The 34 member countries of the Organisation for Economic Cooperation and Development (OECD) coordinated to develop a Base Erosion and Profit Shifting (BEPS) plan. BEPS is the practice of artificially shifting income into tax-advantaged environments, generally through the abuse of transfer pricing. A coherent BEPS Action Plan was finalized in October 2015 and the G-20 finance leaders gave their approval shortly thereafter. U.S. Treasury Secretary Jacob Lew released a statement that the United States was “encouraged that a consensus was reached on BEPS across the entire G-20 and that non-G-20 developing countries also participated in the work.”
The OECD is not a government, therefore, the tax authorities will be required to pass laws and regulations to support the BEPS Action Plan and compel companies to comply with those rules. Since the release of the plan, legislation around the BEPS Action Plan has been taking shape. The U.S. Senate Finance Committee and the House Ways and Means Subcommittee on Tax Policy held separate hearings on BEPS in early December 2015. On December 21, 2015, the IRS released proposed regulations requiring multinational enterprises to provide information on a country-by-country basis related to the multinational group’s income and taxes paid, as well as indicators of the location of economic activity within the group.
Officials from 31 countries signed an agreement in January 2016 that triggers the automatic exchange of country-by-country reports on multinational corporations.The U.S. did not sign the agreement, but even if the U.S. does not implement the country-by-country reporting, or delays implementation, U.S. multinational companies will be required to file reports if their group includes entities with operations in a foreign country in which country-by-country requirements have been implemented.
Countries within the European Union are taking the lead on instituting reporting requirements. The United Kingdom issued final rules on February 26th on country-by-country reporting. The Netherlands, Belgium, Spain, France, Poland and Germany have already introduced or passed legislation that increases the transfer pricing reporting requirements. Australia, Mexico and Brazil have also introduced legislation related to the BEPS Action Plan, with more countries likely to follow suit.
The OECD BEPS Action Plan and subsequent legislation marks a defining moment for transfer pricing compliance. Multinational companies will have to make significant changes to manage the additional compliance requirements. Non-compliance will become more costly, arduous and time consuming. Tax executives should work with their advisors to minimize risk and get out in front of the reporting requirements, which include increased audit scrutiny, country-by-country reporting and new anti-avoidance legislation.