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Nov. 4 — New York University, which has degree-granting campuses in Abu Dhabi and Shanghai, is getting ready for a sweeping international tax reporting requirement.
It’s surprising, but the university is just one of possibly many nonprofit organizations that may be caught up in an international reporting regime meant to reveal multinational companies’ aggressive tax planning.
The Internal Revenue Service included an exception for nonprofits when it issued rules on the requirements, but other countries have applied the concept more broadly—and some don’t recognize tax-exempt status at all.
Thus, exempt entities—including charitable organizations, nonprofit hospitals, universities with foreign campuses and private foundations—could have foreign filing requirements under the regime, known as country-by-country reporting. Complying will cost organizations money and time, could expose them to fierce scrutiny from the public, and may open them up to audits as tax authorities pore over the information, practitioners told Bloomberg BNA.
“What looks like a generous exemption from the IRS from country-by-country reporting might actually backfire,” David Ernick, a principal at PricewaterhouseCoopers in Washington, said, adding that clients have already raised concerns. “It seems to have very troublesome implications for U.S. tax-exempt organizations.”
Country-by-country reporting is the most widely adopted recommendation in the Organization for Economic Cooperation and Development’s Action Plan on Base Erosion and Profit Shifting (BEPS), and OECD officials have hailed it as the project’s greatest legacy. The regime is meant to give tax authorities the information needed to understand the activities of multinational companies and to assess transfer pricing risk.
The IRS’s interpretation of the reporting requirements—laid out in June 29 final regulations (T.D. 9773)—included a filing exemption for tax-exempt organizations with unrelated business taxable income below the $850 million threshold, based on the 750 million euro reporting bar in OECD guidelines. Companies with annual revenue above that mark must report information including the amount of revenue, profit or loss, capital and accumulated earnings for each country of operation.
“It is a complex issue and one that has taken a lot of time and effort to address,” Matt Nagel, a spokesman at New York University, told Bloomberg BNA Nov. 3. The university will finalize its compliance strategy once the IRS releases the country-by-country reporting form (Form 8975), he said.
The reporting “is intended to cover any taxable multinational enterprise that exceeds the stated revenue threshold, even if the ultimate owner is not subject to tax in the owner’s country of residence,” Jefferson VanderWolk, head of tax treaty, transfer pricing and financial transactions at the OECD’s Center for Tax Policy and Administration in Paris, said in a Nov. 2 e-mail to Bloomberg BNA. The OECD hasn’t received questions from exempt organizations about the regime, he said.
Several dozen countries—including Australia, Canada, Chile, Germany, China and the U.K.—have signed an agreement to initiate the exchange of country-by-country reports, according to data from the OECD.
OECD officials probably haven’t spent much time mulling over tax-exempt organizations, because they’re more focused on larger companies dodging taxes, said Will James, a principal and transfer pricing leader at BKD LLP in St. Louis.
“I think they just think in their mind it’s clear: they’re going after the Apples, the Googles, the Amazons of the world,” he said.
The “big, proverbial question” for tax-exempt organizations is what other countries consider revenue, James said. Because other countries may not recognize such organizations at all, considering them to be for-profit entities, the groups will have to look at each country in which they operate to see how authorities implement the rules, practitioners said.
“Really, what they’ve said is ‘It’s just revenues, and revenues are not defined.’ That could be an issue for a lot of tax exempts—they just don’t know they’re subject to these requirements, and all of a sudden they drift up on them,” James said.
Organizations shouldn’t make the mistake of viewing country-by-country reporting only from a U.S.-centric perspective, Kimberly Tan Majure, a principal at KPMG LLP in Washington, said.
“I think there’s maybe a forgetfulness of, ‘Are there foreign obligations I might have?’” said Majure, vice chair of the American Bar Association tax section’s Committee on Foreign Activities of U.S. Taxpayers.
Collecting and submitting the necessary information will be labor-intensive, particularly to ensure systems work across borders and meet countries’ specific accounting principles, said Matthew Herrington, a partner at McDermott, Will & Emery LLP in London.
Still, the information will help authorities assess transfer pricing risk in real time, rather than forcing them to wait several years for returns to come in and then request more information, he said. Herrington is on the tax policy committees of the Business and Industry Advisory Committee to the OECD, the International Chamber of Commerce and the U.S. Council for International Business.
“My guess is as they start to see this huge increase in the volume of information coming through, it will be natural for them to be asking more questions,” he said.
For the U.S., the regulations are effective for tax years beginning on or after June 30, 2016, according to the IRS—six months after the effective date for countries that followed the OECD’s Jan. 1 implementation timeline, such as Australia and France. That lag is likely to create problems, practitioners said.
Organizations have some logistics to figure out before the filing deadline in each country where they operate, meaning they shouldn’t delay in looking at the rules, practitioners said.
U.S. organizations with entities overseas must name a “surrogate parent” that will file the report on behalf of the whole organization, and that entity must notify the country in which it is filing a report before the deadline. If an organization has multiple entities in different countries, those entities must also notify those tax authorities that they won’t be doing the filing, said Paul Hoberg, a tax director specializing in transfer pricing at Moss Adams LLP in Seattle.
IRS officials have said they are working on a system to allow voluntary filings of the reports for companies required to comply with the U.S. rules and with those in countries with earlier effective dates.
While some universities, such as Harvard and NYU, have branch campuses overseas, the majority of schools offer short-term study abroad programs, said Brian Whalen, president and chief executive officer at the Forum on Education Abroad. Those programs likely wouldn’t be affected by the rules, practitioners said.
As of the end of 2015, 55 schools in the U.S. had 78 branch campuses overseas, according to Jason Lane, an associate professor and co-director of the Cross-border Education Research Team at the State University of New York University at Albany.
Harvard University didn’t return a request for comment.
Information in the country-by-country reports could be hacked or inappropriately disclosed, exposing companies and tax-exempt organizations to new scrutiny, practitioners said. The IRS considers the information confidential under tax code Section 6103—just as it does tax returns—but other countries may not stick to the same standard, practitioners said.
It is “almost inevitable” the information will be misinterpreted if it is released publicly, as some groups are urging, Ernick said. Exempt organizations may fear dings to their reputations if critics think they aren’t paying their fair share of taxes—a revelation that could turn donors off, others said.
“The impact here is a lot of disclosure for information that doesn’t seem relevant to its stated purpose, which is assessing transfer pricing risk, and it’s going to be pretty costly to comply with and there’s a lot of potential for misinterpretation,” Ernick said.
Still, the information revealed about tax-exempt organizations would likely mirror some information included in annual reports or on the Form 990, Return of Organization Exempt from Income Tax, James said.
The U.K. became the first country to allow public country-by-country reporting after the House of Commons unanimously passed an amendment to its finance bill in a Sept. 5 parliamentary vote.
Hospitals in affiliations overseas or U.S. universities teaming with foreign universities to conduct research may have to report under the regime, Ofer Lion, a partner at Seyfarth Shaw LLP in Los Angeles, said.
But overall, the regime isn’t “geared toward anything the nonprofits are really going to be very concerned with,” because they aren’t the ones shifting profits, conducting inversion transactions or storing intellectual property offshore, he said.
“I think in large part, the nonprofits will care about the administrative burden of having to do this more than anything else,” Lion said.
Gian Franco Borio, an attorney and certified public accountant at Studio Legale Tributario Internazionale in Florence, Italy, helped form the European Association of Study Abroad, a group of associations representing U.S. university programs in Europe, which was started in May. The association will take a closer look at country-by-country reporting in the future, as schools begin to ask more questions about it, he said. Borio helps U.S. universities comply with Italian laws.
Tax authorities probably will see the benefits of the regime, and more countries, including some in Africa, may join in down the road, James said.
“I think a lot of people feel like the BEPS initiative really is just a European initiative and other countries tag along that may or may not be members of OECD, but I think most countries will say, ‘This is just an easy way of dealing with it,’” he said.
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