US Country-by-Country Reporting Requirements Proposed
On December 23, 2015, the U.S. Department of the Treasury issued proposed regulations that would require multinationals with U.S. parents and revenue greater than $850 million for the prior accounting period to prepare Country-by-Country reporting documentation on an annual basis. The new reporting requirement would relate to the provision of information by the multinational group on income earned, headcount, taxes paid, as well as other economic indicators, along with the location of the associated economic activity. The Treasury notes that while the proposed standards are generally in line with the model legislation recommended by the Organization for Economic Cooperation and Development (OECD) as part of the Base Erosion and Profit Shifting (BEPS) Project, it has been tailored for U.S.-based companies. The proposed regulations also include detail on information exchange protocols among governments, as well as the efforts that will be taken to safeguard confidential taxpayer information.
For more detailed information, the complete release from the Treasury is available here. Notably, page 16 includes a sample Country-by-Country Reporting Template. The Treasury is requesting public commentary by March 22, 2016.
U.S. Reacts to OECD's BEPS Deliverables
On November 30, 2015, the staff of the U.S. Joint Committee on Taxation released a Congressional report on the implications of BEPS entitled “Background, Summary, and Implications of the OECD/G20 Base Erosion and Profit Shifting Project.” The report provides a detailed overview of the OECD BEPS Project, including a summary of the final deliverables associated with the 15 BEPS Action Items. It acknowledges the decline in the average tax rate of large U.S. Controlled Foreign Corporations (CFCs) over the period 1998 to 2012, noting that this phenomenon may or may not be related to BEPS. However, the report further states that the U.S. “has engaged in the BEPS Project out of concern expressed by a number of U.S. policymakers that planning by some taxpayers has resulted in inappropriate erosion of the U.S. tax base as well as aggressive shifting of income to low-tax jurisdictions.”
The following day, Robert Stack, Deputy Assistant Secretary of International Tax Affairs at the U.S. Department of Treasury, appeared before the House Ways and Means Subcommittee on Tax Policy to discuss the Administration’s work on various international tax issues, including BEPS. In reference to transfer pricing, Mr. Stack stated that the “existing standards in the area of transfer pricing have been clarified and strengthened as part of the BEPS Project. Because the transfer pricing work is based on the arm’s length principle, it is consistent with U.S. transfer pricing regulations under Section 482.” Further, he outlined some of the Administration’s proposals to reform the U.S. tax system “to improve competitiveness, secure our tax base, and reduce incentives for profit shifting by U.S. firms.”
- In regard to interest deductibility, the Administration’s proposal would limit a U.S. subsidiary’s interest expense deduction to the greater of 10.0 percent of the subsidiary’s EBITDA (Earnings before Interest, Tax, Depreciation, and Amortization) or its proportionate share of worldwide third-party interest expense based on its share of worldwide earnings. This proposal is in line with the OECD’s recommendation in the final Action 4 report and would be a significant change from current U.S. law which allows interest deductibility up to 50.0 percent of EBITDA.
- In regards to the migration of intangibles offshore, the Administration acknowledges this as a key avenue for base erosion, especially in situations where the intangibles are undervalued and/or taxpayers apply a narrow definition of intangibles. The Administration’s FY2016 budget reiterates a number of proposals offered in prior years to discourage BEPS through the transfer of intangibles, which include imposing a minimum tax on excess returns and broadening the definition of intangible property to include goodwill and going concern value.
For more information, please see copies of the report and testimony.
European Commission’s Investigations into Illegal State Aid Continue
On December 3, 2015, the European Commission (EC) announced the opening of a formal investigation into Luxembourg’s transfer pricing rulings concerning a McDonald’s franchising affiliate in Luxembourg, McDonald’s Europe Franchising (MEF). Specifically, the EC is investigating whether certain rulings issued by Luxembourg on behalf of MEF constituted illegal state aid.
The announcement of this new investigation comes in the wake of several high profile investigations of transfer pricing related tax rulings issued by EU member states. In October, the EC took two of these investigations a step further by issuing a decision that Luxembourg and the Netherlands had granted illegal state aid to Fiat and Starbucks, respectively (for more information, see Transfer Pricing Times: Volume XII, Issue 11)
The ECs investigations have not gone unnoticed in the U.S. During Stack’s testimony (see details above), he raised several concerns with the EC’s investigations, including whether:
- U.S.-headquartered companies are being unfairly targeted;
- The EC has jurisdiction over tax treaties between the U.S. and EU member states;
- The retroactive nature of the EC’s rulings is appropriate;
- The settlement amounts in these cases should be deemed foreign tax credits from a U.S. perspective; and
- The EC is overstepping its authority by requiring the taxation of deferred income that only the U.S. is entitled to tax.
As noted above, click here to review the complete testimony provided by Mr. Stack.
Inversions Still a Hot Topic with Pfizer’s Announcement
Corporate inversions remained in the limelight throughout 2015, most recently with the announcement of a proposed merger between US-based Pfizer Inc. and Irish-based Allergan plc on November 23, 2015. In the press release announcing the transaction, Pfizer noted that the combined company will maintain its legal domicile in Ireland. Ireland’s current corporate tax rate is 12.5 percent; in comparison, the U.S. corporate rate is 35.0 percent. As with prior corporate inversions, the Pfizer/Allergan transaction set off a wave of headlines and public discourse.
The U.S. Treasury has attempted to limit the attractiveness of corporate inversions, namely through Notice 2014-52 and Notice 2015-79. In Mr. Stack’s testimony (detailed above), he discussed the U.S. Treasury’s intention “to examine additional ways to reduce the tax benefits of inversions, including through limiting the ability of inverted companies to strip earnings with intercompany debt.” Mr. Stack acknowledged that the U.S. Treasury alone cannot unilaterally limit the flow of inversions without legislation from Congress and “(t)o this point, we look forward to working with Congress in a bipartisan manner to protect the U.S. tax base, to address the issue of corporate inversions, and to reform our business tax system.”