Not a week goes by without news of controversy surrounding the international corporate structure of a major U.S. firm, be it Apple, Starbucks or Amazon. Each company has come under scrutiny for placing rights to its intangible assets, such as trademarks and patents, in Ireland, Luxembourg or the Netherlands – countries with corporate tax rates significantly lower than the American levy of 35 percent.
A great deal of attention has also been paid to so-called inversion transactions, whereby a large U.S.-based multinational merges with a smaller competitor in a lower-tax jurisdiction and relocates its headquarters, and much of its profits, resulting in a lower tax bill but few changes to its operations.
As a way of identifying and combatting these strategies, member countries of the Organization for Economic Cooperation and Development (OECD) and the G20 have been working since February 2013 to implement a 15-point Action Plan to combat “base erosion and profit shifting” (BEPS). The information reporting required by Action 13 is one of the more urgent and impactful pieces of the BEPS initiative for large multinational entities (MNEs), in its initial phase generally applying to companies with consolidated revenues in excess of €750 million (U.S. $850 million).
What is Base Erosion and Profit Shifting Action 13?
There are three main components to the documentation requirements of Action 13: the master file (MF), local file (LF) and Country-by-Country Report (CbCR), with participation in each varying by member state.
- MF: The master file is a collection of relevant information on a multinational group as a whole, including organizational structure, financial statements and descriptions of supply chain, as well as financing, intercompany services and intangibles strategies.
- LF: The local file will include very similar information to the MF, but on a country-specific level for each jurisdiction where the company has a presence. The LF also must include a description of transfer pricing assumptions, agreements and methodology.
- CbCR: The country-by-country report is made up of two tables of data, grouped by country and entity. The first is used to identify the main business activities of each entity. The second will reflect quantitative data by country including revenues, profit before tax, income tax paid and accrued, stated capital, accumulated earnings, number of employees and tangible assets. MNEs with a parent company based in the U.S. will prepare and submit Form 8975 with its federal return to satisfy this requirement.
Action 13 documentation may serve as a roadmap to audits for taxing authorities, so care should be taken to ensure that all three parts work together to tell the same story. Reporting data that appears inconsistent could invite increased scrutiny.
When do BEPS rules take effect?
Implementation of the rules are effective in most countries for fiscal years beginning on or after January 1, 2016 (July 1, 2016 in the U.S.). While due dates for preparation and/or submission of the three components vary by country (as early as May 2017 for China and the Netherlands), most are due by the tax return due date or one year from the end of the fiscal year in question. There is also an obligation to notify taxing authorities in each country which entity is the parent of the MNE, generally by December 31, 2016.
Is my company responsible for reporting?
The primary responsibility for reporting rests with the multinational entity’s parent company. The CbCR will be reported to the taxing authorities in its home country, then sent to other nations under to-be-completed information sharing agreements. In the U.S., a multinational parent’s filing of Form 8975 with its federal return will allow the IRS to share the data with the applicable member countries. For most jurisdictions the MF and LF are to be maintained, but only submitted to authorities upon request. Penalties apply for MNEs that fail to maintain the files as required. While the parent is ultimately responsible, significant coordination will be required by personnel at the local entity level to gather and document the information required for the MF, LF and CbCR.