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2040 S St. NW, Lower Level | Washington, DC | 20009 | USA Tel. +1 (202) 683-4816 | Fax. +1 (202) 683-4849 | www.thefactcoalition.org March 22, 2016 Filed via http://www.regulations.gov The Honorable John Koskinen Commissioner Internal Revenue Service Room 5203 P.O. Box 7604, Ben Franklin Station Washington, DC 20044 Mr. Mark J. Mazur Acting Assistant Secretary for Tax Policy Department of the Treasury 1500 Pennsylvania Avenue, NW Washington, DC 20220 RE: IRS REG-109822-15: Country-by-Country Reporting Dear Commissioner Koskinen and Mr. Mazur: The purpose of this letter is to express strong support for, and recommend several measures to further strengthen and clarify, the proposed rule on Country-by-Country Reporting. 1 The U.S. Treasury Department and Internal Revenue Service (IRS) are to be commended for the prompt issuance of this proposed rule to implement, in a timely fashion, the United States’ global commitment to require country-by-country reporting by U.S. multinationals. This comment is submitted by the Financial Accountability and Corporate Transparency (FACT) Coalition. Founded in 2011, the Financial Accountability and Corporate Transparency (FACT) Coalition unites over 100 different civil society representatives from small business, anti- corruption, faith-based, government watchdog, human rights, investors, labor, public-interest, and international development organizations from across the ideological spectrum. 2 The coalition seeks an honest and fair international tax code, greater transparency in corporate ownership and operations, and commonsense policies to combat the facilitation of money laundering and other criminal activity by the financial system. 1 See 80 Federal Register 246 (12/23/2015), at 79795. 2 A list of FACT members is available at http://thefactcoalition.org/about/coalition-members-and-supporters/.

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Page 1: The Honorable John Koskinen Internal Revenue Service Room ... · Page 2 of 21 2040 S St. NW, Lower Level | Washington, DC | 20009 | USA Tel. +1 (202) 683-4816 | Fax. +1 (202) 683-4849

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March22,2016Filedviahttp://www.regulations.govTheHonorableJohnKoskinenCommissionerInternalRevenueServiceRoom5203P.O.Box7604,BenFranklinStationWashington,DC20044Mr.MarkJ.MazurActingAssistantSecretaryforTaxPolicyDepartmentoftheTreasury1500PennsylvaniaAvenue,NWWashington,DC20220

RE:IRSREG-109822-15:Country-by-CountryReporting

DearCommissionerKoskinenandMr.Mazur:

Thepurposeofthisletteristoexpressstrongsupportfor,andrecommendseveralmeasurestofurtherstrengthenandclarify,theproposedruleonCountry-by-CountryReporting.1TheU.S.TreasuryDepartmentandInternalRevenueService(IRS)aretobecommendedforthepromptissuanceofthisproposedruletoimplement,inatimelyfashion,theUnitedStates’globalcommitmenttorequirecountry-by-countryreportingbyU.S.multinationals.

ThiscommentissubmittedbytheFinancialAccountabilityandCorporateTransparency

(FACT)Coalition.Foundedin2011,theFinancialAccountabilityandCorporateTransparency(FACT)Coalitionunitesover100differentcivilsocietyrepresentativesfromsmallbusiness,anti-corruption,faith-based,governmentwatchdog,humanrights,investors,labor,public-interest,andinternationaldevelopmentorganizationsfromacrosstheideologicalspectrum.2Thecoalitionseeksanhonestandfairinternationaltaxcode,greatertransparencyincorporateownershipandoperations,andcommonsensepoliciestocombatthefacilitationofmoneylaunderingandothercriminalactivitybythefinancialsystem.

1 See 80 Federal Register 246 (12/23/2015), at 79795. 2 A list of FACT members is available at http://thefactcoalition.org/about/coalition-members-and-supporters/.

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Inadditiontosupportingtheneedfortheproposedrule,wemakethefollowingrecommendationstostrengthenorclarifyitsprovisions:(1)requiringU.S.parententitiestoprovidecountry-by-country(CbC)Reportingforconstituententitiesthatareaccountedforundertheequitymethodaswellasforthoseincludedintheparent’sconsolidatedfinancialstatements;(2)correctingapossibletechnicaldraftingerrorinSection1.6038-4(d)(2)(iv);(3)addingdeferredtaxesanduncertaintaxprovisionsasdataelementsintheCbCReport;(4)requiringeachparententityfilingaCbCReporttoprovide,inadditiontoaTaxpayerIdentificationNumber,aninternationalLegalEntityIdentifierforitselfandeachconstituententity;(5)allowingU.S.multinationalgroupstocountasemployeesonlythoseindividualsforwhomtheypaypayroll,socialsecurity,orotheremploymenttaxes;(6)requiringmultinationalstoperformaninternalreconciliationor,ataminimum,retaintheworkpapersneededtosubstantiateitsCbCReportdata;(7)requiringCbCReportstobepubliclyavailable;(8)decliningtocreateanationalsecurityexceptiontoCbCreporting;(9)treatingCbCReportsasTreasuryreportsratherthantaxreturninformation;(10)mandatingissuanceofanannualpublicsummarycontainingaggregatedinformationfromtheCbCReports;and(11)sharingCbCinformationthroughthemultilateralexchangeagreementcreatedforthatpurposeinsteadofthroughtheU.S.networkofbilateraltaxagreements.

StructureofthisComment.Thiscommentisdividedintofourparts.PartIwillprovidebackgroundonwhythisinitiativeissoimportant.PartIIwilldiscussthescopeofthereporting,includingentitiesforwhichCbCReportswillbefiledandthedetailsofthoseReports.PartIIIwilldiscussthelegalbasisforthisrulemakingandaccessibilityofCbCinformationgenerally.PartIVwilldiscusshowtheUnitedStateswillengagewithothercountriestoprovideaccesstoU.S.CbCReports.

PublicHearing.Theproposedrulerequestscommentontheneedforapublichearing.

Giventheyearsofworkandpublicinteractionthathavealreadygoneintotheissueofcountry-by-countryreporting,wedonotfeelthatsuchahearingisnecessary.PARTI:Background

Theproposedruleistheculminationofamulti-yeareffortbymanyintheinternationalcommunity,includingtheUnitedStates,toshedlightonthebusinessandtaxpracticesoflargemultinationalgroupsthatoperateinmultiplecountries.3Themotivatingfactorbehindthisinternationalefforttoobtainmoreaccurate,comprehensive,andtimelydataonmultinationalbusinessandtaxpracticesistheoverwhelmingevidencethatmanymultinationalssystematicallyshiftprofitstojurisdictionswheretheypaylittleornotax.Evidence,takenfrominvestigationsconductedbylegislatures,taxadministrations,journalists,andnon-profitorganizationsaroundtheworld,demonstratesthatmultinationalsareusingavarietyoftacticstopullprofitsoutofbothdevelopedanddevelopingcountriesandmovethosefundsto

3 See OECD/G20 Base Erosion and Profit Shifting Project Explanatory Statement, Organization for Economic Cooperation and Development (2015), http://www.oecd.org/ctp/beps-explanatory-statement-2015.pdf.

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jurisdictionsofferinglowtaxratesandsweethearttaxdealsnotavailabletotheircompetitors.4ArecentIMFWorkingPaperestimatedthatthelong-runrevenuelossfromthistypeofprofit-shiftingwasapproximately0.6%ofGDPforOECDcountriesand1.7%ofGDPfordevelopingcountries.5

Profit-shiftingbymultinationalsisaparticularlyacuteproblemintheUnitedStates.OnerecentestimatefoundthatprofitshiftinghaslikelycosttheU.S.governmentbetween$77and$111billionincorporatetaxrevenuesfrom1983to2012,withtaxrevenuelossesincreasingsubstantiallyinrecentyears.6ThistypeoftaxdodgingerodestheU.S.taxbase,negativelyimpactsU.S.andstatebudgets,increasesthedeficit,andlimitsfundsavailableforcommerciallyimportantserviceslikeproducinganeducatedworkforce,maintainingAmerica’sinfrastructure,andfinancingU.S.courtsandlawenforcement.ItalsocontributessignificantlytoanunevenplayingfieldforAmerica’ssmallbusinesses.Profitshiftingdrainsmoneyoutofdevelopingcountriesthesameway,undercuttingU.S.foreignaidefforts,exacerbatingglobalpoverty,andcontributingtotheeconomicinstabilitythatleadstoextremismandterrorism.WorldBankPresidentJimYongKimrecentlylikenedcorporateprofit-shiftingtocorruption,stating:“Somecompaniesuseelaboratestrategiestonotpaytaxesincountriesinwhichtheywork,aformofcorruptionthathurtsthepoor.”7

TheUnitedStatesanditsOECDandG20partnersdecidedthatafirststeptowards

counteringmultinationalcorporatetaxdodgingthroughprofit-shiftingwouldbetocollectharddataonwheremultinationalsareconductingbusiness,declaringprofitsorlosses,andpayingtaxes.Theycollaboratedonandagreedasetofstandardsandguidelines,undertheaegisof

4See, e.g., U.S. Senate Permanent Subcommittee on Investigations reports and hearings, “Offshore Profit Shifting and the U.S. Tax Code – Part 1 (Microsoft and Hewlett-Packard),” S. Hrg. 112-781 (9/20/2012), https://www.gpo.gov/fdsys/pkg/CHRG-112shrg76071/pdf/CHRG-112shrg76071.pdf; “Offshore Profit Shifting and the U.S. Tax Code - Part 2 (Apple Inc.),” S. Hrg. 113-90 (5/13/2013), https://www.gpo.gov/fdsys/pkg/CHRG-113shrg81657/pdf/CHRG-113shrg81657.pdf; “Caterpillar’s Offshore Tax Strategy,” S. Hrg. 113-408 (4/1/2014), https://www.gpo.gov/fdsys/pkg/CHRG-113shrg89523/pdf/CHRG-113shrg89523.pdf; “Tax Avoidance – Google,” London: House of Commons, Committee of Public Accounts, 9th Report 2013-14, http://www.publications.parliament.uk/pa/cm201314/cmselect/cmpubacc/112/112.pdf; “Special Report: How Starbucks avoids UK taxes,” UK Parliament Committee on Public Accounts, Minutes of Evidence, HC 716, Session 2012-13; Tom Bergin, (10/15/ 2012), http://www.publications.parliament.uk/pa/cm201213/cmselect/cmpubacc/716/121112.htm;“Commission decides selective tax advantages for Fiat in LuxembourgandStarbucks in the Netherlands are illegal under EU state aid rules,” European Commission press release, No. IP/15/5880 (10/21/2015), http://europa.eu/rapid/press-release_IP-15-5880_en.htm; “Corporate tax avoidance,” report by Australian Senate Committee on Economics References, No. ISBN 978-1-76010-274-6 (8/18/2015), http://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Economics/Corporate_Tax_Avoidance/Report_part_1.5 Base Erosion, Profit Shifting and Developing Countries, IMF Working Paper WP/15/118, Crivelli, E., De Mooij, R., and Keen, M. (2015). 6 The Effect of Profit Shifting on the Corporate Tax Base in the United States and Beyond, Kimberly Clausing (1/11/2016), http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2685442. 7 Speech before the Institute for Peace, Jim Yong Kim (10/1/2015), http://www.worldbank.org/en/news/speech/2015/10/01/speech-world-bank-group-president-shared-prosperity-equal-opportunity.

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theBaseErosionandProfitShiftingInitiative,which,amongotherthings,requirestheparententitiesofmultinationalgroupstoreportcertainbusinessandfinancialdatatotheirhomecountriesonacountry-by-countrybasis.Thisinformation,collectedinCbCReports,wouldthenbesharedamongtaxauthoritiesworldwidesothatallgovernmentscouldbuildabetterfactualfoundationforanalyzingmultinationaltaxpractices.Becausemultinationalprofit-shiftingandtaxavoidancenecessarilyinvolvesmorethanonecountry,itisnotaproblemthattheUnitedStatesoranyothercountrycananalyzeorsolvealone.Moreover,ashometomanyofthelargemultinationalsengaginginquestionableprofit-shiftingandtaxpractices,U.S.implementationofitscommitmenttocollectCbCReportsfromitsmultinationalsiscriticaltotacklingboththeU.S.andglobaltaxproblem.

WhiletheproposedruleadherescloselytotheOECDstandardsthattheUnitedStatesparticipatedindevelopingandagreedtoimplement,italsotakesadvantageoftheareasinwhichcountriesweregivensomediscretioninimplementation.Inaddition,theUnitedStateshastheopportunitytoadoptarulethatwoulddomoretotackletheprofit-shiftingproblemthantheconsensus-basedOECDstandards.PARTII:ScopeofReporting,ConstituentEntities,InformationtoBeProvided DefiningConstituentEntitiesSubjecttoCbCReporting.TheproposedruledefinesaU.S.multinationalgroupforwhichaCbCReportmustbefiledas“agroupofbusinessentities,includingtheU.S.businessentitythatistheultimateparententity,thatarerequiredtoconsolidatetheiraccountsunderU.S.GAAP[GenerallyAcceptedAccountingPrinciples],orwouldberequiredtoconsolidatetheiraccountsifequityinterestsintheultimateparententitywerepubliclytradedonaU.S.securitiesexchange.”8Theproposedrulecontinues:“Generally,underU.S.GAAP,ifanentityownsamajorityvotinginterestinanotherlegalentity,themajorityownermustcombinethefinancialstatementsofthemajority-ownedentitywithitsownfinancialstatementsinconsolidatedfinancialstatements,”basedonFinancialAccountingStandardsBoard(FASB)AccountingStandardsCodification(ACS)810-10-15,“Consolidation—Overall—ScopeandScopeExceptions.”TheproposalalsocautionsthataU.S.multinationalgroup“doesnotincludebusinessentitiesthatareaccountedforundertheequitymethod(becausethoseentitiesdonotconsolidatetheiraccountswiththeequityowner),notwithstandingthattheequityowner'sproportionateshareofthebusinessincomeofsuchentitiesisincludedintheequityowner'sconsolidatedfinancialstatements.”

Theabovedefinitionmeansthat,generally,parententitiesmayexcludefromtheirCbCReportsanyinformationrelatedtoaconstituententityinwhichtheparententityhasa50%orlessownershipinterest,eveniftheparentincludesincomefromthatentityinitsfinancialstatements.Itisunclearwhytheproposedruledrewthelineonreportingat50%insteadofapplyingtheequitymethodthresholdof20%.IfthefinalruleweretorequireparententitiestoincludeintheirCbCReportsconstituententitiesthatareaccountedforundertheequity

8 80 Federal Register 246 (12/23/2015), at 79797.

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method,meaningentitiesinwhichtheparententityhas,directlyorindirectly,a20%orgreaterequityinterest,thefinalrulewouldprovideamuchmorecomprehensiveviewofthemultinationalgroup’sbusinessandprofit-shiftingpractices.UnderU.S.GAAP,a20%orgreaterequityinteresttriggersapresumptionthattheinvestorhastheabilitytoexercise“significantinfluence”overtheentityandthattheentityshouldbeaccountedforintheinvestor’sfinancialstatements,absentpredominantevidencethatsuchcontroldoesnotexist.9Inotherwords,U.S.multinationalsarealreadyrequiredtobothidentifyandaccountforconstituententitiesoverwhichtheyhavesignificantinfluencepursuanttoequitymethodaccounting,sonoadditionalaccountingburdenwouldbeimposedifthisbroaderapproachweretaken.

Inaddition,usingthe20%ownershipthresholdwouldalsobemoreinlinewiththerestoftheworld.InternationalFinancialReportingStandards(IFRS),theaccountingstandardsusedbythevastmajorityofcountriesandwhichsomeforeignmultinationalsuseintheUnitedStates,requiresaccountingforconstituententitiesinamannerthatisverysimilartoGAAP’sequitymethod.10Asaresult,mostcountriesshouldberequiringCbCreportingforconstituententitieswithinamultinationalgroupdowntothe20%equityinterestlevel.ToensureU.S.CbCreportingiscomparabletothereportingthatwillbeprovidedbymultinationalsglobally,thefinalruleshouldrequireU.S.parententitiestoreportinformationforallofitsconstituententitiesaccountedforundertheequitymethod.

WestronglyrecommendthatthefinalrulerequireU.S.parententitiestoprovideCbCreportingforconstituententitiesthatareaccountedforundertheequitymethodaswellasforthoseincludedinconsolidatedreporting.Evenlayingasideconcernsaboutinternationalcomityandcomparability,theaimoftheU.S.CbCreportingruleistoprovidefactualinformationabouthowlargeU.S.multinationalgroupsallocatebusinessresources,employees,andcapitalcomparedtohowitallocatesitsprofits,losses,andtaxesonacountry-by-countrybasis.Includingthatpercountryinformationforentitiesoverwhichamultinationalparententityhassignificantinfluencewouldgoalongwaytowardprovidingacompleteandaccuratepictureofthefacts.

Inlightofrecentcorporateinversionactivity,wealsoencourageyoutoconsider

requiringCbCReportsfortheMNEgroupentitiesdescribedabovefromanyU.S.entitythatexercisesthemindandmanagementfunctionsofanyMNEgroupinwhichtheforeignparentoftheMNEgroupistaxresidentinajurisdictionthatdoesnotrequiresubstantiallyequivalentreporting. The$850,000,000ReportingThreshold.TheproposedrulerequiresonlyMNEgroupswithrevenuesof$850,000,000orgreaterduringtheprecedingannualaccountingperiodtoprovideCbCreportinginformation.Werecommendthatthisthresholdbereducedto$45,000,000ingrossrevenues,inlinewithsimilarrecommendationsmadebycivilsociety

9 See U.S. GAAP Accounting Standards Codification (ASC) 323-10-15-8. 10 See International Accounting Standard (IAS) 28.

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groupsinEuropetoproposedEuropeanlegislationtoimplementthesamepartoftheBEPSagreements.EuropeancivilsocietyorganizationshaverecommendedthattheCbCreportingthresholdbesetat€40,000,000,thesamelevelforpubliclyavailablecountry-by-countryandproject-by-projectlevelreportingofpaymentsmadetogovernmentsbymultinationalcompaniesoperatingintheextractiveindustriesundertheEuropeanAccountingDirective.11TheEuropeanAccountingDirectiveisoneofthelegalinstrumentsimplementingaEuropeanversionofSection1504oftheDodd-FrankWallStreetReformandConsumerProtectionAct(Section1504),whichrequiressimilarpublicreportingbyU.S.multinationalsoperatingintheextractiveindustries.12AlthoughtheimplementingregulationsforSection1504havenotyetbeenfinalized,theU.S.SecuritiesandExchangeCommission(SEC)hasnotproposedthatanyrevenue,capitalizationorothersize-basedreportingthresholdbeappliedintheUnitedStates;allU.S.entitiesoperatingintheextractiveindustriesthatarerequiredtofileannualreportswiththeSECwouldberequiredtofilecountry-by-countryandproject-by-projectreportsofpaymentsthey,theirsubsidiaries,andentitiesundertheircontrolhavemadetoanygovernmentanywhereintheworld.13 Theproposed$850,000,000thresholdisintendedtoalignwiththeOECD’srecommendedthresholdof€750,000,000ingrossrevenues.However,theOECD’sowncalculationsshowedthatthisveryhighthresholdwouldexcludebetween85-90%ofallmultinationalentitiesfromthesereportingrequirements.14TheOECDjustifiesthissignificantlyexclusionaryapproachbystatingthatthecompaniesthatwouldberequiredtoreportunderthisthresholdcontrolnearly90%ofcorporaterevenues.15BecausetherawdataneededtoconductsimilaranalysiswithrespecttoU.S.companiesspecificallyisnotavailabletotheAmericanpublic,werespectfullyrequestthattheTreasuryandIRSprovideinformationintheexplanatorytextofthefinalrulethatidentifiesthenumberandpercentageofU.S.entitieswithmorethanone(i)foreignsubsidiary,or(ii)foreignentityoverwhichishassignificantinfluence,thatwouldberequiredtoprovideCbCReportsunderthethresholdadoptedinthefinalrule,andthepercentageofgrossrevenuesforsuchinternationallyoperatingU.S.corporategroupsthatthresholdwouldrepresent.

U.S.TemplateforFormXXXX.TheproposedtemplateforFormXXXX,theU.S.Country-

11 Eurodad, et al. (2015). Fifty Shades of Tax Dodging: the EU’s role in supporting an unjust global tax system, p. 18, 38, available at http://www.eurodad.org/files/pdf/1546494-fifty-shades-of-tax-dodging-the-eu-s-role-in-supporting-an-unjust-global-tax-system.pdf. Note that the Accounting Directive reporting threshold is met when companies meet to of the following three criteria: at least 40 mil annual revenue; at least 20 mil annual balance sheet total; on average more than 250 employees. 12 Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376 (2010), Section 1504. 13 See Securities and Exchange Commission, Release No. 34-76620; File No. S7-25-15, Proposed Rule on the Disclosure of Payments by Resource Extraction Issuers, available at http://www.sec.gov/rules/proposed/2015/34-76620.pdf. 14 OECD, (2015). Action 13: Guidance on the implementation of transfer pricing documentation and country-by-country reporting, p. 4, available at https://www.oecd.org/ctp/beps-action-13-guidance-implementation-tp-documentation-cbc-reporting.pdf. 15 Id.

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by-CountryReport,isconcise,wellorganized,andconsistentwiththeinternationaltemplatedevelopedwithU.S.inputandsupportedbyG20worldleaders.BecausetheU.S.CbCReportelicitsinformationfrombusinessesthatoperateacrossinternationallines,itiscriticalthatitusesdataelementsandaformatthatiscomparabletowhatisbeingusedinothercountriesinordertofacilitateefficientdatacollectionandanalysis.Usingthesamedataelementsandformatasothercountrieswillalsominimizethereportingburdenplacedontheparententitiesrequiredtofilethereports.

OneprovisionoftheproposedruledescribingtheinformationtobeprovidedinForm

XXXX,however,seemstocontainaninternalcontradictionthatmaybetheresultofatechnicaldraftingerror.Section1.6038-4(d)(2)statesthattheU.S.formwillcontaininformation“withrespecttoeachtaxjurisdiction”butitssubsection(iv)requiresthereportingof:“Totalincometaxpaidonacashbasistoalltaxjurisdictions.”Thereferenceto“alltaxjurisdictions”couldbemisinterpretedtomandateorallowtherequiredtaxinformationtobereportedonanaggregatedbasisforalljurisdictionsasopposedtobeingreportedonacountry-by-countrybasis,asintended.Toavoidanyconfusion,theprovisioninsubsection(iv)shouldbeclarifiedtoread:“Totalincomepaidonacashbasistoeachtaxjurisdiction.”

Finally,whilewestronglysupportFormXXXX’susingthesamedataelementsand

formatasthecomparableformsbeingusedbyothercountries,wealsosupportaddingtwonewcolumnstothesecondcharttocapturetaxdatathatisuniquetoU.S.taxlaw.Currently,theproposedruleexplicitlyexcludesdeferredtaxesandprovisionsforuncertaintaxpositionsfromcalculationoftheaccruedtaxexpensetoberecordedbymultinationalparententitiesonFormXXXX.Whilethatapproachmakessense,informationregardingamultinational’sdeferredtaxesanduncertaintaxpositionsoffersextremelyusefuldatainevaluatingitstaxpractices.Multinationalsoftenshiftprofitstoothercountriesandthendeferthepaymentoftaxesonthoseprofits,makingdeferredtaxinformationapossibleindicatorofprofitshiftingand,overtime,amarkerofanychangesinprofit-shiftingpatterns.Inaddition,theU.S.taxcodenowrequiresmultinationalstotakeaprovisionforanuncertaintaxpositionwhenitismorelikelythannotthatthetaxpositionwouldnotsurviveanIRSchallenge.16Provisionsforuncertaintaxpositionsare,thus,clearindicatorsoftheextenttowhichamultinationalisoperatingingrayareasandmaybeengaginginaggressiveorabusivetaxpractices,includingwithrespecttotransferpricing.Duetotheuniqueandhighlyusefulnatureofcorporateinformationrelatedtodeferredtaxesanduncertaintaxprovisions,andbecausethosefiguresarealreadycalculatedonanannualbasisandcanbeaddedatvirtuallynocosttotheCbCReport,werecommendthatbothdataelementsbeaddedtoFormXXXX.

CountingEmployees.Theproposedrulerequiresparententitiestoprovide,ona

country-by-countrybasis,theaggregatenumberofemployeesworkingforthemultinational

16 See Financial Accounting Standards Board (FASB) Interpretation No. 48, http://www.fasb.org/cs/BlobServer?blobcol=urldata&blobtable=MungoBlobs&blobkey=id&blobwhere=1175820931560&blobheader=application%2Fpdf.

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group“onafull-timeequivalentbasis”ineachjurisdiction.17Theproposedruleprovidesgeneralguidanceonhowtoderivethatnumberwhilealsorequestingcommentonwhetheradditionalguidanceisneeded.

Theproposedrulecurrentlyprovidessignificantflexibility.Itstates,forexample,thata

parententitymaydeterminethenumberofitsemployees“asoftheendoftheaccountingperiod,onthebasisofaverageemploymentlevelsfortheannualaccountingperiod,oronanyotherreasonablebasis,”providedthattheparentusesthesamemethodology“onaconsistentbasisacrossentities,taxjurisdictions…andfromyeartoyear.”18AnychangesinthemethodologymustbedisclosedandexplainedintheCbCReport.Thatapproachprovidesacost-effectiveandflexiblewaytominimizecostsforthefilingentities.

Atthesametime,onekeyissue,thetreatmentof“independentcontractors,”istreatedinsuchacavalierfashionastoencouragereportingthatmaybedifficulttounderstand,contradictory,andevenmisleading.Currently,theproposedrulestatesthataparententity“may”countasitsemployeesthe“independentcontractorsthatparticipateintheordinaryoperatingactivitiesofaconstituententity.”19Itoffersnoadditionalguidanceonthemeaningof“independentcontractor”or“ordinaryoperatingactivities.”Byleavingituptomultinationalgroupsonhowtointerpretthosephrasesandwhetherornottotreatcertainindependentcontractorsasemployees,theproposedruleintroducesunnecessaryuncertaintyintothedataandallowswidelyvaryingapproachestoafactorthatcouldhaveasignificantimpactonemploymenttotals.Inaddition,theapproachcreatesalegalandlogicalinconsistencyinthattheU.S.taxcodecurrentlyhasadetailedbodyoflawdistinguishingbetween“independentcontractors”and“employees”fortaxpurposes,whiletheruleproposestoallowprofessed“independentcontractors”tobetreatedas“employees”ontheCbCReport.ThisapproachpromisestoconfuseU.S.taxlawinanareathatisalreadyhighlycontested.

Stillanotherproblem,ofparticularsignificanceinmultinationaltaxpractice,involves

constituententitiesorganizedoroperatedintaxhavens.Onecommontaxavoidancetacticisformultinationalstoformshellentitiesintaxhavensandhirecorporateserviceproviders,lawfirms,orfinancialinstitutionstoprovidetheshellentities’withapresident,manager,orotherofficer.Allowingtheparententitytotreatthosehiredindividualsas“employees”wouldnotonlyartificiallyinflateitsemploymentfiguresinthetaxhaven,butalsocompletelydistortthemeaningoftheword“employee.”Thesamewouldbetrueiftheparententityweretohire,forexample,alocal,self-employedaccountanttopreparetheshellentity’sannualfinancialstatement,deemingthathiretobean“independentcontractor.”Sincepreparingfinancial

17 80 Federal Register 246 (12/23/2015), at 79798. 18 80 Federal Register 246 (12/23/2015), at 79798-99. 1980FederalRegister246(12/23/2015),at79799.

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paperworkcouldbeseenaspartoftheshellentity’s“ordinaryoperatingactivities,”theparententitycouldconceivablyclaimtheaccountantasoneofits“employees,”furtherdistortingthemeaningoftheword,inflatingtheparent’semploymentnumbers,andcreatingamisleadingpictureofitsoffshoreoperations.

Toavoidthattypeofmisleading,contradictory,anddifficulttounderstandemploymentdata,thefinalruleshouldallowU.S.multinationalgroupstocountasemployeesonlythoseindividualsforwhomthecompanypayspayroll,socialsecurity,orotheremploymenttaxes.ThatapproachwouldenableTreasuryandtheIRStomaintainaconsistentapproachtodefining“employees”versus“independentcontractors,”andavoidinjectingnewambiguitiesintoanareaalreadyrifewithcontroversy.

NamingConstituentEntities.TheproposedU.S.templateseemstoindicatethatthe

parententityfilingtheformwillberequiredtolistthenamesofeachofitsconstituententitiesinthefirstchart.Theproposedrulealsorequestscommentonwhetheradditionalguidanceshouldbeprovidedon“whichentitiesareconsideredconstituententitiesofthefiler.”20GiventhepracticeofsomeU.S.businessesofsometimesassigningverysimilarnamestorelatedentities,theguidanceshouldmakeclearthattheparentfilermustprovidethecompletelegalnameofeachconstituententity.Providingcompletelegalnameswillhelpgovernmentpersonnelreviewingtheformstoensurethatallentitiesarelistedandidentifyanythatmaybemissing.

ProvidingIdentifyingNumbers.TheproposedrulestatesthatparententitiesfilingCbC

Reportsmustprovidethetaxpayeridentificationnumber(TIN)forthemselvesandeachconstituententityineachrelevanttaxjurisdiction.21Currently,however,theproposedformdoesnotindicatewhereorinwhatcolumnthatinformationshouldbeprovided.Itcouldeasilyfolloweachconstituent’snameoranewcolumncouldbeconstructedtocontainthosenumbers;theformmerelyneedstomakeitclear.

Wealsorespectfullyrecommendthat,inadditiontomandatingTINs,thefinalrule

requireeachparententitytoprovideaLegalEntityIdentifier(LEI)foritselfandeachconstituententity,usingthenewinternationalsystemforidentifyingindividualbusinessentities.22Asyoumaybeaware,theLEIsystemisanewsystemofuniqueglobalidentifiersforcorporationsthatthatwasconceivedofbytheG20inresponsetotheglobalfinancialcrisis.TheLEIsystemisrunbyanon-profitfoundation,theGlobalLEIFoundation,whichisresponsibleforadministeringthesystem,safeguardingitsoperationalintegrity,andensuringthatLEIinformationisavailabletoallinanopendataformat.Agroupofover70regulatorsfromaroundtheglobealsoformaconstituentbodyintheLEIsystem,theRegulatoryOversightCommittee,whichincludesarepresentativefromsevendifferentU.S.agencies,including

2080FederalRegister246(12/23/2015),at79798.21Id.22 For more information about LEIs, see http://www.leiroc.org/index.htm and https://financialresearch.gov/data/legal-entity-identifier/.

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Treasury.23AsofOctober2015,over390,000legalentitiesfrom195differentcountrieshadobtainedLEInumbers.24FortydifferentjurisdictionshaveregulatoryrequirementsthatreferenceLEIs,andLEIsarecurrentlyrequiredbytheUnitedStatesforentitiesengaginginreportablederivativestransactions.25

AcquiringanLEIiseasyandinexpensive.BecauseLEIsprovideauniqueidentifying

numberusedworldwideandthesystemoperatesonacostrecoverybasis(thereforeimposingminimalcosttobusinessandnocosttogovernment),theirusewouldsimplifythecompilingandanalyzingofCbCreportingdataforspecificbusinessentities,eliminatingtheneedtofindandnavigatemultipleTINs.Theycouldalsoeaseanyconfusioncausedbysimilarentitynames.BecauseLEIsofferalow-costmechanismthatenablesmoreefficienttax,economic,andstatisticalinvestigationandanalysis,itshouldbecomeamandatoryelementoftheU.S.CbCReport,listedrightaftertheTIN.

RequiringReconciliations.Anotherimportantissuethatrequiresstrengtheninginvolvesproposedrequirementsforperformingreconciliations.Currently,theproposedrulestatesthatparententitiesfilingCbCReportsarenotrequiredto“reconciletherevenue,profit,andtaxreportedintheaggregateorwithrespecttoaspecifictaxjurisdiction”onaCbCReportwiththemultinational’sconsolidatedfinancialstatementsortaxreturns.26Butatanotherpoint,theproposedrulestatesthat,althoughnoreconciliationisrequired,theparententityfilingaCbCReport“mustmaintainrecordstosupporttheinformationprovidedon”thereport.27Theproposedrulecontainsnofurtherguidanceastothenatureorextentofthesupportingrecordsthatmustbekept.

Theproposedrule’stwostatements,takentogether,invitemisunderstanding.One

possibleinterpretationcouldbethatallaparententityneedstodotosupporttheinformationinitsCbCReportistokeepacopyofitsunderlyingfinancialstatementsandtaxreturns.Surely,ataxauthoritywouldneedmorethanthatifithasquestionsaboutthefiguresprovidedinaCbCReport.Afterall,CbCReportswillbefiledonlybymassivemultinationalconglomerateswithoperationsinmultiplecountriesandhundredsofmillions,ifnotbillions,ofdollarsincomplexfinancialtransactionsthatmayincludesubstantialprofitshifting.VaguereferencesastowhatdocumentsshouldberetainedtosupportquestionabledatainaCbCReportarearegulatoryconflictwaitingtohappen.

AbetterapproachwouldbetorequireeachU.S.multinationaltoperformaninternal

reconciliationbetweenitsCbCReportanditsfinancialstatementsandtaxreturnstosupport

23 Membership of the LEI Regulatory Oversight Committee is available at http://www.leiroc.org/about/membersandobservers/index.htm. 24 Progress Report by the Legal Entity Identifier Regulatory Oversight Committee: The Global LEI System and regulatory uses of the LEI, Nov. 5, 2015, p. 6. Available at http://www.leiroc.org/publications/gls/lou_20151105-1.pdf. 25 Id. at 12. 26 80 Federal Register 246 (12/23/2015), at 79799. 27 Id. at 79800.

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thedataprovidedtoTreasury,andtokeepacopyofthatreconciliationforaspecifiedperiodoftime,butnotsubmitittoanyjurisdictionunlessrequested.Alternatively,ataminimum,theruleshouldrequiretheparententitytoretaintheworkpapersusedtocalculatethefiguresprovidedinitsCbCReportandrequiretheretentionofthoseandanyotherdocumentsneededtoenableanauditortoreconstructthebasisforthereportedinformation.Withoutareconciliationoratleasttherelatedworkpapers,ifataxauthorityhasquestionsaboutaparticularCbCReportayearortwoafteritisprepared,theparententitymayhavenoinstitutionalmemory,documents,oraudittrailtosubstantiatethereport’sfigures.Inthatcircumstance,itmightcostthemultinationalandtaxauthoritysubstantialfundstoreconstructwhathappened,incurringexpensesthatbothcouldhaveavoidedifthisrulehadrequiredsufficientrecordstobemaintained.PARTIII:LegalBasisoftheRulemakingandAccessibilityofInformation Country-by-CountryReportsShouldbePubliclyAvailableInformation.TheproposedrulewouldmakeCbCReportsconfidentialtotheIRSand,intimeandunderspecificcircumstances,taxauthoritiesinforeignjurisdictions.WestronglyrecommendthatCbCReportsbemadepubliclyavailableeitherbytheU.S.Governmentorbythereportingentitiesasastatutoryrequirement.TheproposedrulestatesthatCbCReportswillincludefinancialinformationonmultinationalcorporaterevenues,profits,incometaxpaidoraccrued,capital,earnings,numberofemployees,valueoftangibleassets,jurisdictionsofoperation,andentitieswithinthecorporategroup.Noneofthisinformationamountstotradesecretsorisofparamountcommercialsensitivity.AsnotedbyRosenblumandMaplesinthepublicationContractsConfidential:

Perhapsthemostwidelymade—andunchallenged—claimforconfidentialityisthat it protects commercially sensitive information. But this claim is only thebeginning of an analysis, not the end. There is no technical definition ofcommerciallysensitiveinformation.Everything,fromtheexistenceofacontract,toillegalbribes,tomostofwhatisdisclosedundersecuritiesregulations,canbeclassified as “commercially sensitive” in the broadest sense of the term.However,disclosureofsuchinformationmaystillberequired,inordertoserveagreaterpublicinterest.Insomecasesitmaybeobvious;butinothers,itmayrequiretoolstomeasureandbalancethepublicinterestintransparencyagainsttheprivateinterestinconfidentiality.Themostimportantpublicinterestatstakeistherighttoinformation,whichenablesdemocraticaccountability.28

GiventhemassiveamountsofmoneyhemorrhagingfromtheU.S.economyduetoprofitshiftingandthedireeffectsofprofitshiftingontheglobaleconomyanddeveloping

28 Rosenblum, P. and Maples, S. (2009). Contracts Confidential: Ending Secret Deals in the Extractive Industries, Revenue Watch Institute, New York, NY, p. 33, available at http://www.resourcegovernance.org/sites/default/files/RWI-Contracts-Confidential.pdf.

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countries,asestablishedinPartIofthiscommentletter,thereisasubstantialAmericanandglobalpublicinterestinensuringthatCbCReportinformationisavailabletoasmanydifferenttypesofstakeholdersaspossible.ThatpublicinterestfaroutweighsanyperceivedneedtoprotectwhatsomemayprofferiscommerciallysensitiveinformationcontainedinCbCReports.Itispreciselythelackoftransparencythatcurrentlycharacterizesthisinformationthathaspreventedlawmakersandotherstakeholdersfrombeingabletoseethedevelopmentandeffectsofaggressiveprofitshiftingactivityovertimeandidentifywaystoaddressit.

Thestakeholderstowhichwereferinclude,butarenotlimitedto,(i)U.S.MembersofCongressandotherofficialsresponsiblefortax,development,economic,andotherpolicyareas,(ii)theirequivalentsinothercountries,(iii)thepeopletheyrepresent,(iv)investors,(v)academics,(vi)publicinterestgroups,and(vii)journalists.Wewilltaketheseinturn.

U.S.andForeignGovernmentOfficialsandtheGeneralPublic.U.S.electedofficials,

officialsappointedtooremployedbyagenciesoftheU.S.government,andtheirequivalentinothercountries,havearesponsibilitytothepeoplewhoelectedthemandwho,inmanycountries,paytheirsalariesthroughtheirtaxes,tofixtheprofitshiftingproblem.CbCreportinginformationmustbepubliclyavailabletoallowforthenecessaryunfetteredaccessthatalllevelsofgovernmentrequireinordertoconducttheanalysesneededtoinformthecreationofintelligentandeffectivelegislativeandpolicysolutionstotheprofitshiftingproblem.ThisisthedirectapplicationofthefundamentaldemocraticconceptsexpressedbyBlumenthalandMaples:transparencyofCbCReportinformationservesthepublicinterestbyenablingthepeopletoholdthegovernmentaccountablefortheiractions(orfailuretoact)onthiscriticalissuemovingforward.

Investors.Investorsalsohaveasubstantialinterestthetransparencyofthisinformation.

WithoutpubliclyavailableCbCReports,investorslackinformationthatcaninfluencetheirriskanalysis. In Julyof2015, theEuropeanParliamentadopted the followingamendment to theexisting Shareholder Rights Directive, which would require country-by-country reportinginformationtobepubliclydisclosedifthemeasureisapprovedinthefinalstagesoftheEuropeanlegislativeprocess:

"2a. In the notes to the financial statements large undertakings and public-interest entities shall also disclose, specifying by Member State and by thirdcountry in which they have an establishment, the following information on aconsolidatedbasisforthefinancialyear:(a)name(s),natureofactivitiesandgeographicallocation;(b)turnover;(c)numberofemployeesonafulltimeequivalentbasis;(d)valueofassetsandannualcostofmaintainingthoseassets;(e)salesandpurchases;(f)profitorlossbeforetax;(g)taxonprofitorloss;(h)publicsubsidiesreceived;

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(i)parentcompaniesshallprovidealistofsubsidiariesoperatingineachMemberStateorthirdcountryalongsidetherelevantdata."29Eurosif,theself-described“leadingpan-Europeansustainableandresponsible

investment(SRI)membershiporganization”30hasstatedthefollowingwithrespecttotheinvestoruseofpubliclyavailablecountry-by-countryreporting:

1. Aggressive tax practices can undermine the sustainability strategies thatcompanieshaveadoptedandcorporatecommitmentstoeconomicdevelopmentprojects; 2. Short term financial gains from an aggressive tax positionsmay beoffsetbymedium-tolong-termrepercussionsrelatedtoreputationalrisks;and3.Risksarederivedfrombothactualtaxpracticesandrelatedlackoftransparency.Failingtodiscloseone’staxpositionconstitutesasmuchofariskastheaggressivetaxpracticesthemselves.31Inaddition,Dutchinstitutionalinvestors’representativeEumedionstatedincomments

providedontheproposedrevisiontotheEuropeanShareholderRightsDirective,“Investorswillbenefit from increased public transparency on where taxes are paid (‘country-by-countryreporting’) since it increases overall transparency and allows for amore detailed analysis byinvestors.Itwillalsooffershareholderstheopportunitytohaveadialoguewiththeboardofthecompanyonthistopic.”32

Academics.Legislatorsandpolicymakersaresubjecttoawidearrayofcompetingdemandsandoftenhaveinadequatelevelsofstafftomeetthedemandsoftheirpolicyportfolios.Manyoftheworld’sacademics,however,aretrainedtoanalyzelargedatasetsliketheonesthatCbCreportingwilleventuallycreate,andtheyhavetheabilitytoconsiderthechangesinthesedatasetsovertime.Wecanonlyjudgetheefficacyoflegislativeandpolicychangesovertime,andpubliclyavailabledatawillensurethatsomeofourbrightestmindsinacademiaareabletofullyassessalltherelevantvariablestohelpdeterminewhetheractionsthathavebeentakenhavebeeneffectiveand,ifnot,torecommendalternatives.

29 Amendments adopted by the European Parliament on 8 July 2015 on the proposal for a directive of the European Parliament and of the Council amending Directive 2007/36/EC as regards the encouragement of long-term shareholder engagement and Directive 2013/34/EU as regards certain elements of the corporate governance statement (COM(2014)0213 – C7-0147/2014 – 2014/0121(COD)), available at http://www.europarl.europa.eu/sides/getDoc.do?pubRef=-//EP//TEXT+TA+P8-TA-2015-0257+0+DOC+XML+V0//EN. 30 See http://www.eurosif.org/about/mission/. 31 Eurosif, “Country-by-country Reporting: Eurosif’s position,” available at http://www.eurosif.org/wp-content/uploads/2015/07/2015-07-15_Eurosif-CBCR-Position-FINAL.pdf. 32 Eumedion Corporate Governance Forum, “Comments on the Text Adopted by the Council and the Parliament on the Proposal for the Revision of the Shareholder Rights Directive,” available at http://www.eumedion.nl/en/public/knowledgenetwork/position-papers/2016-01-srd---statement-triloog.pdf. See “Why Public Country-by-Country Reporting for Large Multinationals is a Must,” available at http://financialtransparency.org/wp-content/uploads/2016/02/Joint_Civil_Society_QA_pCBCR.pdf.

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JournalistsandPublicInterestOrganizations.Journalists,andnon-profitpublicinterestorganizationsareresponsibleforconductingmanyoftheinvestigationsandanalysisthathavebroughtthisissuetotheforefrontofglobalpolicymaking,andtheycouldcontributevastlymoretotheefforttoanalyzeCbCReportsandhelpdeveloppolicyoptionsfortacklingtheproblemiftheinformationwasmadepubliclyavailable.OrganizationslikeActionAidbroughttheproblemtothepeoplethroughresearchreportslikeCallingTimeandSweetNothings,reportsthattookentireteamsofresearchersmorethanayeartoproduce.33TheInternationalConsortiumofInvestigativeJournalistshaspublishedexposéafterexposéonmultinationalcompanytaxdodging.34Theseareaverysmallnumberofexamplesoftheawareness-raisingworkofjournalistsandpublicinterestnon-profitorganizationsaroundtheworldonthisissue,demonstratingtheglobalinterestinandneedfortransparencytofurtheridentifythemechanismsdrivingandperpetuatingglobalprofit-shifting.

PublicCountrybyCountryReportingAlreadyExistsWithNoDetrimentalEffectsonBusiness.PursuanttoArticle89oftheEUCapitalRequirementsDirectiveIV35,since2013manyEuropeanbanksandinvestmentfirmshavebeenrequiredtopubliclyreporttheirprofits/lossesbeforetax,turnover,staffnumbers,taxpaid,andpublicsubsidiesreceivedforeachjurisdictioninwhichtheyhaveanestablishment.36AswaspredictedinaneconomicstudycarriedoutbyPricewaterhouseCoopersfortheEuropeanCommission,theeconomiceffectsofsuchpublicdisclosureshavebeensonegligibleastobeacompletenon-issue.37ThisreportingrulehasnotmadeanyofthesebankinginstitutionreconsidertheirestablishmentintheEU,quitethecontrary.Inarecentpublichearing,representativesofboththeHSBCandBarclaysbankshavevoicedtheirsupportforpublicCbCreporting.38 EconomicBenefitsofPublicCountrybyCountryReporting.Inits17thAnnualGlobalCEOSurvey,PriceWaterhouseCoopersfoundthat“almostsixoutoftenCEO’s(59%)agreedthatmultinationalsshouldberequiredtopublishrevenue,profitandtaxdisclosuresonacountrybycountrybasis.”39Whilethebenefitstoinvestorsareclear,publicCbCreportingisalsomuchmorecosteffectiveforcompaniesandgovernment,whichislikelyanotherreasonthatsomanyCEOssupportit.IfcompanieswererequiredtopublishCbCReportsontheirwebsites,forexample,theywouldnothavetoincurcostsrelatedtoprovisionofthe

33 ActionAid’s report Calling Time can be accessed at https://www.actionaid.org.uk/sites/default/files/doc_lib/calling_time_on_tax_avoidance.pdf and Sweet Nothings can be accessed at http://www.peuples-solidaires.org/sites/files/actionaid/sweet_nothings.pdf. 34 See generally, http://www.icij.org/projects. 35 European Union Directive 2013/36/EU. 36 See http://europa.eu/rapid/press-release_IP-14-1229_en.htm. 37 See PricewaterhouseCoopers (2014), General assessment of potential economic consequences of country-by-country reporting under CrD IV, available at http://www.pwc.com/gx/en/eu-institutions-services/pdf/pwc-cbcr-report-en.pdf. 38 The European Parliament Special Committee on Tax Rulings and Other Measures Similar in Nature or Effect - meeting 16/11/2015, available at http://www.europarl.europa.eu/news/en/news-room/20151110IPR01911/Special-Committee-on-Tax-Rulings-and-Other-Measures-Similar-in-Nature-or-Effect. 39 PriceWaterhouseCoopers, Focus on Tax: Building Trust and Growth, Related Summary to the 17th Annual Global CEO Survey, 2014, at p. 17, available at http://www.pwc.com/gx/en/ceo-survey/2014/download.jhtml.

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informationtogovernment(s)orrespondingtorequestsforthisinformationorsubsetsthereof.TheU.S.Government(andthereforetaxpayers)wouldsavethestafftimeandexpenseofestablishingandoperatingtheelaboratesystemthathasbeenplannedforexchangingthisinformationbetweengovernmentsandpolicingits(unnecessary)confidentiality.Developingcountrygovernments,withfarfewerresourcestospendchasinginformationlikethatprovidedinCbCReports,couldfreelyaccesstheinformationasneededwhenassessingtheriskofprofitshiftingbyasubsidiaryofamultinationaloperatingwithintheirborders.

CreatingaNationalSecurityException.Theproposedrulestatesthat“consideration

hasbeengiventothepossibleneedforanexceptiontofilingsomeoralloftheinformationrequiredonFromXXXX,Country-by-CountryReport,fornationalsecurityreasons,”andseeksinputontheprocedurethatshouldbefollowedtodemonstratewhethersuchanexceptioniswarranted.Sincecreatingsuchanexceptionisunnecessaryandwouldrequireexpensive,time-consumingproceduresthatwouldlikelycontributelittletonationalsecurity,werecommendagainstproceedingwiththisproposal.

ItisimportanttonoteinthefirstinstancethatnoneoftheCbCReportinformation

beingcollectedshouldgiverisetoanationalsecurityriskif:(i)reportedtotheIRSonaconfidentialbasis,(ii)providedtothetaxauthorityofaforeigncountrythatmeetstherequiredstandardsofconfidentiality,oreven(iii)ifmadepubliclyavailableasrecommendinthesecomments.Asstatedabove,CbCReportsincludefinancialinformationonmultinationalcorporaterevenues,profits,incometaxpaidoraccrued,capital,earnings,numberofemployees,andvalueoftangibleassets.Noneofthatinformationisnationalsecurity-sensitive.Asaresult,wedonotbelievethereisanyjustificationforanationalsecurityexception.Wehavenotseenanyargumentsinfavorofsuchanexception,anditisnotrecommendedorevencontemplatedintheOECD’sCbCreportingstandards.

Moreover,iftheUnitedStatesweretocreatesuchanexception,othercountriesare

boundtofollow,andmultiplelargemultinationalsdeemedcriticaltothesecurityoftheirhomecountriesmaybeexemptedfromtheCbCreportingobligation.Challengingthenationalsecurityjudgmentsofothercountrieswouldbeextremelydifficult.TheUnitedStatesshouldnotinitiatesuchapotentiallydisruptivesetofexceptionstothisimportantinternationaleffort.

Ifthedecisionisneverthelessmadetocreateanationalsecurityexception,acarefulprocessshouldbeestablishedtopreventabuses.AnynationalsecurityexceptionshouldbegrantedonlywiththejointconcurrenceoftheSecretariesoftheTreasury,State,andDefenseDepartments,afterreviewofaspecificapplicationrequestingtheexceptionbytheparententityotherwiseobligatedtofileaCbCReport.Applicationsbyexistingmultinationalscouldberequiredtobefiledwithin60daysafterpromulgationofthefinalrule,withfinaldecisionsonexceptionstobemadewithin60daysthereafter,withapossibleextensionforuptoanadditional60days.Forentitiesformedaftertheeffectivedateoftheruleorforexistingentitiesthatmeetthethresholdreportingrequirementforthefirsttimeaftertherule’spromulgation,theycouldbegiven60daysfromtheendofthefiscalyearinwhichtheymeet

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thethresholdtoapplyforanationalsecurityexception,withafinaldecisionontheapplicationstofollowwithin60days,withapossibleextensionforuptoanadditional60days.

Inreviewinganapplication,theSecretariesshouldconsidersuchfactorsasthe

likelihoodofharmtonationalsecurityiftheinformationweretobecomepublic,theimportanceofcomplyingwiththeUnitedStates’internationalobligations,andanyevidencethattheentitymaybeengaginginprofitshiftingorothertaxavoidancepractices.TheSecretariesshouldalsoconsiderwhetheranyadditionalconfidentialityrestrictions,suchasbyclassifyingtheCbCReportitself,wouldprovidesufficientnationalsecurityprotectiontoallowthereporttobefiled.Inanycasewhereanapplicationisdenied,theentityshouldberequiredtofileaCbCReportfortheyearinwhichtherequestwasdenied,aswellassubsequentyears.Incaseswhereanapplicationisapproved,theexceptionshouldextendforonlyoneyear,withone-yearrenewalspermittediftheparententityfilesarenewalapplicationexplainingwhythenationalsecurityexceptioncontinuestobenecessary.

Giventhatgrantingnationalsecurityexceptionsisadiscretionaryfunctionandthecriteriausedtograntspecificexceptionsareunlikelytobecomepublic,theSecretariesshouldprovidetheSenateCommitteeonFinance,HouseCommitteeonWaysandMeans,andtheSenateandHouseSelectCommitteesonIntelligencewithanannualletterindicatingthenumberofnationalsecurityexceptionsgrantedduringtheyear,thegeneralreasonsforgrantingthoseexceptions,andtheopportunitytoobtainmoredetailedinformationuponrequest.

TreasuryReports,NotReturns.WhilewefirmlybelievethatCbCreportinginformationshouldbepubliclyavailableinformation,shouldyouchoosenottoadoptthatdemocraticallyaccountable,cost-effectiveposition,wewouldaskyoutoatleastreconsidertheproposedlegalbasisforregulation.TheproposedrulestatesthattheCbCReportwillbeclassifiedas“returninformation”under26U.S.C§6103.40However,theproposedruledescribestheformasan“annualreport”andstatesthatthereport’sinformationwouldnotbeusedas“conclusiveevidence”regardingappropriatetransferpricingpracticesnorprovidethesolebasisformakingtransferpricingadjustments.41Thatapproachisconsistentwiththemutually-agreeduponOECDguidanceoncountry-by-countryreportingprovidingthattaxauthoritiesshouldnot“proposeadjustmentstotheincomeofanytaxpayeronthebasisofanincomeallocationformulabasedonthedatafromtheCbCReport.”42

RatherthantreatingCbCReportsasreturninformation,abetterapproachwouldbetotreatCbCreportsinthesamemannerasFinancialBankAccountReports(FBARs).FBARsarefiledbyU.S.personswiththeTreasuryDepartment,ratherthantheIRS,andarenottreatedasreturninformation.ThisapproachallowsnotonlytheIRS,butalsoTreasuryofficialsandother

40 80 Federal Register 246 (12/23/2015), at 79796. 41 Id. 42 Action 13: Guidance on the Implementation of Transfer Pricing Documentation and Country-by-Country Reporting, OECD (2015), at 5.

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federallawenforcementpersonneltoreviewthereportinformationoutsidetheconfinesof§6103.Atthesametime,whilenotdeemedreturninformationsubjectto§6103,FBARshaveremainedconfidentialdocuments.CbCReportscouldbehandledinthesamemanner.ToenableCbCReportstobetreatedinthesamemannerasFBARs,thefinalrulecouldcitetheTreasurySecretary’sauthorityin§§321(b)(1),5311,5314,and5318(a)(3)ofTitle31oftheU.S.Code.

HandlingCbCReportsasnon-taxTreasuryfilingswouldmakeitpossibleforthecountry-

by-countrydatatobeaccessedbyseniorpolicymakersotherthanIRSagents,suchasTreasuryofficials,andMembersofCongressastheyworktodeveloptaxpolicyand,insomecases,voteontaxlegislationatthefederalandstatelevels.SurelyMembersofCongress,ataminimum,shouldbeabletoreviewinformationabouttheeconomicpresenceoflargeU.S.multinationalsinspecificcountries.Thesamedatawouldlikelyalsobeinvaluabletopolicymakersinotherareas.Thedatacould,forexample,informlawmakersandregulatorsatthestateandfederallevelsworkingonsuchissuesasglobaltrade,monetarypolicy,economicdevelopment,foreignaid,financialmarketregulation,commodityandcurrencytrading,corruption,andmoneylaundering,tonameafewimportantnon-taxissueareas.Leveragingrelevantdatatoinformdecision-makinginimportantpolicyareasisthehallmarkofanefficientandeffectivegovernment.Thisisaprimeopportunitytoleverageimportant,heretoforeunavailabledatatoinformbetterdecision-makingingovernmentagenciesotherthantheIRS.

Under26U.S.C.§6103(f),“returninformation”isavailabletoMembersofCongressonly

inverylimitedcircumstancesandgenerallyuponrequestbytheChairofasmallnumberofspecificcommittees.ThatlimitationmakesaccesstotheinformationsubjecttopoliticalwhimandmachinationsasopposedtobeingdatathatcanbeanalyzedbyallMembersofCongresswithaninterestinsolvingtheproblemoftheerosionoftheU.S.taxbaseasaresultofprofitshifting—aproblemthatdirectlyaffectseveryconstituentofeveryMemberofCongress.Noneofthiscanhappen,however,ifCbCReportsareclassifiedas“returninformation”under26U.S.C.§6103.

Thestatutesimilarlyprovidesforverylimitedandspecificaccesstotheinformationby

otherorgansofgovernment.Forexample,theDepartmentofJusticemayonlyaccesstheinformationsolelyforuseinaproceedingalreadybeforeagrandjury,andonlyifcertainotherrequirementsarealsomet.43GivethatCbCReportsareintendedtobeusedforriskassessment,thislimitationonaccesstotheReportsisnotfitforpurpose.

InformingthePublic.IfthefinalrulecontinuestocategorizeCbCReportsas“returninformation”,werespectfullyrecommendthatthefinalruleincludeprovisionpursuantto26U.S.C.§6103(j)thatwouldrequirestatisticalreportingtothepublic.Today,nooneintheUnitedStateshasreliablecountry-by-countryinformationaboutlargeU.S.multinationalsintermsofwheretheyoperate,howmanyemployeestheyhave,thesizeoftheircapital

43 See 26 U.S.C. §6103(h)(2).

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investments,theamountoftheirprofitsorlosses,orthetaxestheypay.TheinformationtobecollectedintheCbCReportswill,forthefirsttime,provideaccurate,timelyeconomic,business,andtaxinformationthatcouldplayaninvaluableroleindesigningeffectiveandefficientU.S.policy.

Earlierinthisletter,weurgedthattheformsnotbetreatedastaxreturninformation,

sothatthedatawouldnotbecomesubjecttothelegalbarrierserectedby§6103.Ifthedecisionisneverthelessmadetotreattheformsastaxreturninformation,weaskthatthefinalruleatleastmandateissuanceofanannualpublicsummaryofthecountry-by-countryinformationinaggregateform.

Thatannualpublicsummarycouldtakemanyforms.Attheveryleastitshouldprovide

generalaggregateinformationsuchasthetotalnumberofmultinationalsthatfiledtheformand,foreachcountrywithatleastthreeU.S.multinationals,thetotalnumberofU.S.multinationalsoperatingthere,thetotalnumberofemployees,andthetotalamountofrevenues,profitsorlosses,capitalinvestments,andtaxespaidoraccruedbyU.S.multinationalsinthatjurisdiction.TreasuryandtheIRSalreadyprovideorallowotherstoanalyzeandpublishsummariesofmanytypesoftaxreturndata44,includingdataintheSchedulesMfiledbylargeU.S.corporations;CbCReportsshouldbenoexception.Eventhisminimalinformationwouldprovidethefirstaccurate,timelydataofitstypeandwouldbeofinteresttopolicymakers,academics,andthepublic.

Werecommendthatthepublicsummarygofurther,however.First,itshouldincludea

listbynameofthemultinationalsthatfiledCbCReports.Suchalistwouldenablepolicymakers,academics,andthepublictolearnwhatU.S.multinationalsthatmeetthereportingthreshold(ifadoptedasproposed,thosethathaveatleast$850millioninrevenues)–informationwhichisalreadypartiallydisclosedthroughfilingsbypubliclytradedcorporations,whichisofpublicsignificance,andwhichhasnopolicybasisforconcealmentfrompolicymakers,taxpayers,orothers.DisclosingthelistoffilersmayalsoenablethirdpartiestoidentifyanymultinationalsthatshouldhavefiledCbCReports,butdidnot.

InadditiontonamingtheCbCReportfilers,thepublicsummarycouldprovidebasic

aggregatedinformationforeachmultinationalgroup.Thataggregatedinformationcouldinclude,forexample,thetotalnumberofconstituententitiesincludedineachmultinationalgroup,thetotalnumberandnamesofthecountrieswhereithasaneconomicpresence,andthetotalnumberofemployeesreportedforeachjurisdiction.Noneofthosefactsinvolvestaxinformation,andthereisnoreasontokeepanyofthosefactsfrompolicymakers,academics,orthepublic.Inaddition,foreachmultinational,thepublicsummarycouldprovidearangeofprofitsorlosses,capitalinvestments,andtaxespaidoraccruedineachcountry.Again,thisinformationwouldnotonlybenefitpolicymakers,academics,andthepublic,butalsoenablethirdparties,includingothercountries,todoublechecktheaccuracyofthefiguresprovided.

44 See https://www.irs.gov/uac/Tax-Stats-2.

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PARTIV:InternationalEngagement

ExchangingInformation.AnotherimportantissueinvolvesthemannerinwhichtheUnitedStatesintendstoexchangeCbCinformationwithothercountries.TheexplanatorytextprecedingthestatutorytextoftheproposedrulecontainslanguagethatindicatesanintentiontolimitthepermissibleusesofexchangedCbCdataevenbeyondtheconstraintscontainedinexistinginformationexchangeagreements.Itstates:

[U]nderthetermsofinformationexchangeagreements,neithertaxjurisdictionis permitted to disclose the information received under the informationexchangeagreementorusesuchinformationforanynon-taxpurpose.UnderthecontemplatedcompetentauthorityarrangementsfortheexchangeofCbCreports, the competent authorities of the United States and other taxjurisdictions intend to further limit the permissible uses of exchanged CbCreportstoassessinghigh-level transferpricingandothertaxrisksand,whereappropriate,foreconomicandstatisticalanalysis.45TheproposedruleoffersnojustificationforlimitingtheexchangeofCbCdatabeyond

whatisalreadyprovidedforincurrentU.S.informationexchangeagreements.Eventhelimitationimposedbyexistinginformationexchangeagreements,namelyaprohibitiononthedisclosureofinformationforanynon-taxpurpose,istoorestrictive.Thatiswhywerecommendthat,ratherthanutilizeitsbilateraltaxinformationexchangeagreements,theUnitedStatesexchangeCbCinformationusingtheinternationalagreementestablishedforthatpurpose.

WhilewereiterateourcallforCbCreportinginformationtobemadepubliclyavailable,

renderingthisentireissuemoot,shouldthatnotbethecoursechosenwewouldliketoechocommentsonthisissuethathavebeensubmittedtoyoubytheBEPSMonitoringGroup.46Weadoptandendorsethosecommentsinfull,whichwereprinthere:

“OnJanuary27,2016,thirty-onecountriessignedtheMultilateralCompetent

AuthorityAgreementontheExchangeofCountry-by-CountryReports(MCAA).Presumablymanymorewillsigninthemonthsahead.

“IthasbeenreportedthattheU.S.willnotsigntheMCAA,butwillratherenter

into‘bilateralagreementswithappropriatecountriesthathavealsoadoptedcountry-by-countryreportingprovisions,haveappropriatesafeguardsandinfrastructureinplace,andwithrespecttowhichtheU.S.hasanincometaxtreatyortaxinformationexchangeagreementineffect.’

45 80 Federal Register 246 (12/23/2015), at 79796. 46 Comment letter submitted by the BEPS Monitoring Group (undated).

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“Part2oftheBackgroundsectionbeginningonpage5ofthenoticeofproposed

rulemakingdiscussesextensivelytheTreasuryandIRSconcernsregardingU.S.confidentialityrequirements.Presumablybecauseoftheseconcerns,thenoticestates:

ItisexpectedthattheU.S.competentauthoritywillenterintocompetentauthorityarrangementsfortheautomaticexchangeofCbCreportsundertheauthorityofinformationexchangeagreementstowhichtheUnitedStatesisaparty.“WhiletheU.S.networkoftaxtreatiesandinformationexchangeagreementsis

bynomeanssmall,thisnetworkexcludessomenumberofdevelopingcountries,manyofwhicharehonorableintheirrespectforconfidentialityandprotectionoftaxpayerinformation,butwhicharemostinneedofCbCinformationsothattheycanintelligentlydirecttheirlimitedresourcesinidentifyingandcombattingMNEBEPSbehavior.

“ThisplannedapproachbytheU.S.torequireaseparatelyagreedtaxtreatyor

informationexchangeagreementbeforetherecanbeanyCbCexchangemeansthatnotonlywillinitiationofsuchexchangesbeseriouslydelayedformanycountries,butprobablywillneveroccurformanyothers.TherealityisthattherearelimitednumbersofU.S.officialswhonegotiatesuchagreements.ItislikelytobeyearsbeforeTreasury’slimitedresourceswillbeabletonegotiateagreementswithnumerouscountriesand,inaddition,performtheduediligencefunctionssetoutinthenoticeofproposedrulemaking.Frompages5–6:

Priortoenteringintoaninformationexchangeagreementwithanothertaxjurisdiction,theTreasuryDepartmentandtheIRScloselyreviewthetax jurisdiction’s legal framework for maintaining confidentiality oftaxpayerinformationanditstrackrecordofcomplyingwiththatlegalframework.Inordertoconcludeaninformationexchangeagreementwithanothertaxjurisdiction,theTreasuryDepartmentandtheIRSmustbesatisfiedthatthetaxjurisdictionhasthenecessarylegalsafeguardsin place to protect exchanged information, such protections areenforced, and adequate penalties apply to any breach of thatconfidentiality.Moreover,evenwhentheseconditionshavebeenmetandaninformationexchangeagreementisineffect,theU.S.competentauthority will not enter into a reciprocal automatic exchange ofinformationrelationshipwithatax jurisdictionunless ithasreviewedthetaxjurisdiction’spoliciesandproceduresregardingconfidentialityprotectionsandhasdeterminedthatsuchanexchangerelationshipisappropriate.“Therearetwowaystoproceed.Onewayistodoasnowplannedandhave

separatelynegotiatedbilateralagreementswithperhapsasmanyas200tax

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jurisdictions.TheotherwayistobeasignatorytotheMCAA,andthentoconductapplicableduediligencetodeterminewithwhichoftheotherjurisdictionsitispossibletoallowactualCbCRexchanges.

“Takingthisotherwaywouldsignificantlyreducetheeffortsrequiredby

Treasury’slimitedpersonnelresources.Inaddition,though,andveryimportantly,itwoulddemonstrategloballeadershipintaxadministrationthatwouldfavorablyinfluencemanyothercountriestodothesame.Withoutquestion,betterCbCRwillpaysignificantdividendstotheUnitedStatesthroughincreasecollectionoftaxesfromforeign-basedMNCs.

“Ifthepresentlyplannedseparatelynegotiatedbilateralagreementsapproachis

continued,weareveryconcernedthatthedelayswefearwillcometrue,aswillsignificantgapsduetotherebeingnobilateralagreementsexecutedwithmanycountries.SuchasituationwillseverelyhurtboththeUnitedStates’effortstoimplementitsowntaxlawsandtheeffortsofmanyothercountries,bothdevelopedanddeveloping.Itwilllikelyalsoencouragenumerouscountriestobypassthegovernment-to-governmentexchangeproceduresandsimplyrequireMNEstofiletheirCbCreportsdirectlywiththelocalcountrytaxadministrations.”

LiketheBEPSMonitoringGroup,weviewtheUnitedStates’currentplantoexchangeCbCinformationthroughitsnetworkofbilateraltaxagreementsinsteadofthroughthemultilateralexchangeagreementdevelopedforthatpurposeasill-advised,duetotheadditionalcost,delays,andinformationrestrictionsinvolved,thepotentialnegativeimpactondevelopingcountryaccesstotheinformation,aswellasthenegativeimpactsontheMultilateralCompetentAuthorityAgreementontheExchangeofCountry-by-CountryReports.WeurgetheUnitedStatestorespectratherthandisregardtheexistinginternationalprocessforsharingCbCinformationifthedecisionistakenthatCbCreportingshouldnotbepubliclyavailableinformation.

Thankyouforthisopportunitytocommentontheproposedrule.PleasecontactFACT

SteeringTeamMemberHeatherLoweatGlobalFinancialIntegrity([email protected])andFACTMemberEliseBean([email protected])withanyquestions.

Sincerely,

ClarkGascoigneActingExecutiveDirectorFACTCoalition