Minimum thresholds announced as countries adopt BEPS reporting proposals
TAX ALERT |
As part of its Base Erosion and Profit Shifting (BEPS) initiative, the Organisation for Economic Co-operation and Development (OECD) has announced a safe harbor threshold that will likely provide potential relief for middle market multinational groups from the requirement to provide certain transfer pricing documentation and perform country-by-country (CBC) reporting. Specifically, the OECD has proposed an exemption from these rules for groups with annual consolidated revenue in the immediately preceding year of less than €750 million (or the local country equivalent).
Originally unveiled by the OECD in September 2014, the CBC reporting template is intended to create a mechanism to gather information on how global companies allocate profits, taxes and risk. The template was designed to reduce aggressive transfer pricing policies by increasing transparency and information sharing among global tax authorities. The OECD states that the exemption threshold would exclude approximately 85 to 90 percent of multinational groups from the filing requirement while still accounting for 90 percent of corporate revenues. The first reporting requirement for countries that have adopted the OECD-based CBC reporting template will likely be effective starting in the 2016 tax year, with U.K., Spain and France having already announced they will adopt the OECD CBC standards.
Last year, U.K. government officials announced the U.K. would adopt the CBC reporting template and require multinationals to report information from their operations around the world to Her Majesty’s Revenue and Customs (HMRC). HMRC has stated that the objective of the CBC reporting implementation is to “provide HMRC with information about multinational companies’ global activities, profits and taxes. It is intended that the information reported by [multinational enterprises] will be shared with other relevant tax jurisdictions to [sic] so that they too can identify when [multinational enterprises] have engaged in certain forms of base erosion or profit shifting activity.” HMRC estimates that the increased compliance costs for U.K.-based multinational groups will be £200,000 on an annual basis, with negligible implementation costs.
Spain is also moving closer to adopting CBC reporting. On Nov. 27, 2014, the Spanish congress implemented sweeping tax reform that became effective as of Jan. 1, 2015. Spanish officials announced that regulations issued pursuant to the new law will include a requirement, similar to the OECD proposal, for multinational entities to comply with CBC reporting. Some Spanish tax practitioners believe the CBC reporting regulations will be published by June 2015 and that CBC reporting will be in effect for the 2016 tax year.
The French government passed new BEPS-related initiatives in its 2014 finance legislation. Newly implemented French regulations require taxpayers to disclose foreign rulings in their contemporaneous transfer pricing documentation in order to ensure consistent treatment across the multinational group. In addition, France addressed Action Item 4 of the BEPS initiative, related to anti-hybrid arrangements, by disallowing certain interest deductions accrued to related parties from non-French lenders.
While the OECD’s BEPS working group has not yet issued its final report, it is apparent that some countries have chosen to get an early start on addressing what they perceive to be abusive tax avoidance practices by multinationals. As countries begin to adopt CBC reporting and other measures, multinational entities should assess their risk profiles, prepare to comply with new legislation that has been passed, and consider the impact of proposals that countries around the world are likely to implement as they adopt components of the OECD’s BEPS initiative. The planning time frame is short because governments have already begun to enact BEPS-related initiatives even though the OECD has yet to complete its work.