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31 countries sign international agreement on country-by-country reporting, but not U.S.

OECD press release (Jan. 27, 2015).

On January 27, finance ministers and top officials from 31 countries — which didn’t include the U.S. — signed the Multilateral Competent Authority Agreement on the Exchange of Country-by-Country Reports (the Agreement), according to an OECD press release. This is the first signing ceremony for the Agreement to facilitate the automatic exchange of annual country-by-country (CbC) reports as recommended by the OECD in its final report on transfer pricing documentation under the G20/OECD base erosion and profit shifting (BEPS) project.

Note: The precise manner under which the U.S. will facilitate the automatic exchange of CbC reports remains to be seen. However, in the preamble to the proposed CbC report regs that were issued in December 2015 , Treasury and IRS stated that the U.S. competent authority is expected to enter into competent authority arrangements for the automatic exchange of CbC reports under the authority of information exchange agreements to which the U.S. is a party. The preamble further provides that the U.S. intends to closely scrutinize each jurisdiction’s legal framework for maintaining confidentiality of taxpayer information and its track record of complying with that legal framework, before entering into an information exchange agreement with any such jurisdiction.

Background on CbC reporting. In 2015, the OECD recommended a new 3-tiered standardized approach to transfer pricing documentation under Action 13 of the BEPS project. The approach was formally endorsed by G20 leaders in the same year.

Referred to as a “minimum standard,” the recommended approach would require multinational enterprises (MNEs) with annual consolidated group revenue equal to or exceeding €750 million to prepare and submit the following documents:

  1. A master file with high-level information about global business operations and transfer pricing policies that would be made available to all relevant tax administrations;
  2. A local file with detailed transactional transfer pricing documentation that is specific to each country, disclosing (i) material related party transactions, (ii) the amounts involved in such transactions, and (iii) the analysis of the transfer pricing determinations made with regard to such transactions; and
  3. An annual CbC report to (i) report the number of employees, stated capital, retained earnings, and tangible assets in each jurisdiction where business is conducted, (ii) identify each entity within the group doing business in a particular jurisdiction, and (iii) provide an indication of the business activity in which each entity engaged.

The OECD recommended that the information required for the master and local files be filed by the MNEs directly with the local tax administrations. However, it recommended that the annual CbC reports be filed in the jurisdiction of the tax residence of the ultimate parent entity and shared between jurisdictions through the automatic exchange of information on a government-to-government basis under one of the following tax agreements:

  1. The Multilateral Convention on Mutual Administrative Assistance in Tax Matters (the Convention);
  2. Bilateral tax treaties; and
  3. Tax information exchange agreements (TIEAs).

The Convention (see item 1 above), jointly developed by the OECD and the Council of Europe in 1988 and amended by Protocol in 2010, is the most comprehensive multilateral instrument available among jurisdictions for all forms of tax cooperation to tackle tax evasion and avoidance (including the exchange of information on a government-to-government basis), according to the OECD. In fact, since 2009, the G20 has consistently encouraged countries to sign the Convention. More than 90 countries (including the U.S.) currently participate in the Convention.

According to the OECD, countries participating in the BEPS project developed a CbC reporting implementation package, which among other things, includes a model of the Agreement (see Annex IV to Chapter V of the final BEPS Action 13 report). As the OECD explained, this model Agreement was developed based on the Convention (see item 1 above) and “inspired” by the Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information (the MCAA on AEOI) concerning the implementation of the Common Reporting Standard (CRS).

Note: It should be noted that the AEOI standard and the CRS draw extensively from the U.S. approach to implementing the Foreign Account Tax Compliance Act (FATCA). More than 100 countries have currently committed to implementing the CRS. The U.S. has not adopted the CRS, but instead relies on its intergovernmental agreements (IGAs) with other countries to facilitate the exchange of FATCA information.

It is the OECD’s recommendation that countries implement the BEPS Action 13 minimum standard for fiscal years beginning on or after Jan. 1, 2016. The OECD has acknowledged that some jurisdictions may need time to follow their particular domestic legislative process in order to make necessary adjustments to the law.

31 countries signed the Agreement. The 31 countries that signed the Agreement are:

  • Australia,
  • Austria,
  • Belgium,
  • Chile,
  • Costa Rica,
  • Czech Republic,
  • Denmark,
  • Estonia,
  • Finland,
  • France,
  • Germany,
  • Greece,
  • Ireland,
  • Italy,
  • Japan,
  • Liechtenstein,
  • Luxembourg,
  • Malaysia,
  • Mexico,
  • The Netherlands,
  • Nigeria,
  • Norway,
  • Poland,
  • Portugal,
  • Slovak Republic,
  • Slovenia,
  • South Africa,
  • Spain,
  • Sweden,
  • Switzerland, and
  • The United Kingdom.

The OECD has stated that the Agreement will enable the consistent and swift implementation of the BEPS Action 13 minimum standard, facilitate the automatic exchange of CbC reports, and ensure that confidential information is safeguarded.

At the media briefing on January 27, OECD Secretary General Angel Gurrìa stated that “tonight marks an important step in the next stage of BEPS: implementation, implementation, implementation! Without effective implementation, we risk consigning the BEPS reports to books gathering dust on shelves. That is why your efforts to transform the BEPS agreement into reality–evidenced by your signature of the Multilateral Competent Authority Agreement (MCAA) for the automatic exchange of country-by-country reports – are so important”.

Response in Washington. On January 28, Ways and Means Committee Chairman Kevin Brady (R-TX) issued a press release stating that “it’s clear that the European Union is moving full speed ahead to implement the OECD’s BEPS project recommendations that will make it even harder for American companies to compete in the global market. If Washington continues to sit by idly in the face of these punitive policy changes, American workers will continue to be the victims of our irresponsible inaction.” He emphasized the need for international tax reform — a topic that he intends for his Committee to tackle during the coming year.

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Meet Paul Raymond

Meet Paul Raymond

Mr. Raymond is a sought after speaker in tax controversy law by many attorney, accountant, and business groups and at the request of the Internal Revenue Service, has presented programs at the IRS Nationwide Tax Forum, attended by tax professionals throughout the United States.

Additionally, he continues to be an active member in the Section of Taxation, American Bar Association, where he was the Past Chair of the Employment Taxes Committee.

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