First published in the Spring 2017 edition of Partnering Perspectives.
A US corporation with global operations is subject to various reporting and disclosure requirements, as are its counterparts headquartered outside the United States. Certainly, know-your-customer rules and anti-money laundering reporting requirements are not new. New requirements, however, are being imposed on companies by individual countries, by the European Union, and by agreement of the member countries of the Organisation for Economic Co-operation and Development (OECD).
Significant among these new disclosure requirements are Country by Country Reports (CbCRs) that provide tax authorities significant information about the operations of a corporation in each country in which it operates. (Note that these reports are only required for corporations with $850 million or more of group annual revenue.) The CbCR is Action 13 of the OECD Base Erosion and Profit Shifting (BEPS) initiative, which is comprised of 15 Actions that are now being implemented. The BEPS project grew out of the concern of tax authorities that multinational companies were shifting income from high tax countries with manufacturing plants to low or no tax jurisdictions.
A CbCR is to be filed with the tax authority of the home country of the corporation and then automatically exchanged by electronic means with tax authorities in countries in which the corporation has operations. The US regulations require CbCRs to begin for periods after June 30, 2016, although a voluntary procedure for the period beginning January 1, 2016, is provided to make the US reporting period consistent with other countries.
There are multiple obligations under the CbCRs. First, the Primary Filing Obligation is imposed on the ultimate parent of a Multinational Group, which is required to be filed in the parent’s tax jurisdiction of residence on behalf of the Multinational Group. The Secondary Filing Obligation is imposed on each subsidiary of the Multinational Group. Each subsidiary is required to file in its tax jurisdiction of residence, but only if the ultimate parent entity is not required to file in its tax jurisdiction of residence; if the parent’s tax jurisdiction has no Qualifying Competent Authority Agreement in place; or if there is a systemic failure in the parent’s tax jurisdiction of residence.
To facilitate the automatic exchange of the CbCRs, the OECD has developed a Multilateral Competent Authority Agreement. The automatic exchange of information is to occur in accordance with the Standard for Automatic Exchange of Financial Information in Tax Matters. Approximately 87 countries have signed this agreement, including Switzerland. The United States did not sign the agreement, but will implement the automatic exchange through bilateral agreements under income tax treaties or tax information exchange agreements.
There are restrictions on how the CbCR information may be used by a country’s tax authorities. The CbCR is designed to be a risk assessment tool and not an audit tool. The United States Treasury Department has made clear that it will discontinue exchange with any country that violates the agreed upon limitations on the use of the CbCR.
Although the OECD countries agreed that the CbCR information would be confidential and not publicly disclosed, the European Union has proposed that public disclosure of similar information by each corporation on its website be required. If this proposal is adopted, the requirement will apply to subsidiaries of US companies with operations in a European Union country.
Other disclosure requirements are imposed by the United Kingdom, which requires certain corporations to post their tax strategy “on their websites.” Essentially, a tax strategy will explain a company’s tax arrangements but does not require the reporting of amounts of tax paid or commercially sensitive information. A tax strategy also should include a description of how the company manages tax risks, what tax risks are linked to the business’s size and complexity, and any changes to the business.
Additionally, information on governance arrangements is required, including:
• Details on how the business’s tax risk is managed;
• A high level description of key roles and their responsibilities;
• Information on the systems and controls in place to manage tax risk; and
• Details on the levels of oversight of the business’s board and its involvement.
If a company has a code of conduct, the details of that code should be provided. Finally, information should be provided about when a company would seek external tax advice, if any, an outline of tax planning motives, and the importance of each to the tax strategy.
US tax directors of companies with U.K. subsidiaries have been wrestling with these requirements. Obviously, there is a fine line between meeting these disclosure requirements and protecting important proprietary information.
The United Kingdom and the European Union also have proposed disclosure requirements on advisors and intermediaries that would impose monetary penalties.
In addition to tax disclosures, many jurisdictions require collecting beneficial ownership information for corporations. A beneficial owner is an individual who enjoys the economic benefit of the legal ownership of an asset such as a security, stock, or other type of ownership interest in an entity. Without beneficial ownership information, an individual can hide behind an entity through various means.
The United States lags behind other jurisdictions in requiring such information and is frequently cited as a “tax haven” because information about owners of US corporations and other entities is not collected. The IRS recently finalized regulations that require reporting on the owner of a foreign-owned US entity that under US tax law is treated as “disregarded” because the US entity has only one owner. An example would be a single member limited liability company.
In addition to the new US foreign owner disclosure for tax purposes, the US finalized regulations in the Spring of 2016 that imposed on financial institutions the collection of beneficial owner information for use by law enforcement.
Compliance with these disclosure and reporting requirements is important because of the penalties that may be imposed in cases of non-compliance. As a result, compliance has become a very important aspect of the tax department of corporations and has become a risk management exercise.
Increased disclosure and reporting for tax and other purposes is only going to increase in future years. Pressure from nongovernmental organizations (NGOs) for even more public disclosure is intense in Europe and is starting to be felt in the United States.