The OECD’s base erosion and profit-shifting project requires large multinational businesses to file country-by-country reports with the tax authorities in their home jurisdiction. The reports should detail the corporate structure, including deployment of labor and capital, broken out by jurisdiction. The first CbC reports are due this year.
When the OECD first proposed the idea, businesses were skeptical. Aside from the challenges of designing new global reporting and compliance systems, they did not want the public — or their competitors — to see their tax structuring strategies. They were also concerned that the public and the press would not understand the information in the reports, furthering the common perception that large multinationals do not pay their fair share of taxes.
In response to those concerns, the OECD decided against requiring tax administrations to make the CbC reports public. Now efforts are underway in several places — including Europe and Australia — to require some form of public disclosure of the CbC reports. In the U.S., keeping the reports private was the key concession that led it to support CbC reporting in the first place. Efforts to change the negotiated rules after the fact are a major concern to the United States, as well as to U.S. multinational companies.
Expert negotiator Herb Cohen says that negotiations always start before they begin and always end after they are over. The current discussion over whether to make CbC reports public exemplifies that axiom. In the face of this inevitable change, what’s a multinational tax director to do?
Fortunately, public corporations have a wealth of experience to draw upon. Since the enactment of modern securities laws in the 1930s, publicly traded corporations in the U.S. have had to make public key aspects of their finances. This includes information about tax structures, effective tax rates, and reserves for uncertain tax positions. As with financial reporting, corporate communications departments can help tax directors and other executives explain to the public the information in their CbC reports.
Rio Tinto, one of the world’s oldest and largest mining companies, does that now. In 2010 it started its own tax transparency project, publishing the first of its annual CbC reports the following year. The company recently released its annual “Taxes Paid” report, showing it paid $4 billion in taxes worldwide — at an effective rate of 22 percent — about three-quarters of it to Australia (p. 205). If Rio Tinto can tell the public about its tax structuring, including its activities in so-called tax haven countries, the rest of the corporate world should have nothing to fear from public reporting.
While many countries are gathering information and creating registers of beneficial ownership, the battle over sharing the information in those registers mirrors the discussion over public CbC reporting. The OECD’s Pascal Saint-Amans recently expressed serious doubts about the prospect of creating a global public register, as some in Europe have proposed. What’s important, he said, is not whether the information is public, but whether the information “exists, is available, and is accessible by the tax authorities” (p. 222).
But what constitutes beneficial ownership? Recently the Italian Supreme Court applied a substance-over-form analysis in considering whether a “pure” holding company could be a beneficial owner. The Court decided that a French holding company acting as a conduit to funnel earnings to U.S. owners was a beneficial owner. Elio Andrea Palmitessa discusses the case and its implications (p. 259).