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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