The Global Tax Information Age: International exchange of info growing, but still room for development.

Date01 July 2021
AuthorO'Brien, Shawn

For years, governments around the world have called for changes to tax administration to prevent abusive tax avoidance and tax evasion. The need for change has been driven in part by the increasingly globalized economy, where cross-border activities and transactions are the norm rather than the exception.

The Organisation for Economic Co-operation and Development (OECD), whose thirty-seven member countries work to establish international standards and solutions to economic, social, and environmental challenges, has been key to these efforts. Since at least 2013, the OECD and its members have pushed for greater access to and sharing of taxpayer information as an important tool to prevent abusive tax avoidance and tax evasion.

Efforts to reform the international exchange of taxpayer information are fairly mature but still have significant room for development. Taxpayers can likely expect greater scrutiny of their international operations at both the domestic and overseas levels. The outlook is not wholly dire, because new tools, such as the OECDs International Compliance Assurance Programme (ICAP), have recently debuted to provide taxpayers with greater certainty that multiple tax administrations will accept both their global transfer pricing model and their treatment of particular transactions. This article will describe and provide updates on the OECDs country-by-country (CbC) reporting program, the United States' own CbC reporting program, international agreements that allow countries to exchange taxpayer information, and developments such as the OECD's request for comments to improve CbC reporting, published CbC reporting statistics, and the ICAP program.

OECD BEPS Action Item 13 OVERVIEW

In 2013, the OECD and the G20 countries adopted a fifteen-point action plan to end perceived abusive tax avoidance practices by multinational entities (MNEs) involving base erosion and profit-shifting (BEPS).1 Since then, over 135 countries have joined the BEPS Inclusive Framework.2 BEPS Action Item 13 identifies a "lack of quality data" as a major limitation in assessing transfer pricing transactions between affiliated companies, one that has contributed to the alleged abusive practices.3 As a remedy, the OECD BEPS Action 13 Final Report called for greater international tax transparency and standardized transfer pricing documentation and--most important--for members to adopt an aggregate information-sharing standard referred to as CbC reporting.4 As of October 2020, over ninety countries, including the United States, have introduced or passed legislation requiring CbC reporting.5 As discussed below, at least seventy-six countries have international agreements in place to share CbC reports.6

ACTION ITEM 13 REPORT

Action Item 13 called for a three-tiered structure to improve transfer pricing documentation and transparency. The three tiers consisted of a master file containing standardized information relevant for all MNE group members, a local file referring specifically to the local taxpayer's material transactions, and a CbC report containing certain information relating to the global allocation of the MNEs income and taxes along with indicators of economic activity location within an MNE group.7

The master file requirement sought to provide a high-level "blueprint" of the MNE group's overall business operations, transfer pricing policies, and global allocation of income and economic activity to assist tax administrations in evaluating transfer pricing risk.8 The information requested in the master file requirement fell into five categories: 1) the MNE group's organizational structure, 2) a description of the MNE's business or businesses, 3) the MNE's intangible property, 4) the MNE's intercompany financial activities, and 5) the MNEs financial and tax positions.9 Unlike this master file requirement, the local file requirement was about providing detailed information on specific intercompany transactions, including relevant financial information, a comparability analysis, and selection and application of the best transfer pricing method.10

The CbC reporting requirement requested countries to provide aggregate tax-jurisdiction-wide information relating to the global allocation of income, taxes paid, and indicators of economic activity among tax jurisdictions. The

CbC report also requested that lists of entities, including their incorporation and residence jurisdictions and the nature of the business activity each entity carried out, be reported." These reports aimed to allow tax administrations to perform economic and statistical analysis to identify instances of potentially abusive transfer pricing practices.12 Action Item 13 sought to exclude MNE groups with consolidated revenue less than [euro]750 million from the CbC reporting requirement and to have its members first require CbC reports beginning in 2016.13 Because more than ninety countries have introduced or passed legislation implementing some variation of the Action Item 13 CbC reporting requirement, substantially all MNE groups above the revenue threshold are now subject to CbC reporting or will be shortly.14

United States CbC Reporting

BACKGROUND

On June 30, 2016, the US Treasury issued final regulations that implement its interpretation of Action Item 13 guidelines. In particular, these regulations require annual CbC reporting by certain US entities that are the ultimate parent entity of an MNE group.15 Although some countries adopted CbC reporting for earlier periods, the US CbC reporting began to apply to reporting periods of the ultimate parent on or after the first day of the ultimate parent entity's taxable year beginning on or after June 30, 2016,16 but reporting is required only for MNE groups with annual revenue of $850 million or more for the previous accounting period.17

TYPE OF INFORMATION REPORTED

The ultimate parent entity of an MNE group must file the CbC report on Form 8975, Country-by-Country Report, with the entity's timely filed US federal income tax return.18 The ultimate US parent of the MNE group must report required information about the "constituent entities" of the MNE group. A "constituent entity" is any separate business entity of the US MNE group, except a foreign corporation or foreign partnership or any permanent establishment of such foreign corporation or foreign partnership.

Form 8975 must present general information about each constituent entity--the complete legal entity name, the jurisdiction of tax residence, the jurisdiction where the entity is organized, the tax identification number assigned by the tax jurisdiction of residence, and the entity's main business activity. With respect to each tax jurisdiction in which one or more constituent entities resides, Form 8975 also requires the ultimate US parent to report, on an aggregate basis, the following information for the constituent entities resident in each jurisdiction:

* revenues generated from transactions with other constituent entities;

* revenues not generated from transactions with other constituent entities;

* profit or loss before income tax;

* total income tax paid on a cash basis to all jurisdictions, and any taxes withheld on payments received by the constituent entities;

* total accrued tax expense recorded on taxable profits or losses, reflecting only operations in the relevant annual period and excluding deferred taxes or provisions of uncertain tax liabilities;

* stated capital, with special rules applying to stated capital of permanent establishments;

* total accumulated earnings, with special rules applying to accumulated earnings of permanent establishments;

* total number of employees on a full-time equivalent basis;19 and

* net book value of tangible assets, not including cash, cash...

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