June 30, 2015 | KPMG LLP’s John Gimigliano and Manal Corwin discuss recent reactions by U.S. Congress and Treasury to BEPS developments, specifically whether Treasury has the authority to implement country-by-country reporting standards in the United States and what potential implications for U.S. multinationals exist if they do not. They also discuss Treasury’s point of view on recent BEPS related developments. Visit KPMG's Base Erosion and Profit Shifting (BEPS): Tax Transparency site for more insights.
JOHN GIMIGLIANO: Today we wanted to briefly discuss a few very interesting and recent developments related to the U.S. involvement in the OECD's Base Erosion and Profit Shifting project, BEPS. Specifically, a recent letter from Congressional tax writers to Treasury, and then also recent statements from Treasury about the BEPS process.
Manal, you've been heavily involved in the BEPS project, both during your time at Treasury and since returning to KPMG, so we've really got the ideal person here to discuss this with.
First Manal, my first question to you is about this letter to Treasury. It's a letter from the top tax writing people in Congress: Paul Ryan, Chairman of the Ways and Means Committee, and Orrin Hatch, the Chairman of the Senate Finance Committee. I've got a copy of it here. I thought I'd just sort of read sort of a relevant part here, and I'd like to get your reaction.
They say, "We are concerned about the country-by-country, or C-by-C, reporting standards that will contain sensitive information related to a U.S. multinational's group operations. Some recent press reports have indicated that the Treasury Department believes it currently has the authority under the Internal Revenue Code to require C-by-C reporting by certain U.S. companies, and that the IRS guidance on this reporting will be released later this year. We believe the authority to request, collect and share this information with foreign governments is questionable."
Okay, so before we get to the content of that—and I know you've got thoughts on it—could you just remind us, what is the C-by-C reporting? What does it do, and what it is intended to do?
MANAL CORWIN: Sure. The C-by-C report is the output of the recommendation that came out of Action Item 13 of the BEPS project. There was broad consensus on requiring all multinationals to produce a report that would capture information about their activities, revenues, taxes paid, entities in every jurisdiction in which they operate. It's intended that that report be filed by the parent entity of the group, of the multinational group in the jurisdiction in which that entity is resident, and then shared by each of the jurisdictions who collect the report with every other jurisdiction that is mentioned in the report. So basically, a blueprint of a multinational's activities and revenue and taxes paid across the globe.
JOHN GIMIGLIANO: Got it. Now, I'm a former Ways and Means counsel, and I know that one of the things that's hardwired into you when you work there is you protect your jurisdiction very carefully. You're a former Treasury official. So maybe you can convince me as to what Treasury's authority here is on this, because another part of the letter says that they asked Treasury to provide documentation sort of outlining why they have the authority to do this. So let's hear it. What is Treasury's authority here?
MANAL CORWIN: So without getting into a technical analysis of Treasury's authority, in general, Treasury has fairly wide, broad authority to collect information. And as we know, IRS and Treasury collect quite a bit of information already about the activities of business and multinationals. So Treasury has said that, based on the existing authority in existing legislation, that authority is broad enough to collect the information that's being asked for in this report.
And I should just say that the ability to adopt the recommendation in Action Item 13 for C-by-C reporting really involves two levels of authority. It's authority for the Treasury and IRS to require multinationals to provide the information, to complete the report and collect it. And then they also need then authority to exchange it with other countries.
So the first one, again, Treasury has said based on existing statutory rules that they have broad authority to collect the information.
The authority to then take information that they've collected, the actual report, and share it with other countries is embodied in international agreements, in treaties which provide and allow for the automatic exchange of information with other countries, tax information exchange agreements and in the currently ratified multilateral convention for information exchange.
JOHN GIMIGLIANO: Okay, next question. As I said, the letter from Hatch and Ryan sort of questions whether or not Treasury has the authority to implement the C-by-C standards. Now, Treasury has said, I think repeatedly, they believe that they do. But let's just assume for a moment, what if Hatch and Ryan are right, or that Congress intervenes and somehow prevents Treasury from implementing the C-by-C standard. Does it much matter for U.S. companies in the end, or U.S. multinationals in the end?
MANAL CORWIN: So it does matter, but not in the ways that some would think. If the U.S. were not to adopt the requirement to collect the C-by-C report and exchange it, the way that the OECD recommendation is drafted, and the implementation guidance, is that other countries who do require the report, the first rule is that they're supposed to get it via exchange from another country.
If that is not available for whatever reason—the country decides not to adopt or cannot adopt—then the implementation guidance suggests that other countries are permitted to seek that report directly from the multinational, from the subsidiary, or [from] other operation in its jurisdiction.
So the implication of that for U.S. multinationals is: if they have business operations in other jurisdictions who do adopt, and those jurisdictions can't get the report from the U.S. government, then they will be faced with the requirement to provide the C-by-C report directly to the government, each of the governments in which they're operating.
That is significant because there's an administrative component, but there's also a practical component with respect to the confidentiality of the information. One of the advantages of a treaty exchange or a TIA exchange is that there are built-in protections that require the maintenance of confidentiality of taxpayer information. And the U.S. has the right to terminate exchange within a jurisdiction that fails to maintain those standards. You lose those protections if you're providing it directly.
The implementation guidance does allow multinationals who are not providing information to the resident's country to designate one of their subsidiaries as the collector of that information, and maybe then obtain protections if the country in which that designated entity is located exchanges it.
So there are implications, but the implication is not that U.S. multinationals are off the hook.
JOHN GIMIGLIANO: I think that's a really important point, and one that companies probably ought to be aware of. And it's interesting to me whether or not Congress was aware of that, you know, when they made their comments.
So, last question for you, then. There was a conference here in Washington a few weeks ago which was really around what's happening with BEPS, the BEPS process. There were a number of officials that were here discussing sort of the process on BEPS, and there were comments made by a Treasury official, and they apparently were very interesting, and have caused some to wonder, "Well, what does that exactly mean? Does that mark perhaps a different point of view for the U.S. in terms of how they participate in the BEPS project?" So could you just give us an overview, you know, what was said, and what does it mean?
MANAL CORWIN: So Deputy Assistant Secretary Bob Stack gave the opening speech at the conference,1 and he in that speech expressed some frustrations the U.S. has had with the process, both the BEPS process at the OECD, but also some of the actions that other countries have taken since the BEPS process had begun.
In particular, he expressed frustration with the actions of the U.K. in enacting the DPT, as well as Australia in enacting a GAAR, a general anti-avoidance rule, that was similar to the DPT, because he felt that those actions were unilateral actions that were taken to address BEPS inconsistent with the efforts that were going on at the OECD to come up with a coordinated approach. So that was principally his focus.
I think he also expressed concerns about whether or not the U.S. voice was being heard at the table in the OECD to get to a right policy answer as opposed to politically motivated or domestically politically motivated outcomes.
That said, Deputy Assistant Secretary Stack also noted that he felt there were some successes coming out of the BEPS process, including country-by-country reporting, including some of the changes to the transfer pricing rules, the work on hybrids, and interest deductibility.
So at the end of the day, I think while he used the opportunity to speak out around some concerns, I don't think it was an indication that the U.S. was planning to pull out or take a different approach to BEPS than what has been happening so far, but simply to say that there are certain things that they're comfortable with and certain things they're not comfortable with, and that they're going to continue to contribute to the process consistent with their policy objectives.
JOHN GIMIGLIANO: Does this represent perhaps a wavering commitment from the U.S. to the BEPS process, your answer is no?
MANAL CORWIN: I think it's a commitment defined by what the U.S. policy objectives are, which include protecting the U.S. tax base as well as the interests of U.S. multinationals. And so it's an articulation of the U.S. position around it. I don't think it's a pulling out by the U.S.
JOHN GIMIGLIANO: Excellent. Well, I wish we had more time, because there's so much content here we could probably make this into an hour-long conversation. But that's all we've got time for today. So thanks for joining us. If you have any questions about the BEPS process, please contact a KPMG professional. Thank you very much.
1 Robert B. Stack, Deputy Assistant Secretary for International Tax Affairs, U.S. Treasury, spoke at the 2015 OECD International Tax Conference, held June 10-11, 2015, in Washington, DC.
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