The OECD’s new terms of reference to assess the implementation by countries of BEPS Action 13 related to Country-by-Country Reports (CbCR) may penalise countries, especially developing ones, that try to obtain by their own means the CbCR’s valuable data needed to tackle multinational tax avoidance.
Country-by-Country Reports (CbCR) (to be prepared by multinationals with group revenues over EUR 750 million) will offer information on multinational economic activity, profits and tax paid broken down for each country where they operate. This CbCR “map” will reveal any misalignments between the location of real activity, and where profits are ultimately declared to hold both multinationals and tax havens to account.
We have long advocated that this CbCR map should be publicly available, so that all tax authorities, civil society and journalists may have access to them. Our suggestion is that multinational companies publish their CbCR maps on their webpages.
But the OECD, which is, after all, a club dominated by the interests of rich countries, disagrees. It wants this map’s information to be fully confidential and to be obtained by authorities only via bilateral automatic exchange of information, in the same way as banking information.
Banking information should be confidential and it makes sense to exchange it bilaterally, as the OECD’s Common Reporting Standard or CRS requires. After all, information on bank accounts held by say, Zambians in German banks is only relevant for Zambia, but no other country could make use of it.
But with CbCR “maps”, the opposite is true. Not only should they be public (because they contain no confidential or sensitive information), but if they are to remain confidential, at least their dissemination to foreign authorities should be as easy as possible.
Once a multinational prepares their CbCR map, that same CbCR map is relevant for every country where the multinational operates. There was thus no need to create a new international legal framework and have countries sign new treaties for automatic exchange of CbCR maps among authorities. Multinationals should have been required to disseminate their CbCR maps to all of their subsidiaries for them to locally submit the CbCR to every tax authority.
But the OECD wanted the complex framework precisely to limit access to CbCR, not only by the general public, but also by developing countries’ authorities. Responding to the OECD’s approach, TJN’s last report advised countries, especially developing countries, not to follow the OECD’s complicated framework enshrined in the Model Legislation that all countries are required to adopt (see the figure below, left side). Since CbCR maps are so relevant to tackle tax avoidance, countries should make sure that they will obtain them one way or another. If any country is unable to receive the CbCR automatically from another country for whatever reason (regardless of the reasons that the OECD legislation contemplates), they should ask for the CbCR map from any local subsidiary resident in their country (“local filing”) as the figure below shows, right side. Otherwise, they may never access the CbCR at all (see text in red in the figure below). Also, for a fuller explanation graphic on CbCR see here.
The OECD approach, based on automatic exchange of information, uses a complex framework that depends on developing countries being able to convince a developed country to sign an international agreement with them. Not only is it complex, but it leads to situations (in red) where the developing country will not access CbCR information they need. TJN’s improved OECD-proposal, while not as ideal as having multinationals publish CBCR information on their websites, at least simplifies the framework and ensures that developing countries obtain the CbCR one way or another.
The new OECD’s Terms of Reference for peer reviews on CbCR however, will penalise countries that do not abide by the OECD’s Model legislation that focuses on restricting “local filing” by subsidiaries. The OECD allows local filing of CbCR maps, only if, among other things, the interested country already has an international agreement to exchange information with the country where the multinational company is headquartered, very likely a wealthy country. Local filing is allowed only when a second international agreement is not in force:
“(c) Limitation on local filing obligation:
(…) iv. that no local filing of a CbC report relating to a particular fiscal year can be required unless one or more of the following conditions have been met with respect to that fiscal year:
(…) b) the jurisdiction in which the Ultimate Parent Entity is resident for tax purposes has a current International Agreement to which the given jurisdiction is a party but does not have a Qualifying Competent Authority Agreement in effect to which this jurisdiction is a party by the time for filing the Country-by-Country Report” (Terms of Reference, page 13; emphasis added)
If the wealthy country (where the multinational is headquartered) does not want to sign the first agreement with the developing country interested in receiving the CbCR map, what happens then? Well, the developing country pays the price: it will not be able to obtain the CbCR at all.
The OECD does say that all jurisdictions should sign agreements with all relevant countries, but it also acknowledges that this takes time1 – and that means time paid for by the country interested in receiving the CbCR map. In the meantime, if the developing country tries to require the CbCR from a local subsidiary, the OECD may penalise it with a bad peer review.
It is clear to us that the OECD does not want local filing (the easier way to access CbCR), and that not only will it give a bad review to those countries that do not respect the Model legislation framework, but the OECD also explicitly welcomes countries not requiring local filing at all:
“Local filing is not required to be introduced in order to meet the minimum standard and the absence of local filing requirements will not affect the outcome of the peer review on CbC reporting” (Terms of Reference, page 18).
The OECD does not seem to welcome civil society involvement either:
“Because peer review is an intergovernmental process, business and civil society groups’ participation in the formal evaluation process and, in particular, the evaluation exercise and the discussions in the CbC Reporting Group is not specifically solicited” (ibid., page 22).
As for developing countries, the only provisions in their favour is that if they cannot implement CbCR provisions or expect to receive the CbCR, they will not be penalised (as long as they prove that none of their multinationals would be covered by CbCR provisions):
“It is recognised that developing countries may face capacity challenges in implementing CbC reporting (…). Many developing countries are interested in receiving CbC reports, and as such will introduce CbC reporting obligations even if they do not have any MNE Groups headquartered in their jurisdiction that would be subject to CbC reporting. This is because introducing domestic legislation for CbC reporting is a precondition in order to receive CbC reports. However, it is possible that there are developing countries that do not have any MNE Groups headquartered in their jurisdiction that would be subject to CbC reporting, and that are not yet ready to receive CbC reports. In such cases, rather than find such developing countries to have failed to implement CbC reporting, the peer review will instead require a certification process whereby the jurisdiction could confirm that there are no MNE Groups within scope that are headquartered in the country and documenting how that fact is known for the year in question” (ibid. page 18; emphasis added).
To sum up, given the OECD’s opposition to public CbCR, developing countries will be on the safe side with regard to blacklists if they do not expect to access the CbCR. If they want to access it, they will have to depend on the discretion of rich countries on whether they will deign to sign an international agreement with them. If a developing country cannot convince a developed country (where most major multinationals are headquartered) to sign an international agreement, and decides to require it from a local subsidiary, it may be given a bad review by the OECD, with the potential of being blacklisted.
The worst part is that developing countries have a greater need to access CbCR to try and address tax avoidance by multinationals, and this information is so general that it should be considered public, so that civil society, researchers and journalists have access to it as well.
1 End note 11 on page 18 of the Terms of Reference Report reads: “It is acknowledged that jurisdictions may not have exchange of information instruments in place with all members of the Inclusive Framework. Jurisdictions are encouraged to expand the coverage of their international agreements for exchange of information. However, as this can take time, for the purposes of the peer reviews, jurisdictions will be assessed on their compliance with the minimum standard in respect of the exchange of information network in effect for the year of the particular annual review”.