The discussion draft on item 13 of the OECD's July 19, 2013, base erosion and profit-shifting action plan was released on January 30 and contains proposals for a two-tiered approach to transfer pricing documentation. The first tier would contain a master file with standardized information for all entities of a multinational group, including the CbC reporting template. The second tier would contain a second file available in the local language that would contain information on local taxpayers' material transactions.
According to Pierre Habbard, senior policy advisor to the Trade Union Advisory Committee to the OECD (TUAC), his organization recently received a revised proposal for a CbC template that was "considerably slimmed down."
Habbard described the benefits of MNE group members directly filing CbC reports with local authorities, saying that doing so would support the BEPS action plan's goal to have companies file returns where they create income. One advantage of direct filing is that it would assist tax authorities, especially those in developing countries, but a potential problem with direct filing is the risk of confidentiality breaches and unauthorized information disclosures.
On the other hand, filing CbC information in the parent company's jurisdiction and sharing it under treaty information exchange provisions would not be ideal because a treaty-based system would be slower and more burdensome, and might not ensure that measures introduced under the BEPS action plan meet minimum public expectations regarding corporate transparency, Habbard said.
However, the biggest problem with the revised proposed CbC template is that it may create legal uncertainty about the rights of stakeholders, because the CbC template requires information that is not confidential, he said. In many OECD countries, especially in the EU, workers have the right to access a company's business plan to be informed of foreseeable risk factors, he noted.
TUAC supports direct filing with local authorities and urged the OECD to offer the option of making information from the CbC template publicly available, Habbard said. He acknowledged that some stakeholders are concerned that making CbC information public could result in misunderstandings or campaigns against MNEs, but he argued that confidentiality "will not be a decisive factor" in whether a nongovernmental organization or union or any other party "will want to engage a campaign or not." Declaring CbC template information confidential when it is not legally protected could invite legal challenges and disrupt corporate governance, he said.
Habbard urged stakeholders to have a more detailed conversation on what information is confidential.
Maria Villanueva Serrano of Oxfam said CbC reporting should be made available to every country in which an MNE has a legal presence. A treaty-based approach to filing and sharing CbC information would put developing countries at a disadvantage because many of those countries have weak or nonexistent treaty networks, she argued. Even if developing countries did sign more treaties, they will still have limited administrative resources to obtain information on request from new treaty partners.
"We need the CbC report to be made public, as companies should have no reason to hide information," Serrano said. "It is not commercially sensitive information, especially if every multinational is doing it." She argued that public CbC reporting is feasible, noting that European banks are required to provide information similar to what is being proposed by OECD.
"In a nutshell, we think all countries, including developing countries, but also investors, shareholders, and citizens should benefit from country-by-country reporting template information," she said. "The easiest and quickest solution for this is that every country should have access to it."
Naoyuki Kawasaki of Keidanren, the Japanese business federation, argued for a treaty-based system for filing and sharing CbC information, saying that direct filing would raise confidentiality issues that would discourage cross-border trade and investment.
A common argument for treaty-based information sharing is that highly confidential information, such as sales, taxes paid, and pretax income, is usually held at the parent-company level, and subsidiaries may access only information that concerns them and their subsidiaries. A direct filing system would offer access to confidential information and would affect MNE corporate governance. Another concern is that some countries do not subject authorities to tax confidentiality statutes.
"We believe the CbC report should be submitted only to the government. This is not because we have something we feel guilty about or have to conceal," Kawasaki said.
Responding to criticism that a treaty-based information sharing system would disadvantage developing countries, Kawasaki noted that the OECD's primary role is to urge nations to conclude tax conventions. Developing and using multilateral instruments while also giving developing nations maximum support for capacity building is another important goal, he said. However, the international community must "promote dialogue with the tax authorities of developing nations in a cooperative manner to enhance mutual understanding," he added.
Brian Meighan of the Washington, D.C., office of PwC agreed that a treaty-based mechanism would be ideal. He quoted from the OECD's "Keeping It Safe" guide, saying that "taxpayers need confidence that sensitive information is not disclosed, whether intentionally or by accident."
Meighan recommended limiting the CbC report's risk assessment data points to revenue, pretax income, taxes, and activity codes, saying that it would reduce compliance burdens because those data are covered by other MNE reporting functions.
He also argued that the CbC reporting template should be filed in the year after the last day of the parent entity's fiscal year. "Such an approach would balance the needs between companies and tax authorities," he said.
More Questions, No Answers Yet
Responding to a New Zealand official's question about whether private sectors should invest in supporting developing nations to help them build infrastructures sufficient for participation in treaty-based CbC information exchanges, Alan McLean, deputy chair of the Taxation and Fiscal Policy Committee of the Business and Industry Advisory Committee to the OECD (BIAC), said it "feels inappropriate" to speculate about what developing countries need and want.
BIAC has heard from representatives doing business in developing countries that those governments don't want a CbC template, McLean said. Instead, they want assistance in using their existing laws to look at activities of multinational groups and in determining whether profits being reported are appropriate.
"This requires an understanding of the arm's-length principle, which is far away from any information being provided by a CbC template," McLean said. "We need to change the conversation to assist tax authorities to administer the system which they have, rather than confusing them with information which may or may not be relevant."
Carol Dunahoo of the Treaty Policy Working Group asked why some countries seem reluctant to join the Convention on Mutual Administrative Assistance in Tax Matters, which has been signed by at least 77 countries, and to conclude TIEAs, which hundreds of countries have already signed.
"It's not just a question of who has the capacity to conclude bilateral tax treaties," she said. "If there is reluctance to enter into these kinds of framework agreements that provide protection for this kind of information, why is that, and what does that tell us about the question regarding what the information will be used for?"
Dunahoo said the G-20 "got it right" when it called for reporting to tax administrations rather than for public reporting, because "tax information is very easily misconstrued, for political purposes and otherwise." She was also concerned about tax administrations being deluged by information supplied by other administrations, noting that it "can be hard to find the needle in the proverbial haystack."
Marlies de Ruiter, head of the Tax Treaty, Transfer Pricing and Financial Transactions Division at the OECD, said developing countries have indicated that it is difficult to get relevant tax information and that they believe CbC reporting would be a good way to obtain it. However, they also worry whether information they receive will be correct, because they have no way to check if the data reflect reality. One question that must be addressed is what other mechanisms are required to verify that correct information is being supplied to developing countries, she said.
Joe Andrus, head of the OECD's transfer pricing group, also questioned advocates of the treaty-based sharing system, saying that that their proposals suggest that nations would be prohibited from requiring CbC information to be filed locally. The implication is that the information could be filed only in the parent company's jurisdiction and that the OECD should limit individual jurisdictions' rights to request information.
"If that's what you intend, who will prohibit those countries from doing that?" Andrus asked. "You are ascribing a little more authority to OECD than it has."
Andrus also questioned whether centrally filing documentation in one country will really work, because no country has a central depository of transfer pricing documentation. "In my experience the first question in every tax audit is, 'Could you please provide a copy of the tax return, because it will take us six months to find it if we go to the central filing location,'" he said.
Michelle Levac, chair of Working Party 6, which is in charge of transfer pricing, expressed hope that even if stakeholders disagree, "we get to a result that is acceptable and we get a buy-in from both the countries and the MNEs and make it a workable and practical tool."
Mindy Herzfeld contributed to this report.
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