The action plan for the prevention of base erosion and profit shifting (”BEPS”) approved in 2013 by the Organization for Economic Cooperation and Development (”OECD”) and by the group of twenty ministers of finance and governors of central banks (”G20”) brought to the attention of the public two important aspects that should be considered when fighting against profit shifting.
The first aspect considered was that tax authorities in countries all over the world did not have the necessary instruments to fight against profit shifting and taxable base erosion and that the implementation of systems and tools that must render tax information transparent should be implemented as concerns companies that are members of multinational groups.
The second aspect considered was that, even if instruments existed, a joint and uniform mechanism would still be necessary to assess risks brought by transfer pricing and other risks pointed out by BEPS as concerns the profit shifting and taxable base erosion.
As concerns instruments for fighting against price shifting and taxable base erosion and systems and tools for rendering information transparent, EU Member States had already implemented Directive 2011/16/UE of the Council providing for the exchange of information upon request in several fields and which, theoretically, would have allowed for the taking of actions in this respect.
However, as (i) the objective of Directive 2011/16/EU was rather a general one and not an objective specifically focused on preventing the profit sharing and taxable base erosion and (ii) the exchange of information was done upon request only, it did not properly operate and, therefore, an update of Directive 2011/16/EU was necessary, by means of Directive 881/2016, which brought concrete specifications as to systems and tools that actually force the information to become transparent and the automatic exchange of a pre-defined set of information in the fiscal field between European countries.
Measures provided by Directive 881/2016 resulted from action 13 from BEPS plan of OECD, taken over by many countries outside the OECD and the EU (for example by Singapore, China, etc.). Thus, we can say that all premises exist, that the exchange of information will be put in practice even at international level, regardless if certain countries are part of the OECD or the EU or not.
Moreover, OECD published a manual to help tax authorities to interpret reports for each country, CbCR (Country by Country Reporting), and, eventually, to help them focus all their resources on a vast verification of companies whose financial-fiscal indicators show a possible profit shifting risk.
Considering the above, we may say that the CbCR topic, included in the BEPS plan, reached the final implementation stage at the level of the EU and OECD Member States and at the level of some of the non-member states, as well.
Effects of transposing the EU Directive 881/2016 about the mandatory automatic exchange of tax information into the European Union countries law
As the deadline imposed by the European Union for transposing the EU Directive 881 / 2016 about the mandatory automatic exchange of tax information (i.e. 4 June 2017) approaches, EU Member States transposed all changes brought to this directive into their local laws in an accelerated rhythm. Without making important changes to the European text, the newly adopted legislation offered the premises of a new source of information that may be used during aax inspections or during risk analyses preliminary to the commencement of tax inspections. By interpreting the new law, one can conclude that there are many categories of companies in European Union that are part of groups whose consolidated turnover (according to the provisions of Directive 2013/34/EU of the European Parliament and of the Council from 26 June 2013) is above EUR 750 million and that will have the obligation to send a report for each country – CbCR, as follows:
1. companies that must file the report for each country – CbCR – as final parent company;
2. companies from groups whose final parent companies are in other countries and that, most probably, will appoint surrogate parent companies to file the report for each country – CbCR;
3. companies that have no other branch in any of the countries in which the law on the reporting for each country – CbCR – is implemented or whose final parent companies / companies appointed to file the report for each country – CbCR – are resident in one of the countries that: (i) are not part of the European Union (i.e. so that the automatic exchange of information be made based upon Directive 881/2016 transposed into local laws).
4. companies in systemic failure: for example when tax authorities from one country do not receive the report for each country – CbCR – from jurisdictions where groups filed this report either due to the suspension of the automatic exchange of information, or due to the fact that only exchanges of information with Governments that are ISO/IEC 27000 certified as concerns the security of information was requested in these countries were reports were filed, or because such jurisdictions simply refuse to file such reports to that country tax authorities;
5. other companies appointed by final parent companies as being surrogate parent companies or other appointed reporting entities.
The text of the EU Directive 881/2016 is quite franc as concerns the purpose of collecting such information, namely the carrying out of risk analysess on transfer pricing or other fiscal aspects.
Those that have undergone tax inspections on the transfer pricing topic must have probably seen by now that some of the adjustments made by tax authorities were often made without considering the key factors, such as functional profile, economic circumstances, business strategy or negative impact of extraordinary events.
Even if the bill of law specifically provides that no transfer pricing adjustments can be made strictly based upon simplistic information presented in these reports for each country – CbCR, we are expecting a major intensification of the aggressiveness of tax authorities as concerns branches of multinational groups that record losses or fluctuating results. All such inspection or risk analysis actions will be carried out having as background the extensive use of information in the reports for each country – CbCR.
Moreover, it is expected, that tax authorities will take advantage from their option to apply fines bigger than approximately EUR 7.000 for not filing or delayed filing of reports for each country – CbCR .
To make the issue international, after the outbreak of scandals in Panama Papers, LuxLeaks and Paradise Papers, the passing to the next level of tax transparency is more and more obvious, namely obliging multinational groups to publish such reports for each country – CbCR. The first step in this respect was already made on 12 June 2017 when the European Parliament approved the proposal that reports for each country – CbCR – be accessible to the public.
As part of this scenario, once with the exposure, the public pressure of different communities on multinational groups will importantly rise. If until now the spectre of risks was dominated by the financial risk, from now on it might be accompanied by the reputational risk, whose effects are hardly quantifiable.
It is already becoming obvious that during the next period many measures will be implemented in an accelerated manner, leading to total fiscal transparency and in the close future we foresee a significant decrease of the current reporting threshold by the consolidated turnover of EUR 750 million.
Questions to which everybody expect answers are (i) if all such measures will eventually lead to hardening the competition between multinational and local groups, (ii) if the latter will be advantaged and last (iii) if all such measures will result into major disputes between Governments of countries with low tax rates and those of countries with high tax rates.