavior of companies, or their actual tax liabilities, or even how useful it will prove to be as a tool for tax authorities. These are reasons why this action will be revisited in 2020.”

Paul Morton, head of group tax of RELX Group—formerly Reed Elsevier Group plc—said that “the debate on Action 13 has resulted in a sensible plan which meets the design criteria in a reasonably practical way. Of course, the in-country implementation will be the key to lasting success.”

Deterrent Effect

De Ruiter said, “I have already heard that because of this deterrent effect many multinational groups are changing their structures because they don’t want to be exposed. It is a very effective tool.”

When looking at country-by-country reporting from the perspective of tax administrations, the master file is also of key importance, she said. “When I talk to developing countries, one of the things they always mention is the challenge that they don’t have sufficient information.”

Therefore, developing countries can’t assess what is really happening, she said. “So that whole action point is going to be crucial especially for developing countries to improve their transfer pricing administration.”

Practitioner Reaction

Clark Chandler, a principal at KPMG LLP in Washington, said, “I expect that a number of countries will put rules in place to require country-by-country reporting, either through a treaty exchange, if the U.S. collects it, or some other process.”

Linda Pfatteicher, a partner at Squire Patton Boggs in San Francisco, cited a company that has done a “pro-active” country-by-country report that allowed it to identify potential weaknesses, or “holes” or other problems,that it could correct before country-by-country reporting is required in 2016.

The effectiveness of that approach would depend on what countries a particular company is located in. For example, a company located in the U.K., which has the diverted profits tax, and Australia, which has been very vocal with plans to implement things now, such a preemptive approach to country-by-country reporting could allow making immediate changes to improve the company’s situation, she said.

Chandler agreed that depending on the structure and the country where it is located in, preemptive country-by-country reporting “could reveal some structures or things the OECD has said are of concern. Certainly there are some situations in which the CBCR is going to indicate that there are a large amount of profits, with few or no people, and that clearly is something which will be targeted by the new rules.”

“Doing a draft CBCR will also allow companies to identify situations where the CBCR data may be misleading, and to take affirmative steps to try to address this,” he said.

Cash Boxes

De Ruiter said “Action 13 will mean that cash boxes will be very, very much exposed.”

Then Actions 8 to 10 on transfer pricing will make sure that cash boxes that are only providing funding and that don’t have any activities will only get a risk-free financial return, which is a very low return in most countries, she said.

De Ruiter said Actions 8, 9, 10 and 13 won’t be the only reasons cash boxes disappear. “Other actions will play a part,” she said.

Biggest Surprise

De Ruiter said the biggest surprise during the two-year BEPS project “was the work on country-by-country reporting.”

“When we began the work, I had no clue that it would be so extensive and such a brain challenging exercise to do, to get it right, participating in challenging interactions with the business community, sensitivities, getting all the countries aligned. It was a fascinating exercise. I never suspected that when we started that we would end up where we did,” she said. “I thought we were going to make a template and that would be the end of the matter.”