2015 has been a productive year for the Base Erosion and Profit ShiftingProfit shifting is when multinational companies reduce their tax burden by moving the location of their profits from high-tax countries to low-tax jurisdictions and tax havens. (BEPS) project. The OECD published the BEPS recommendations in October of last year and has since began its campaign to convince member nations to implement their suggestions. Consensus among member nations poses the biggest challenge for the BEPS project.
To some extent the OECD has had some success already. Many national have agreed to implement the Automatic Exchange of Information, a key recommendation from the BEPS project. The Multilateral Competent Authority Agreement (MCAA), an OECD initiative, has collected agreements from 78 nations to implement a Common Reporting Standard (CRS) and an automatic exchange of information by 2018. This includes all OECD countries except for Israel, Turkey, and the United States.
Although the United States has not signed the MCAA, the U.S. Treasury and IRS has proposed country by country reporting based on the CRS for U.S. persons with annual revenues of more than $850 million. The proposal signals the intent of the current administration to implement the BEPS recommendations.
Even with the momentum behind the Automatic Exchange of Information, there are several hurdles ahead. Many of the signatory countries must ratify the MCAA in the legislature and agree to its implementation. This has proven difficult even in the strongest supporters of the MCAA.
The French parliament, for example, rejected a measure to implement the country by country reporting for French companies. France’s Secretary of State for the Budget, Christian Eckert, argued that the measure would damage the country’s competitiveness, but expressed support for automatic reporting if other countries adopt it simultaneously.
Each country has considerable leeway to determine which companies are required to report detailed information concerning their operations, both domestically and abroad. Smaller companies are often exempt because the cost of compliance would be overly burdensome. Other exemption may be granted for companies operating in nationally sensitive parts of the economy. These reporting loopholes could be added as a means of shielding politically influential companies from reporting requirements.
The United States has expressed concerns regarding national security if the Automatic Exchange of Information was implemented. In the proposal drafted by the U.S. Treasury and IRS, they suggested an exemption for companies working with federal agencies, such as the Department of Defense, is needed to protect companies with national security operations. Such an exemption would give contracted companies a distinct strategic advantage, creating an additional benefit for securing a government contract.
Moving forward in the New Year, consensus between nations is likely to be the biggest hurdle to the Automatic Exchange of Information program. Governments throughout the OECD realize the disadvantage bestowed upon domestic companies if the country adopts automatic reporting unilaterally. In addition, governments have an incentive to create exemptions to protect economically important companies. The OECD members are caught in a prisoner’s dilemma where the first movers are likely to pay a steep price. Which nations have the political will is a question for 2016.
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 Forty-three of the 78 nations have agreed to implement the CRS by 2017