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Jan. 13 — The decision to delay IRS rules implementing country-by-country reporting requirements from the OECD is stoking fears of increased administrative complexity for the upcoming year.
Many are hoping the Internal Revenue Service will give taxpayers the option to file the country-by-country reports directly with the agency in 2016—both to simplify the process and to safeguard against local jurisdictions requesting them directly.
“There are going to be some problems because of the mismatch of the timing,” said Catherine Schultz, vice president of tax policy for the National Foreign Trade Council. “I do think there are a lot of taxpayers who are going to ask Treasury for the option of submitting the reports early.”
Although Treasury officials had previously indicated that the requirement would apply for the 2016 tax year, the proposed regulations, issued Dec. 18, would not apply to most taxpayers until after Jan. 1, 2017 (245 DTR G-4, 12/22/15).
The proposed regulations were released shortly after Bloomberg BNA reported that Rep. Charles Boustany Jr. (R-La.), chairman of the House Ways and Means Tax Policy Subcommittee, was drafting a bill that would forbid the IRS from collecting the reports for years before Jan. 1, 2017 (244 DTR G-9, 12/21/15).
Boustany's bill (H.R. 4297) was officially released soon after the proposed regulations became public.
While taxpayers normally welcome any delay in new reporting requirements—especially those criticized as onerous and difficult, as were the country–by-country reporting provisions when first proposed by the OECD—the delay could cause more trouble for them.
Under the requirements, developed as part of the Organization for Economic Cooperation and Development's project to combat base erosion and profit shifting (BEPS), companies must submit documentation beyond the traditional transaction-based transfer pricing analysis, giving tax authorities a global blueprint of their business operations. While only officially finalized with the overall BEPS project last October, the template has already been adopted in many jurisdictions. Australia, France, Ireland, Mexico, the Netherlands and Poland have all enacted new legislation or issued regulations implementing the plan, while the U.K. and Denmark have proposed new legislation on it.
Several other countries, such as Japan and India, have indicated their intention to follow the new reporting system.
The OECD's final recommendations on documentation call for a company to submit the country-by-country report to the government of its parent organization, which then would use established treaty information exchange agreements to submit the information to local jurisdictions where the corporation has a presence.
However, in situations where the parent company's government doesn't collect the reports, the company can either select a “surrogate” parent in a second jurisdiction to do it, or submit the information directly to a country requesting it.
Confusion for 2016
That provision was intended to work around governments that refuse to cooperate with the system—but some taxpayers wonder if they'll be forced to use an alternative method for reporting in 2016 simply because the U.S. requirement isn't effective yet. This could create logistical challenges as well as provoke fears that the information will not be as secure.
“There's a whole host of issues,” said Manal Corwin, a former deputy assistant secretary for Treasury, currently with KPMG LLP in Washington, noting that using a different filing system—even for just one year—can cause administrative headaches. “Even a minor shift in process can be significant.”
As well as having to navigate local regulations, taxpayers will be unable to rely on the treaty-based information-sharing network if they submit the documentation locally.
“If it's coming through a pure local filing, it's not going through a treaty, so you don't have the international standard for the protection of information that's exchanged,” Corwin said. “You don't have that additional layer of protection around the treatment of information.”
Whether it will come to that remains unclear to many practitioners.
The final BEPS report on documentation includes a recommended effective date of Jan. 1, 2016—but also acknowledges that “some jurisdictions may need time to follow their particular domestic legislative process in order to make necessary adjustments to the law.”
Australia's guidance on implementing country-by-country reporting requirements includes an assurance that exemptions will “most likely” be granted for the first year of reporting if a parent jurisdiction has not yet implemented a requirement.
Other jurisdictions that have issued language on their requirements haven't included such exemptions, however.
The OECD's language “implies that there ought to be some sort of allowance for a country to get their legislation in order, but it doesn't explicitly say that,” said Carol Doran Klein, vice president for tax at the U.S. Council for International Business.
“It's confusing, and people would like to have certainty,” Doran Klein said.
The IRS in issuing the proposed regulations Dec. 18 imposed a 90-day deadline for comments.
Shortly after the IRS proposed the regulations, many Republicans in Congress issued harsh warnings and vowed to work to preserve taxpayers' rights.
“Congress will not allow Treasury to move forward with BEPS policies that enable foreign governments to misuse information reporting and exploit American companies,” said Rep. Kevin Brady (R-Texas), chairman of the Ways and Means committee, in a statement released shortly after the regulations were unveiled.
Boustany's bill, aside from mandating a one-year delay, seeks other protections for taxpayers, especially regarding the master file—another item of documentation recommended under the BEPS project and one that will be directly submitted to foreign jurisdictions. The requirement for the master file, which is supposed to contain narrative descriptions of the company's overall business, was largely overlooked during the BEPS debate and has begun to raise concerns about corporate confidentiality.
If enacted, Boustany's bill would mandate that the IRS halt the transmission of country-by-country reports to a foreign government if it is found that the foreign government has misused or abused master files.
Peter Barnes, former senior tax counsel for General Electric Co. and current lecturer at Duke University School of Law, said this protection could end up being unhelpful to corporate taxpayers because the end result is to close off a network for transmitting the country-by-country reports.
“All you do is substitute an organized process for the U.S. Treasury with a disorganized process,” Barnes said. “I don't see this as helping companies.”
Barnes said companies should look to the master file requirements as an opportunity.
“This is an opportunity for the taxpayers to affirmatively explain where it creates value, and why,” Barnes said. “That's something that taxpayers have not been very good at.”
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