The American Institute of CPAs has written to the Internal Revenue Service recommending some changes in the IRS’s proposed regulations for country-by-country reporting by multinational corporations of financial information to curb tax avoidance.
The proposed regulations were issued last December as part of an effort by the Organization of Economic Cooperation and Development to crack down on tax avoidance by multinational corporations. The U.S. Treasury Department has worked with the OECD and the Group of 20 nations on those efforts, which also included the Base Erosion and Profit Shifting, or BEPS, action plan. The proposed regulations would require annual country-by-country reporting by U.S. businesses that are the ultimate parent entity of a multinational enterprise, or MNE group, and have annual revenue for the previous annual accounting period of $850 million or more.
In line with commitments the U.S. has made to its OECD and G20 partners, the IRS and the Treasury proposed the regulations. They would require the U.S. parent company of large, public and privately held multinational companies to provide certain financial data to the IRS on a country-by-country basis. The information is meant to provide tax authorities with better tools to identify where a company might be artificially shifting taxable profits into tax havens—a red flag for tax avoidance warranting further investigation.
The AICPA made a number of recommendations in its March 21 letter, including allowing a voluntary opt-in for calendar year 2016 reporting and a robust National Security Exception for the information required to be reported. In addition, the AICPA requested clarification Monday on several issues.
The AICPA’s six recommendations are:
1. Allow U.S. MNE groups to elect on a voluntary basis to apply the proposed regulations for tax years beginning on or after Jan. 1, 2016 and before the effective date of the final regulations
2. Clarify that a U.S. MNE group’s reporting is based solely upon its own annual accounting period and is not contingent on the timing of the annual accounting periods of its foreign constituent entities;
3. Clarify the classification of certain assets as tangible, intangible or cash equivalents;
4. Clarify issues related to the reporting of the number of full-time equivalent employees for each tax jurisdiction included on Form XXXX, Country-by-Country report;
5. Confirm the status of U.S. possessions and territories and whether their treatment as foreign jurisdictions is correct; and
6. Allow a National Security Exception for information contained in the required Country-by-Country reports.
The letter provides a detailed discussion of each of the six recommendations.
Other groups are also weighing in with comments in time for the March 22 deadline for comments.
Global Financial Integrity (GFI), along with more than 100 other members of the Financial Transparency and Accountability (FACT) Coalition, submitted a letter Tuesday to the Treasury Department and the IRS urging them to maintain and strengthen a proposed rule on country-by-country reporting that would bring more transparency to how U.S.-based companies book profits and pay taxes in many of the countries in which they have subsidiaries. The groups believe the proposed rule could give the IRS and, potentially, foreign tax authorities, a window into how multinational companies may be manipulating the international tax system and avoiding taxation in the U.S. and other countries.
“We are extremely pleased to see that the government is moving swiftly to implement this international commitment, but we’re concerned that Congress will be unable to access the data, which will really frustrate the intent of having this additional transparency,” said Heather Lowe, legal counsel and director of government affairs for GFI, who organized FACT’s letter. “The IRS is treating the new form that large multinational companies will have to file as tax information, which means that it will be shielded from the public and even Congressional view by a high level of confidentiality. However the information captured on the form is simply a disaggregated version of information already publicly available for many companies on their SEC filings. Congress must be able to access this information to analyze it and propose the kind of tax reforms necessary to stop corporate tax dodging for good.”
The FACT Coalition’s comment letter also recommends that the reporting include a larger percentage of the corporate group than what has been proposed, and that the basic financial information required by the form be made publicly available.
Other recommendations include the addition of two new columns on the form—one for offshore income on which the company is deferring taxes and another to capture the company’s reserves for “uncertain tax positions.” These are important pieces of information that are unique to American corporate tax planning and would go a long way to helping the government understand how corporations may be engaging in aggressive profit-shifting.
GFI president Raymond Baker added, “This rulemaking is an unprecedented opportunity to finally bring transparency to one of the most economically damaging practices that multinational companies engage in. The U.S. has lost billions in corporate tax revenue from this kind of activity, and developing countries lose even more. This proposed regulation is a start, but the government needs to make their international commitment to tax transparency real by publishing a stronger rule that puts the information in the hands of the people, or at least the people they have elected.”