MNCs Beware: Country-By-Country Reporting Is Here!

UK, US, Australia, Brazil, India- governments of developed and developing countries are battling profit shifting by MNCs such as Amazon, Google, Apple and Starbucks. The allegation- MNCs are shifting profits to jurisdictions where there is little or no tax to be paid. The solution- OECD’s BEPS action plan which, among other things, recommends country-by-country reporting of income, taxed paid, economic activity etc. Last year we discussed what country-by-country reporting will bring. Well now, it’s here! The OECD has put out a guidance note on how country-by-country reporting will be implemented starting 2016. Payaswini Upadhyay asks experts if this will give countries access to their fair share of taxes.
By one estimate, 28 developing countries lose over 1 billion dollars in tax revenue annually; courtesy use of the Dutch tax system by multi national corporations. The developed countries are crying foul too- a US Senate Subcommittee found that while Apple did pay $6 billion in taxes in 2012, it shifted offshore $36 billion in taxable earnings. Thus avoiding a payment of $9 billion. In the UK, Starbucks came under severe public pressure for paying no corporation tax in the last 5 years. Amazon too has faced sharp criticism for reportedly doing business worth £320 mn in 2012 and paying just £3.2mn in taxes by routing sales through Luxembourg.
In September last year, the OECD suggested fighting this base erosion and profit shifting via country by country reporting.
Porus Kaka
Senior Advocate
President – International Fiscal Association
“At a practical level, the just want to know where global profits are being booked and they want to see the economic activity; perhaps in the area where profits are being booked. If you see some of the columns, you have specified the number of employees out there and also the location of the tangible asset; they want to know where your operating companies are – that means where you have men, machine an materials- and where you are booking profits where you don’t have that. So they want a global overview of where the profits are being booked.”
S Gayathri
Group Head- Direct Tax, Essar
“The whole objective is that once it’s clear as to where the incomes rest and what are the indicators- location wise- that match the revenues, there will be better understand as to whether- if at all- there is any attempt to shift base of tax revenues.”
Last week, the OECD put out a guidance note that lays down the when, who and how of country by country reporting. Multi national enterprises with annual consolidated group revenue of over 750 million euros will be required to implement country by country reporting starting fiscal year January 2016. The 750 million euros threshold will exclude 85-90% of multi national companies but as per the OECD, it’s the remaining 10% who control 90% of corporate revenues.
Porus Kaka
Senior Advocate
President – International Fiscal Association
“For all the multi nationals who qualify and are above the threshold, there will be an additional 3-layered documentation that will be required. One is, they will have to prepare a master file of the global corporation; secondly they will have to prepare a local file which was possibly getting done as per the domestic jurisdiction law anyway; and thirdly, they will now be required to prepare this country by country report which will be filed at the headquarters of the multi national group but automatically exchanged with the respective tax jurisdictions; wherever the group operates. So its additional corporate documentation and I think the burden will be to tie up the master file and to ensure that all the domestic filing mirrors or matches it because if there are gaps or the description is wrong, I think you’re going to have a problem.”
According to Transparency International’s 2014 report, 90 of the 124 world’s biggest publicly traded companies do not disclose the taxes they pay in foreign countries. Some who have done so in the past, experts have termed their attempts as half hearted. For instance, after Vodafone drew severe criticism for paying zero corporate tax in the UK for three consecutive years, it disclosed in 2013 how much tax it paid in different jurisdictions. The disclosure on corporate tax payment was buried among over 60 other taxes and charges like customs duty, social security tax, garbage tax, municipal waste tax etc. And information on its alleged tax avoidance vehicle in Luxembourg was clubbed with other holding companies. And so, the OECD has now prescribed a standard template for country-by-country reporting.
S Gayathri
Group Head- Direct Tax, Essar
“The whole aim is to have consistency in the way the various countries and MNEs maintain documentation. Apart from whatever they’ll maintain in the master and local file, they have to very specifically maintain a jurisdiction-by-jurisdiction data or a listing of the revenues they earn, taxes they pay, what is the profit or loss in each jurisdiction, what are the taxes accrued as against what is the capital used, what are the reserves lying there, what are the assets used and who are the employees in each of these jurisdictions.”
Porus Kaka
Senior Advocate
President – International Fiscal Association
“I think this a huge amount of information that’s going to be available I see some problems, for eg, on the group’s ability to describe their businesses and make it consistent. And this amount of information will be, for lack of a better word, tempting. For eg, if you know that an operating company has lesser revenues than a holding company in a more tax friendly zone. The temptation will be to simply use the data to support what will be the transfer pricing analysis.”
And here perhaps the checks proposed by the OECD could help multi national groups. The guidance note has limited the use of the information to assess transfer pricing and profit shifting risks only. The tax departments will also need to maintain strict confidentiality and the protection will be equivalent to the protections applicable under the tax treaty or an information exchange agreement.
Porus Kaka
Senior Advocate
President – International Fiscal Association
“It has specifically clarified that this information will not automatically be used for global allocation of profit in a transfer pricing assessment – meaning if you have allocated profits to a particular jurisdiction and lesser profits to the local jurisdiction, then this information will simply not be used automatically to crate an allocation of income based on this data. This data can only be used for risk assessment and it is clarified that the competent authorities- if they find that there local tax administration has simply used this data in some kind of global allocation of profits, they will concede that upfront in the tax treaty negotiation under MAP. So that’s the commitment that the OECD wants to do.”
S Gayathri
Group Head- Direct Tax, Essar
“MNEs are likely to be worried and concerned about what is that will be in place for each domestic legislation and whether it compares with the kind of legislation in other countries because we don’t want to end up giving equal information and yet not be adequately protected in comparison with other countries because it’s not the parent company giving information only to their resident authorities but the OECD is putting a mechanism of government-to-government automatic exchange.”
Addressing those two concerns will be the next milestone in the country-by-country reporting action plan. The OECD hopes to achieve it in April this year where key elements that countries need to embody in domestic legislations and contours of automatic exchange of information will be prescribed. But one visible area of concern for India is the commitment OECD wants on dispute resolution- it has indicated that countries should resolve the disputes arising from this report via arbitration ..something that India has been hesitant to commit to. In case the OECD makes arbitration mandatory, may be, the lure of fair share of tax will nudge the Indian government to meet the OECD standards.