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UK: the first OECD nation commit to country by country reporting
Also published in Bloomberg BNA's Transfer Pricing International Journal, November 2014
In the latest twist in the ongoing saga of country by country reporting, the UK has announced it shall be the first OECD territory to implement the controversial measure. The UK has re-affirmed its commitment to tackling tax avoidance, while at the same time risked angering multinationals, already fearful of the measure designed specifically to increase detection risk of tax-driven structures. Taxand UK discusses the impact that this decision has had on the global marketplace.
In a statement released by the Financial Secretary to the Treasury of the UK, David Gauke announced in September that the UK will spearhead the global adoption of the OECD’s country by country reporting template. This template, gaining significant attention in recent months as part of the Base Erosion and Profit Sharing (BEPS) initiative, is designed to report numerous components of a multinational’s business model typically only available to a fiscal authority previously in the event of an audit. While the specific components of the template may still be subject to change (and indeed a specific timeframe for UK legislative adoption has not been released), the components are anticipated to include:
- The number of staff in a given territory (split per entity)
- Profits attributable
- Tax paid
The logic being that if a company has the majority of staff and significant revenue in a territory, yet minimal profits and tax in that same territory (particularly if significant profits are being declared in an additional territory with very few staff), the tax authority may wish to look into the structure further.
While it may come as a surprise that the pro-business UK has chosen to stick its head above the parapet in this instance (becoming the first of any of the 44 OECD territories to adopt country by country reporting), if the history of the template is taken into consideration, this decision becomes slightly more expected. The UK was the first territory to suggest the implementation of the template during its G8 presidency in 2013, in light of significant negative media coverage around whether (usually foreign) companies were paying their ‘fair share’ of tax on UK based activities. As such, considering the timing of the OECD’s own initiative regarding BEPS, the UK lobbied the OECD to include such a template in the ultimate BEPS deliverables. The lobbying was successful, and the template is now a core feature of the deliverables, despite its relative unpopularity.
Multinationals and advisors alike have generally met the template with negativity, noting the vastly increased compliance burden such a template could create, and the superficial nature of the information offered. Many multinationals have expressed significant concerns that systems across the globe may not be aligned to produce such a global overview consistently, and as such significant efforts will be required to render the data cohesive to fit into a global comparison matrix. This is despite the treasury claiming in their press release that the template will give tax authorities the information they need and minimise the additional administration burden on businesses.
Further, the view has often been expressed that while such a template may raise a red flag to tax authorities about tax-efficient structures, it will also raise needless questions about conventional structures. Without, for example, a loss brought forward column (arguably the most overlooked tax reduction method by modern media) – how can a fiscal authority truly place a value on the taxable profits attributable to a territory?
While the UK has chosen to lead this campaign, it will most certainly not be alone for long. Germany in particular has already expressed strong support for the template, and is typically only too eager to legislate against tax avoidance. Further, considering the quantity of multinationals with operations in the UK, which will become required to produce this information for HM Revenue & Customs, it is all too likely that other nations will consider it low risk to bring in the same template locally. This will become a component of annual reporting going forward, and the only impact will be further scrutiny. Unfortunately for multinationals, the war against country by country reporting has been lost.
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Multinationals must now prepare for country by country reporting. The UK may have been the first, but will certainly not be the last to announce implementation of this measure. As such, advice should be sought regarding any previously implemented structure to ensure that:
- The structure, as is, remains compliant from a domestic tax and transfer pricing perspective (particularly in ‘core’ OECD nations such as the UK and Germany)
- The structure is audited by advisors to ensure that when reported under the template, it will not raise any red flags to areas of concern
- The structure is ‘BEPS compliant’, particularly considering by the time the template is legislated, the BEPS deliverables will likely have been introduced, and fiscal authorities may start referencing many of these measures in audits. This may include ensuring that staff are contractually employed by the entity they do the majority of their work for in a territory
- Anticipate similar queries from multiple nations when the template is ultimately adopted more widely
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