Since their implementation in 2015, country-by-country reporting and information exchange related to base erosion and profit shifting have proved to be game changers for international tax transparency, despite potential design flaws in accessing the reports.
In October 2015, the OECD finalized and released its BEPS reports on 15 action items, which the G-20 endorsed at its annual summit November 2015 in Turkey. Since then, the OECD has increased global tax transparency by providing for CbC reporting under action 13 (transfer pricing documentation and CbC reporting) and facilitated the exchange of tax rulings under action 5 (harmful tax practices).
Regarding BEPS action 5 on harmful tax practices, the OECD has called for countries to automatically exchange summary information about specific types of rulings issued by tax administrations. This helps national tax authorities gain a better understanding of the cross-border tax treatment of transactions related to the rulings and determine appropriate adjustments to taxable income.
In addition to BEPS, the adoption of the OECD's common reporting standard (CRS) in 2014 has allowed significant strides in increasing the volume of automatic exchange of information (AEOI) between countries.
“These three initiatives show that tax transparency and international tax cooperation have now become the global norm and have matured well beyond an ad hoc case-by-case system of exchange of information into part of the core business of tax policymakers and tax administrations alike," Pascal Saint-Amans, director of the OECD Centre for Tax Policy and Administration, told Tax Notes.
Saint-Amans noted that over 90 jurisdictions have implemented CbC reporting and more than 2,500 information exchange relationships exist between jurisdictions that facilitate the automatic exchange of CbC reports. Further, the exchange of tax rulings has urged countries to adopt a stricter, more formalized approach to the issuance of rulings, he said.
Has the OECD Done Enough for Developing Countries?
CbC reporting — one of the BEPS project’s four minimum standards — provides jurisdictions with information on the activities and revenue of multinational enterprises, which allows tax administrations to assess transfer pricing risks and overall tax compliance. Action 13 requires countries to implement CbC reporting for parents of MNEs with at least €750 million in annual revenue.
To satisfy the minimum standard, CbC reports must follow the reporting template set out in the action 13 report. The reporting template requires a jurisdiction-by-jurisdiction breakdown of the group’s unrelated- and related-party revenue, pretax profit, income tax paid and accrued, employee head count, tangible assets, and accumulated earnings.
Sol Picciotto, coordinator of the BEPS Monitoring Group, told Tax Notes that the OECD needs to improve developing countries’ access to CbC reporting, highlighting that during a public consultation, an official from a developing country said it would cost the country $1 million to introduce the systems necessary to participate in effective information exchange. Markus Meinzer, a director at the Tax Justice Network (TJN), said the OECD’s tax policies are systematically biased against the interests of lower-income countries, and that this must be urgently addressed.
Saint-Amans said the OECD acknowledges that lower-income countries have capacity limitations and face greater challenges in participating in processes related to BEPS minimum standards. He said the OECD has provided developing countries with access to 41 tailored induction programs to help them identify and implement priority base erosion and profit-shifting measures and provide support in the peer review processes for the BEPS minimum standards.
Developing countries' participation in the CRS and BEPS actions has significantly increased in the last five years, Saint-Amans said, with 90 countries participating in the work of the OECD’s Global Forum on Transparency and Exchange of Information for Tax Purposes and 66 participating as members of the inclusive framework on BEPS.
Nevertheless, many developing countries, including African countries, have raised fears of immense economic losses resulting from decisions of the OECD inclusive framework. According to Logan Wort, executive secretary at the African Tax Administration Forum, many of the BEPS project's topics, including CbC reporting standards, are not high on developing countries’ agendas. Wort also said that in Africa and other developing countries, the tax administrations are not the policymakers, which fosters a gap in the political policy process that must be addressed.
According to Oxfam’s comments from the OECD’s public consultation on BEPS action 13 in March, “developing countries are more dependent upon the corporate income tax, are more exposed to profit shifting, and are expected to mobilize more domestic revenue to meet the Sustainable Development Goals.”
Didier Jacobs, a senior policy adviser at Oxfam, told Tax Notes it is important that CbC reports are published. But Oxfam noted in its comments that five years after the implementation of CbC reporting, low-income countries still do not have access to the reports. “Only three lower middle-income countries have received some data: India, Indonesia and Pakistan. The legal and administrative requirements to access the data have proved too onerous for developing countries,” Oxfam said.
Despite these setbacks, Meinzer said there is a silver lining to the difficulties in accessing CbC reporting data. “By making the process of accessing CbC reporting data unnecessarily awkward and costly, the OECD inadvertently spurred some countries to enact simpler regulations, openly defying [the] OECD's constraints, by requiring direct local filing of CbC reports by subsidiaries without OECD-authorized exchange arrangements,” he said.
A Look Forward: The Future of BEPS
“The availability of CbC reporting is a game changer because it means tax authorities shift their focus to looking at MNEs as unitary enterprises and consider the allocation of their income,” Picciotto said.
Meinzer agreed that the key contribution of the BEPS project was the adoption of CbC reporting, which was a long-standing proposal of the TJN. But Picciotto said the design of the CbC reporting template must be improved, as suggested in the submission by the BEPS Monitoring Group.
Looking forward, Picciotto said that “the best solution would be publication of CbC reports. At the very least, the OECD could allow local filing obligations.” According to an April 2019 report by the Financial Accountability and Corporate Transparency Coalition, there is global demand for greater tax transparency, with widespread calls for public CbC reporting instead of confidential reports available only to national tax authorities.
The CbC reporting requirements in the action 13 report generally apply only to the ultimate parent entity’s jurisdiction of residence, which must automatically exchange the reports with the jurisdictions of the MNEs’ other constituent entities. Thus, a local filing requirement can only be imposed when the ultimate parent’s jurisdiction does not implement CbC reporting or fails to effectively exchange reports.
Meinzer said the design of CbC reporting has “clipped its potential for transformative corporate transparency, accountability, and tax behavior.”
“By redefining CbC reporting data as tax data as opposed to accounting data, the OECD's major capital exporters have succeeded in shrouding the data in tax secrecy. Through the extremely cumbersome exchange protocols for this suddenly highly confidential tax data, the OECD has excluded many governments from accessing and using the data for ensuring fair taxation of multinational companies operating on their territory,” Meinzer said.
According to the OECD’s latest peer review report on the action 13 CbC reporting initiative, released September 24, 40 of the 131 jurisdictions reviewed still need to establish or finalize the necessary domestic legal or administrative framework for CbC reporting. The report says 34 countries, including the United States, need to make improvements to specific areas of their framework.
“The world looks on and questions if the OECD is fit for purpose, as it has effectively imposed all the compliance costs for CbC reporting on companies but failed to deliver most of the public benefits to most of the world’s population,” Meinzer said.
Saint-Amans said that five years after the implementation of the CRS and BEPS actions, the OECD is reviewing the policies more broadly to ensure they remain “fully fit for purpose toward the future.”
Beyond BEPS: The Emergence of AEOI Networks
The CRS provides a standard for jurisdictions to obtain from their financial institutions account information of nonresidents and automatically exchange it with other jurisdictions annually. The implementation of the AEOI standard required jurisdictions to have all necessary laws in place to start exchanging information under the standard by the end of 2018 and to activate agreements with all interested appropriate partners by the end of 2019.
In 2019 nearly 100 countries exchanged information on 84 million financial accounts worth a total of €10 trillion, increasing tax transparency and aiding the fight against offshore tax evasion, according to a June 30 OECD release. According to the release, countries have been moving “ever closer to the goal of eradicating banking secrecy for tax purposes.”
The release also says that the volume of AEOI significantly increased from 2018, the first year of information exchange statistics, almost doubling in financial accounts and total assets. In 2018 countries had exchanged information on 47 million financial accounts with assets worth €4.9 trillion.
According to a July 29 OECD release, many developing countries have begun implementing the CRS and CbC reporting, but several jurisdictions have yet to sign and ratify the Multilateral Convention on Mutual Administrative Assistance in Tax Matters (MAAC) (2010 protocol), a multilateral treaty relating to BEPS-related exchanges of information and the legal basis for the CRS. Saint-Amans told Tax Notes that more developing countries would be joining the MAAC by the end of September. On September 29 Botswana, Eswatini, Jordan, and Namibia signed the convention.
The OECD has continuously aimed to expand developing countries’ exchange of information (EOI) networks. It published a toolkit July 29 that provides step-by-step guidance on the procedures to join the MAAC. The toolkit is targeted at developing countries and provides them with substantive requirements for joining the MAAC. There are currently 141 jurisdictions participating in the MAAC, according to OECD data collected as of September 29.
According to a June 25 report from the Africa Initiative, supported by the OECD’s Global Forum and other key organizations, the EOI networks of African countries have increased to 3,262 bilateral relationships in 2019, up from 685 in 2013. The report attributes the expansion to more African countries joining the OECD’s MAAC, resulting in millions in tax for eight countries over a five-year period. In total, eight African countries were able to track down $189 million in additional tax between 2014 and 2019 thanks to such requests, the report adds, without identifying the countries.
According to Saint-Amans, extensive technical assistance programs are underway at the level of the Global Forum to ensure that an increasing number of developing countries can exchange CRS information.
“The experience from the implementation of the CRS and the BEPS actions has shown that international tax policy change on a global scale can only occur swiftly and consistently when the policy development stage is followed by a hands-on strategy to facilitate the implementation in all interested countries,” Saint-Amans said. "The experience of the last years will no doubt be extremely helpful in making sure that the future new policy framework for the digital economy can be successfully implemented by countries around the world."