On June 30, 2016 the U.S. Treasury and the IRS finalized and issued a ruling, which requires U.S. parent companies of large multinational public and private companies to provide financial data to the IRS on a country-by-country basis. This is intended to provide information to tax authorities (world-wide) so that they will have the ability to identify where companies may be shifting profits into tax havens. This will most likely initiate additional investigation as this is a sign of possible tax avoidance.
The U.S., along with other countries that are part of the Organization for Economic Cooperation and Development (OECD), made a commitment (last year) to adopt country-by-country reporting. This rule solidifies that commitment. The headquarters of the OECD is in France. However, the U.S.-based multinational companies will be required to provide their financial information to the IRS. The U.S. government will then make that information available to tax authorities in other countries where these companies have subsidiaries.
The OECD has an initiative, which is meant to discourage these multinational companies from artificially moving profits to low-tax countries. This initiative is called Base Erosion and Profit Shifting. The country-by-country reporting was included in Action 13, which is part of the 15-point BEPS Action Plan. The final regulations apply to taxable years beginning on or after June 30, 2016. Taxpayers that are affected should not wait to begin their preparation for the new requirements.
Action 13 does not make the country-by-country reporting available for public consumption, though, which had been requested so that Congress would have access to the information to ensure that they are crafting effective tax laws as they look to reform the U.S. tax code. There are a number of proposed law changes, which have been presented for consideration. Providing them more information on a subject that many of them already cannot agree upon seems to be misguided, at this point. This information may be more relevant after January 20, 2017.
Whether or not you agree with this rule, we are part of a global economy. Technology has made the world a much smaller place. We literally have access to all sorts of information at our fingertips. This is another step in attempting to level the playing field for many companies. It is also a major step for taxing authorities to receive their fair share of the global business profits. We obviously still have a long way to go. The recent Panama Papers’ situation shows that. The response from these companies will be eye-opening for the world. Will they decide to continue to expand or will they shut down subsidiaries? Will the executives take more compensation or will they invest back into their companies and their employees? Will workforce continue to be moved? Time will tell. Hindsight will give us all perfect vision.
-Michael Hermanson, CPA | CGMA