In October 2015, the member countries of the Organization for Economic Cooperation and Development (OECD) released 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.
BEPS Action 13 calls on nations to obtain country-by-country reports from multinational companies on their intercompany transactions of goods, services and intangibles and to exchange these reports with the tax authorities in the countries in which the multinational operates. The objective is to provide tax authorities with information they can use to identify whether a multinational operating in their country is likely to be avoiding tax through transfer pricing or other means.
The IRS has entered into country-by-country exchange agreements with 20 countries, including Australia, Belgium, Brazil, Canada, Denmark, Estonia, Guernsey, Iceland, Ireland, Isle of Man, Jamaica, Latvia, Malta, Netherlands, New Zealand, Norway, Republic of Korea, Slovakia, South Africa, and the United Kingdom. The IRS has stated that each country has satisfied U.S. requirements for protecting data. The exchange of the reporting data will be accomplished via competent authority arrangements in circumstances where the U.S. has an underlying tax treaty or other tax information exchange agreement with a nation.
On August 30, the IRS announced that it is negotiating with 20 countries to annually exchange country-by-country reports, namely Colombia, Czech Republic, Finland, France, Germany, Hungary, India, Israel, Italy, Jersey, Liechtenstein, Lithuania, Luxembourg, Mauritius, Mexico, Poland, Portugal, Slovenia, Spain, and Sweden.
The agreements between the U.S. and other countries make it easier for the IRS to obtain key information about foreign multinational operating in the U.S. Even if the U.S. does not reach a deal with another country to make the report exchange, a country can still require the multinational to provide the information directly.
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.
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