Finland has proposed its new country-by-country (CbC) reporting requirements, having an effective date of 1/1/2017, as further summarized in EY’s Global Tax Alert provided for reference. Other countries have legislated CbC 2016 effective dates, thus a Finland multinational that does business in other countries requiring a 2016 effective date CbC report will be looking to adopt a surrogate country for its 2016 tax year.
This delay in effective date, while the intention may have been to help Finnish headquartered multinationals, presents significant complexities for their 2016 CbC reporting requirements. However it does the provide the Finnish / US tax authorities another year to ensure reporting processes are in place to review, and exchange, CbC information.
This legislation mirrors the US proposed regulations (i.e. Final Regulations yet to be issued), which delays the effective date past 2016.
This complexity, although anticipated by the OECD’s BEPS Actions in identifying a surrogate mechanism, understates the practical uncertainties that loom ahead. For example, some issues are called into question:
- Will the choice of a surrogate country lock in their CbC requirements, as would be the case if its present headquarter jurisdiction adopted CbC for 2016? Or could other countries that have add-on CbC requirements, such as Mexico’s intercompany transactional detail, claim/assert that their local requirements could apply in a surrogate situation since the headquarter jurisdiction is not subject to the CbC automatic exchange of information?
- The search for a surrogate country will entail the review of treaty exchange mechanisms to reduce additional CbC filings, and complexities, in other countries.
- The identification of a surrogate will require review of CbC legislation by every country to ensure that a surrogate’s reporting / information exchange satisfies the literal reading of statutory requirements. This comprehensive review, that may not have been required by a US or Finnish multinational due to extensive exchange of information legislation, will need to be read in the broadest sense to avoid penalties.
- The identification of a surrogate has not been expressly anticipated by other countries that have proposed CbC legislation, apart from addressing the non-applicability of automatic exchange of information requirements for CbC reporting.
Post BEPS complexity increases with delayed reporting years for CbC reporting. It may take some time to fully understand all the nuances and complexities of surrogate reporting to ensure potential CbC disclosures are timely met and penalties avoided.
With these complexities becoming reality, countries should clarify CbC reporting in their respective jurisdiction by CbC surrogates.