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A complex web of government relationships providing for the exchange of confidential taxpayer information may end up having a few holes, with significant consequences for U.S. multinational companies.
The U.S. Internal Revenue Service is racing to negotiate approximately 90 qualified competent authority agreements (QCAAs)—government-to-government agreements for exchanging taxpayer information—so that U.S. multinational companies can file their reports of global taxes and profits for 2016 with the IRS rather than with foreign jurisdictions.
Action 13 of the 15-action international plan for fighting tax evasion and avoidance by multinational companies, the Action Plan on Base Erosion and Profit Shifting, calls for companies to report to government taxing agencies on taxes paid and profits earned in each country of operation, and for countries to automatically exchange that information, while ensuring confidentiality.
The IRS, unlike many of its foreign counterparts, has a good reputation for keeping tax information confidential. If the information leaks, the consequences for multinational companies are dire: trade secrets made available to competitors, criticism in the press and harm to customer-facing businesses.
“With respect to country-by-country reporting, U.S.-parented multinationals would prefer to file only with the IRS, and not in every foreign jurisdiction in which they’re doing business,” David Ernick, a principal at PricewaterhouseCoopers LLP in Washington, told Bloomberg BNA Feb. 15.
In order to “turn off” direct foreign filing obligations under the so-called secondary mechanism from the final Action 13 report, the IRS will have to have the ability to exchange the country-by-country reports it will be receiving with other countries, Ernick explained. “That means that for each country, the U.S. will have to have both a legal instrument authorizing the exchange of tax information with another country—a tax treaty, a tax information exchange agreement (TIEA) or the OECD Multilateral Convention on Mutual Administrative Assistance—and a competent authority agreement.”
Michael Plowgian of KPMG LLP in Washington said the IRS is aware of the need to get the QCAAs in place. “We have gotten repeated assurances from the IRS that they are moving forward with that process.”
Under the OECD Action 13 guidance, the ultimate parent company of a multinational group is required to file its country-by-country report in its tax jurisdiction of residence on behalf of the entire group. However, a subsidiary in the group would be required to file the report in its tax jurisdiction of residence if the parent’s tax jurisdiction has no QCAA in place.
“I’m not aware of any updates from the IRS on the state of play with the competent authority negotiations, but time is moving quickly,” said Ernick.
There are some countries where the U.S. simply has no legal instrument authorizing exchange of tax information, “so direct foreign filing obligations are a concern there,” the former U.S. Treasury official said. But even for those countries where the U.S. has tax treaties and TIEAs in force, the IRS still has to negotiate the bilateral competent authority agreements on a timely basis.
“That sounds easy enough, but as a practical matter I’m sure it’s more difficult than it sounds, and takes time and resources,” Ernick said. “Hopefully those all get negotiated on time. There are approximately 90 that need to get done considering our existing network of treaties and TIEAs.”
Barbara Mantegani of Mantegani Tax PLLC in McLean, Va., said it will be hard to prevent the need for local filing in jurisdictions that have an early deadline. “I am expecting that not all the agreements will be negotiated in time to prevent local filing in those jurisdictions that have a local filing requirement in effect for tax years beginning after January 1, 2016.”
The first reports don’t need to be filed in most countries until Dec. 31, 2017, Mantegani said. “I am confident that there will be some CAAs in place before that deadline.”
However, Mantegani said, “It is not clear to me how the government is prioritizing its efforts to get the CAAs signed. I’m sure that there are some sort of levels of priority based on amount of cross-border activity and quality of the competent authority relationship between the two countries, or some other factors.”
Plowgian said the IRS hasn’t yet announced any completed QCAAs, and the process of entering into an agreement always takes some amount of time. “I think it will be important for the IRS to prioritize QCAAs with jurisdictions that have a secondary filing requirement for calendar year 2016, and particularly those with early deadlines.”
For example, Brazil has a filing deadline of July 31 for calendar year groups, so it will be important for the IRS to prioritize that agreement, he said.
“While it would be wonderful for a U.S. taxpayer to file only with the U.S. tax authorities, and then let the IRS exchange the CbC reports with the relevant countries, that is not realistic for the largest companies,” said Peter Barnes, a tax law professor at Duke University. “There will almost certainly be a need for big multinationals to make some local filings, generally because there is not a treaty between the home country and the local country.”
Barnes said a taxpayer may have an affiliate in a country like the Netherlands, which has a broader treaty network than the U.S., “file in the Netherlands and ask the Dutch authorities to exchange the information with certain countries outside the U.S. treaty network.”
Several countries have delayed a requirement for large companies to notify governments that they will file reports of their global tax and profits for 2016.
The Netherlands in November announced it would delay the notification requirement until Sept. 30, 2017, and Belgium, the Czech Republic, Finland, Portugal, Sweden and Switzerland have also either followed suit or included a first-year delay in their original legislation or regulations.
The U.S. didn’t include the notification requirement as part of its country-by-country regulations, and set an overall reporting deadline to coincide with the tax return filing date. It also delayed the effective date, requiring the reports only for tax years beginning after June 30, 2016.
Although Ernick said he had no information about how the U.S. competent authority agreements are being negotiated, he said “it seems reasonable to assume they would be streamlined, by using a standard template rather than completely bespoke negotiations.”
Hopefully other countries will be motivated to negotiate bilateral competent authority agreements with the IRS, he said. However, they might not have much of an incentive to do so. “Failure to agree on such an agreement would mean U.S. companies would have to file in such jurisdictions directly—which they might not consider to be a bad thing, from their perspective.”
The practitioners said the IRS timely negotiating the QCAAs is important for U.S. multinationals.
Plowgian said the agreements are important for U.S. multinational enterprises because they allow for filing with the IRS to satisfy the secondary filing requirements in other jurisdictions. “Without the QCAAs in place, U.S. groups would be required to file either with a surrogate jurisdiction or in each jurisdiction in which they have a filing obligation.”
Those filings would need to comply with the requirements in those jurisdictions, which may vary from the U.S. requirements, he said. “That would create a large administrative burden, and also would mean that the information was not protected under U.S. treaties or TIEAs.”
Mantegani said companies are concerned that country-by-country reports may be released to the public and are also concerned about “whether they will be used by certain tax authorities inappropriately to issue transfer pricing tax adjustments.”
The model CAA that the IRS has proposed includes specific conditions for automatic exchange that would require the receiving countries to keep the reports confidential and use the reports only for transfer pricing and BEPS risk assessment and statistical analysis, Mantegani said.
Turning to Brazil, Ernick pointed to the country’s recently released rules on country-by-country reporting.
Those rules address the situation of an ultimate parent entity of a non-Brazilian multinational group that is tax-resident in a jurisdiction such as the U.S. that has a TIEA with Brazil, but it is not a party to a multilateral or bilateral competent authority agreement to which Brazil is a party.
As of July 31, 2017, the due date for filing of the country-by-country report in Brazil, a Brazilian constituent entity of the non-Brazilian multinational group will have to file the country-by-country report in Brazil by the due date of its income tax return.
Ernick said that if the IRS doesn’t have a competent authority agreement with Brazil by July 31, 2017, U.S.-parented multinational enterprises doing business there will have to file the country-by-country report along with their Brazilian tax returns.
Singapore is among the countries having no legal instrument in place authorizing the exchange of tax information with the U.S.
“The situation with Singapore at the moment is fluid,” said Mantegani. While Singapore has apparently announced that country-by-country reporting will be required for fiscal years beginning on or after Jan. 1, 2017, it doesn’t appear—at least as reported on the OECD’s Automatic Exchange Portal—that Singapore has passed any implementing legislation. Also, while Singapore has indicated that it will require local filing, there is no information on the OECD’s portal indicating when the local filing requirement will come into effect.
Mantegani said that presumably the earliest that U.S. groups might have to make a local filing in Singapore would be Dec. 31, 2018, for fiscal year Jan. 1, 2017 to Dec. 31, 2017. “It is possible that by then the U.S. and Singapore will have entered into a bilateral CAA that would preclude a local filing and allow U.S. groups to rely on the governments to automatically exchange the reports.”
The U.S. expects to sign a tax information exchange agreement in time for exchanges to be made with Singapore, Barnes said. There was an announcement last summer that the U.S. and Singapore are working on a TIEA, and a TIEA doesn’t require Senate approval.
The more interesting case is China, said Mantegani, who at one time worked for the U.S. Competent Authority, the IRS division responsible for negotiating tax cases with foreign governments.
She said it appears that China has passed both primary and secondary legislation requiring the filing of country-by-country reports for fiscal periods beginning on or after January 1, 2016, and for local filing for the same fiscal periods.
“If the U.S. has not signed a bilateral CAA with China by the end of this year, it would seem that U.S. groups would be required to make a local filing in China,” she said.
“Clearly, U.S. multinationals have an interest in having CbC reports they file with the IRS protected by the provisions of the QCAA,” Mantegani said. These provisions are nearly identical to the conditions outlined in the multilateral competent authority agreement (MCAA) for the automatic exchange of country-by-country reports signed by many of the U.S.'s treaty partners.
The U.S. has not signed the MCAA.
Mantegani pointed out that the U.S. has signed, but not yet ratified, the most recent version of the underlying treaty, the Convention on Mutual Administrative Assistance in Tax Matters. Given the political challenges in getting any treaty or treaty-related document approved by the U.S. Senate, it would appear that the only way for the U.S. to get the protections outlined in the MCAA for reports it exchanged with treaty or TIEA partners would be to enter into individual bilateral agreements.
Fifty-seven jurisdictions, including Australia, Belgium, France, Germany, Greece, Ireland, Italy, Japan, Luxembourg, Mexico, Netherlands, Switzerland and the U.K., have signed the MCAA.
Barnes said while the exchange arrangements are important, the biggest focus for U.S. multinationals right now is making sure they have processes in place internally to gather the information required for the country-by-country reports and that they can explain why the results shown on the report are reasonable.
“The exchange procedures are important, and everyone hopes that confidentiality will be preserved, but the exchange is the tail, not the dog,” he said. “The dog is the data.”
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