In a statement submitted to the House Ways and Means Committee for today’s hearing on the Global Tax Environment in 2016 and Implications for International Tax Reform, the NAM highlighted concerns about some of the recent tax policy developments in Europe that will have a negative impact on U.S. manufacturers.
In particular, NAM members are deeply concerned about proposals in the European Union (EU) and the Organisation for Economic Co-operation and Development (OECD) on disclosure of tax, financial and other sensitive business information that would both impose substantial and unnecessary compliance costs on companies and, in some cases, force release of sensitive, confidential U.S. taxpayer information. These and other recent developments will create a new set of challenges for manufacturers and stand to harm our competitiveness in an already difficult global economic environment.
For more than a year, manufacturers have raised alarms about the proposed information reporting, sharing and disclosure requirements in the OECD’s Base Erosion and Profit Shifting (BEPS) project approved late last year, which include country-by-country reports on global tax and financial information and a master file that includes more detailed global business and financial information including org charts, consolidated financial statements and analyses of profit drivers, supply chains, intangibles and financing.
While country-by-country reports impose a new compliance burden on U.S. global companies, the U.S. Treasury Department plans to collect this information from U.S. multinationals and transfer the reports to other countries through treaty information exchange agreements that include certain confidentiality, consistency and appropriate use standards. According to Treasury, if a foreign tax authority does not comply with these standards, Treasury will suspend transmitting country-by-country reports to the foreign tax authority.
Unfortunately, the master file, which individual countries will require directly from companies, is not covered by the confidentiality, consistency and appropriate use standards that apply to country-by-country reports. Manufacturers believe that putting this sensitive information into the hands of foreign tax authorities, without any clear safeguards to protect confidentiality, will put critical commercial information at substantial risk of public disclosure. At a time of widely reported corporate espionage and high-profile data hacks, there is no guarantee that other countries would not inadvertently compromise companies’ information, a risk that U.S. businesses should not have to face.
Moreover, in some cases, requirements to provide foreign tax authorities with a global organizational chart and consolidated financial statements constitute an unprecedented level of disclosure to foreign governments. Some of the information in the master file also could be considered confidential or proprietary. For example, information about global supply chains could well be considered sensitive commercial information that, if disclosed, would be of high value to a company’s market competitors. And, even if individual pieces of information taken alone may not be sensitive, the master file requires companies to pull it all together as a “blueprint” of the company, which could reveal competitively important strategic information that would be valuable to competitors.
Manufacturers’ concerns about protecting the confidentiality and preventing the misuse of sensitive business information under the BEPS recommendations are exacerbated by recent reports that the EU is working on legislation to require global companies to publically disclose tax and other financial information.
The latest information disclosure proposal—coming on the heels of BEPS—would both impose additional compliance costs on companies and force disclosure of sensitive taxpayer information. While the EU initially indicated that tax information reported to national tax authorities in Europe would not be made public, it appears that they have changed this position. Indeed, the EU proposal contradicts the assertion by the OECD that country-by-country reports would not be made public, “to protect the confidentiality of potentially sensitive information.”
From the NAM’s perspective, the forced public disclosure of large amounts of company tax and financial information—under both BEPS and the EU proposal—likely will lead to even more aggressive foreign audits and tax assessments. Furthermore, given the rhetoric surrounding these discussions, U.S. global companies likely will be the primary targets. Moreover, public disclosure of this detailed financial information will substantially increase the likelihood that this information will be used for reasons far beyond determining a company’s tax liability, raising additional and significant competitiveness and security concerns for U.S. companies.
The NAM also shares many of Treasury’s concerns about the continuing EU “state aid” cases involving ex post facto and novel application of non-tax European law to effectuate tax policy changes that lead to retroactive taxation. It is a long-standing position of the NAM that the retroactive imposition or increase of taxes is fundamentally unsound, unfair and punitive.
Even though the BEPS recommendations were finalized this fall, the NAM strongly believes that taxpayer confidentiality concerns can and should be addressed during the BEPS implementation phase.
While manufacturers recognize that there is a compliance burden associated with the country-by-country reports, we support efforts by the Internal Revenue Service (IRS) and Treasury to issue guidance so U.S. global companies can file once with the IRS and have their information confidentially exchanged via tax treaty or tax information exchange agreements with countries that agree with these confidentiality protections. Other countries already have announced that they will require country-by-country reports, and our members have some level of comfort in exchanging information under a standard process that offers data protection.
In addition, we believe that Treasury should link master file information to its agreements to provide country-by-country reports to other countries through information exchange. To that end, the NAM supports legislation (H.R. 4297) introduced by House Ways and Means Committee member Charles Boustany (R-LA) that would require the federal government to withhold country-by-country reports from countries abusing master file documentation requirements or failing to keep master file information confidential.
The legislation, which clearly describes potential abuses of the master file requirements, provides the federal government with a tool to protect U.S. businesses from being forced to disclose sensitive and confidential taxpayer information to foreign tax authorities—the same tool that protects country-by-country reports.
At the end of the day, it is abundantly clear that the long-term solution to making U.S. global companies more competitive and to increase investment in the United States is a comprehensive overhaul of our tax system. More specifically, we need a comprehensive tax reform plan that both reduces the corporate tax rate to 25 percent or lower and includes lower rates for the nearly two-thirds of manufacturers organized as flow-through entities. We also believe that comprehensive tax reform must include a shift from the current worldwide system of taxation to a modern and competitive international tax system, a strengthened research and development (R&D) incentive and a strong capital cost-recovery system.
At the same time, an appropriate balance needs to be struck between transparency and confidentiality of the proprietary information that enables companies to compete and prosper in a global economy. In contrast, requests for much more information than needed to assess a company’s tax liability, coupled with the public disclosure of this tax and financial information, will threaten economic growth and competitiveness on a global basis.