Understanding BEPS and the impact of country-by-country reporting.

• Author: Hayes, Terry
• Position: Base erosion and profit shifting

The rise of the digital economy coupled with increased globalization and more fluid movement of capital has undeniably changed the way multinational corporations operate, providing them with immeasurable opportunities for global tax planning. With tax regulations still grounded in the past with little regard for intangibles or global risk management, companies also have been able to capitalize on gaps in transfer pricing rules and reduce the tax they pay. However, this practice, broadly known as base erosion and profit shifting (BEPS), will soon be finalized with policy recommendations by the Organisation for Economic Co-operation and Developments (OECD) action plan on base erosion and profit shifting.

Although the OECD does not make laws, the widespread adoption of its international tax guidelines is looming--and in some countries, already in motion. This will bring about extraordinary change as countries worldwide begin to implement BEPS-related policies via domestic laws or bilateral tax treaties to align with the new global guidelines.

RECENT DEVELOPMENTS

On June 8, the OECD released a package of final measures under BEPS Action 13: Country-by-Country Reporting Implementation Package. This package involves requiring multinational companies to provide aggregate information related to the global allocation of their income and taxes paid together with certain indicators of the location of economic activity (e.g., number of employees), as well as information about which entities do business in a particular jurisdiction and the business activities each entity engages in.

Specifically, the OECD Action 13 guidance includes a three-tiered, standardized approach to transfer pricing documentation,

* A master file of information relevant for all multinational company group members.

* A local file referring specifically to material transactions of the local taxpayer.

* A country-by-country (CbC) report of information relating to the global allocation of the multinational corporations income, taxes paid, and other economic activity information (the template).

The CbC implementation package will require multinational companies with global revenues of more than 750 million [euro] (currently about US$850 million, although the United States has not yet set its own reporting threshold) to start using the reporting template for fiscal years beginning on or after January 1, 2016, with submissions to tax authorities starting after January 1, 2017. This...