The OECD’s “Base Erosion and Profit Shifting” principles are being incorporated into tax laws in some nations, requiring more transparency from corporate treasury departments.
For several years, SABMiller has published a report devoted exclusively to the taxes it has paid in various parts of the world. In its latest edition, Our Approach to Tax 2015, the company lists its tax contributions by country and region and outlines how it manages its tax affairs. “We understand the value of our financial reporting to investors and society and work to provide enhanced and balanced disclosure in communicating our tax affairs,” the report states.
SABMiller and the small number of firms that currently share such information may soon have company. In little more than two years, the OECD’s Base Erosion and Profit Shifting (BEPS) project has gone from an idea to a set of fifteen principles—including country-by-country reporting—that were outlined in the BEPS Action Plan, and to which the nations of the G20 have committed.
Country-by-country reporting “is like tax planning on steroids,” says Friedemann Thomma, international tax partner with the law firm Venable. It accentuates companies’ tax planning and reporting obligations.
These principles don’t have the force of law. However, countries can choose to build these principles into their tax codes, says Frank Keane, partner with EisnerAmper Ireland.
A few countries have wasted little time in doing just that. Even before the November 2015 announcement by the OECD, Australia had issued an exposure draft on country-by-country reporting. Just a month after the OECD announcement, Ireland published regulations, and the US issued a proposed regulation, regarding CBC reporting. The UK has also said it would implement country-by-country reporting.
These changes could mean additional reporting requirements for an estimated 9,000 companies around the globe, says Lee Sheppard, contributing editor with Tax Analysts, a global provider of tax news and analysis.
“BEPS has really changed the landscape for multinationals,” says Joe Calianno, international technical tax practice leader with BDO USA, a tax consulting service.
The initiative is finding some support among the business community. “British business supports greater tax transparency where it can strengthen the role of the authorities to stamp out illicit financial activity and abusive tax arrangements,” says Rob Fontana-Reval, head of tax and fiscal policy with CBI, or the Confederation of British Industry. That could help ensure a level, competitive playing field.
The discussion regarding tax practices and CBC reporting developed over the past 15 to 20 years, then “erupted on a global level” more recently, says Russell Guthrie, executive director and chief financial officer with the International Federation of Accountants. It had became clear that some multinationals had substantial and profitable operations in various countries, yet were paying little or no income tax, although they may have paid employment and value-added taxes.
The financial crisis of 2008 accelerated the debate. Even as many governments imposed austerity measures on their citizens, they allocated portions of dwindling cash reserves to bailing out financial institutions. “But individuals couldn’t see that the banks were paying any tax,” says Michael Dirkis, professor of taxation law with the Sydney Law School at the University of Sydney, Australia. That led to a groundswell of negative public opinion in many countries.
Shifting business models are also impacting tax regimes across the globe. “Borders are less and less relevant,” says Olivier Boutellis-Taft, chief executive officer with the Federation of European Accountants. Digital transactions can easily cross from one country to the next. Yet most tax systems are still based on companies’ brick-and-mortar locations.
Indeed, Action One of BEPS addresses the tax challenges posed by the digital economy. It notes that a company can “have a significant digital presence in the economy of another country without being liable to taxation due to the lack of nexus under current international rules.”
The idea behind CBC reporting is to allow governments to see where businesses have economic activity and are reporting revenue, and how this aligns with the income taxes they’re paying, says Ryan Dudley, partner and leader in the international tax practice with Friedman. Tax authorities likely will examine any mismatches.
At this point, the information being requested is not very extensive, Sheppard says. The Irish proposal, for instance, mentions revenue, profit, income tax paid and taxes accrued. It would apply to Irish-parented multinational groups with annual revenue exceeding €750 million ($853 million).
Of course, the final regulations issued by each country may request more information. In addition, some corporate tax and finance executives worry about further pressure to make this information available publicly.
In April, in fact, the European Union proposed requiring multinationals operating in the EU and with global annual revenues of more than €750 million to publish information on the locations of their profits and tax payments. “Transparency is the theme of the day,” says Carol Tello, a US-based partner with Sutherland Asbill & Brennan. “There’s a lot of movement in that direction.”
Suggestions for greater disclosures are prompting some backlash. The EU’s proposals for public CBC reporting “risks adversely affecting the competitiveness of European businesses and the independence of tax authorities,” says Fontana-Reval.
Another concern is the current lack of detailed guidance, Dudley notes. Consider a sales team that splits its time between six Latin American countries. Should its costs be allocated based on sales in each country? Time spent in each country? Some combination of the two?
Making things even more complicated, countries are adopting the principles at different times and asking for information in different formats, leading to inconsistencies, inefficiencies and confusion. “Transparency is a great word,” Boutellis-Taft says, “but you need the information to be meaningful and relevant.”
Implementing CBC reporting will require changes to many companies’ general ledger and accounting systems. These promise to be a significant compliance burden, Fontana-Reval says.
Going forward, every transaction may need to be tagged with “country of origin” data, explains Guthrie of International Federation of Accountants.
Companies might want to talk with others in their industry about the information reporting, Guthrie says. Of course, there’s legitimate concern about sharing information, he notes. However, the large range of accounting decisions and processes—such as those involving the IT infrastructure needed to capture the required information—could be sensible topics for information sharing, he says. By doing so, companies can learn from each other and be confident their own firms are working within industry norms.
CFOs and tax professionals will need to examine their tax structures and transactions to determine the implications of new regulations that incorporate the BEPS principles. For instance, a country’s implementation of rules regarding hybrid mismatches may mean a deduction a company has long enjoyed is no longer allowed. (A hybrid mismatch is an arrangement that exploits differences in the tax treatment of instruments, entities or transfers between two or more countries. It often leads to the company’s paying no tax in either country.)
Companies that have taken an extremely aggressive approach to tax planning may want to reconsider, especially if their actions could be seen as thwarting the intent of regulations. “It’s not good to have young people picketing your stores or throwing bricks through the window,” Sheppard says.
Most significantly, tax is no longer a matter solely for the tax department. It’s now a governance and reputational concern, Boutellis-Taft says: “Tax has entered the board room.” Companies will need to explain how their tax departments are organized, how they approach taxes—for instance, how aggressively they act when the tax law isn’t clear—and the controls in place to ensure their tax strategy is followed. Investors are looking at not just the impact of paying taxes on the bottom line, but the impact not paying taxes might have on the organization’s reputation.