John Brady


On October 20, 2015, the Organization for Economic Co-operation and Development (“OECD”) released the final report on Base Erosion Profit Sharing (“BEPS”) rules to thwart aggressive transfer pricing strategies involving intercompany transactions used by companies to lower taxes.  The OECD defines BEPS as “tax planning strategies that exploit […] gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations where there is little or no economic activity, resulting in little or no overall corporate tax being paid in those countries.”  The OECD paints a grim picture of international commerce through the actions of large multinational enterprises (“MNEs”). 

The final report attempts to correct the apparent gaps between tax jurisdictions, principally to ensure that tax bases are not artificially reduced through MNEs’ aggressive tax practices.  The OECD proposes several initiatives to mitigate and eliminate the effects of aggressive international tax planning.  Yet, none are as crucial as Country-by-Country Reporting (“CbCR”) laid out in Action 13.  The final report attempts some lofty goals in reigning in MNEs, but the entire plan hinges on accurate, comprehensive, and automatic exchanges of MNE business information between tax authorities in different countries.

Benefits of Country-by-Country Reporting

CbCR is intended to accomplish the final report’s overarching goal of creating transparency and uniformity among countries.  This transparency permits jurisdictions to better monitor MNEs business operations within their borders.  In turn, this also permits jurisdictions greater control over and better understanding of taxable activities within their borders.  Additionally, transparency, granted through CbCR, will ensure that MNEs comply with the initiatives laid out in the final report, such as the proposed transfer pricing rules limiting value to the jurisdictions where value creating takes place.

Moreover, uniformity and better transparency among nations achieves the goal of limiting opportunities for MNEs to capitalize on gaps between jurisdictions’ tax laws.  When MNEs seize on these legally permitted opportunities, jurisdictions suffer lost tax revenue even though significant value-creating activities may occur within its borders.

Potential Pitfalls

CbCR costs to MNEs are a significant issue, producing direct and indirect costs to MNEs.  First, there are inherent direct costs associated with the production of data to comply with the CbCR requirements.  Admittedly, many U.S. MNEs already must comply with various business disclosures domestically and abroad, whether security disclosures or tax disclosures.  However, internal data mining is a burdensome and expensive proposition to be added to a business’ bottom line. 

In addition, there are indirect costs associated with providing intimate knowledge about MNE’s business information.  The dearth of information required could catastrophically disrupt business operations if it fell in the wrong hands.  Though the information is intended for “tax purposes,” there is little reassurance that this information will be adequately protected.  These reports will provide significant details about worldwide business operations and assets.  The value of this information would be immense, and thus reasonable to foresee corruptive practices exchanging data with competitors.  Business competitors could disrupt and cripple business operations with the exchanged information.  Costs to combat and recover from corporate espionage could be overwhelming, which not only would affect the entity but also any individual shareholders.

In essence, CbCR means entrusting valuable taxpayer information in the hands of foreign jurisdictions that are not beholden to American voters for ultimate review.  If CbCR is to be implemented and successful, there must be adequate safeguards in place to reasonably ensure that taxpayer information is protected from intrusive and corruptive practices.  

U.S. Status of County-by-Country Reporting

On December 23, 2015, the U.S. Treasury released a proposed regulation to adopt CbCR.  The Treasury used the model OECD template as a guide in this regulation.  In doing so, the proposed regulation will require MNEs to disclose the same information required in the final report, such as financial data, headcount, global snapshot of an MNC and its subsidiaries, and paid taxes.  In addition, the Treasury largely adopts the limitations imposed on the use of such data: (1) CbCR will not be used to conclude abusive transfer pricing, but (2) it may be used as a basis for further inquiry.  Interestingly, the Treasury does take steps to mitigate some of the direct costs in compiling these reports by bringing them in line with existing reporting code sections: 6001, 6011, 6012, 6031, and 6038.

The Treasury adopts the OECD report’s language on inter-country transfers and confidentiality.  The Treasury ensures that a “close review” of a “tax jurisdiction’s legal framework for maintaining confidentiality of taxpayer information and its track record of complying with that legal framework” will occur prior to an information exchange with foreign jurisdictions.  Thus, the receiving jurisdiction will have the “necessary legal safeguards” to protect exchanged information.  Yet, the proposed regulation does little to set any recognizable standard for confidentiality.  There is little reassurance that all foreign jurisdictions will comply under a unified, objective privacy standard.  Without some clear standard, it remains speculative whether a mere examination of legal frameworks and historical enforcement will indicate genuine protection of taxpayer data, especially among cultures that don’t value privacy as highly others.

In contrast, legislators took action to “prevent” this automatic exchange.  The House submitted a bill (“the legislation”) to prevent the Treasury from collecting or transmitting CbCR for taxable years beginning prior to January 1, 2017.  Assuming swift passage, the legislation is only a moratorium on taxable years starting prior to January 1, 2017.  Taxable years after that date could be freely exchanged, unless subsequent legislation blocks those years from exchange.  Therefore, the legislation would do little more than postpone the inevitable – CbCR is here to stay. 

Nevertheless, the legislation would impose some reporting obligations on the Treasury and IRS, and it would also provide specific circumstances where the Treasury and IRS would suspend exchanges in protection of taxpayer information.  The latter would require the Treasury and IRS to suspend exchanges of information with tax jurisdictions that either (1) abuse the master file requirements, or (2) fail to safeguard confidential information.  The bill enumerates specific abuses that would qualify a suspension, such as tax jurisdictions pursuing corporate secrets or violating “U.S. public policy.”  However, the proposed legislation falls short of establishing minimum standards of confidentiality before exchanges commence.  So at best the legislation, if passed, amounts to a temporary measure buying the U.S. time to observe CbCR take effect abroad.  While several jurisdictions implemented CbCR and others anticipate its enactment, it is too soon to tell how well the system will operate.  Some suggest that the final report and CbCR merely serve as a means to destabilize American business, and if true, issues with CbCR will not become apparent until the U.S. goes online with the automatic exchange.

Interestingly, some critics suggest that halting CbCR, even temporarily, may do more harm than good.  Some taxpayers may still need to submit CbCR to other jurisdictions if the U.S. parent entity would not be required to submit CbCR in the U.S.  This path may be less secure with CbCR suspended in the U.S. until 2017.


The U.S. should be prudent in examining additional privacy safeguards to further protect taxpayer data from abuse and unauthorized consumption prior to implementing the automatic exchange.  As mentioned, the current U.S. proposals fail to meet specificity in data protection.  The final report fairs no better, but does cite to prior exchange agreements for guidance, such as Multilateral Competent Authority Agreement for the Common Reporting Standard.  Under this agreement, it is at least understood that a “supplying competent authority” could require the “receiving competent authority” to comply with additional safeguards to protect taxpayer information.  Additionally, the “receiver” may also be expected to comply with the domestic privacy laws of the “supplying” jurisdiction.  This flexibility permits the U.S. to apply additional privacy safeguards to foreign jurisdictions in order to protect taxpayer data.

John Brady is a Staff Member on the Delaware Journal of Corporate Law, and a member of the Moot Court Honor Society.  John works as a pre-trial clerk at the Chester County District Attorney’s office.

Suggested Citation: John Brady, Considerations in Implementing Country-by-Country Reporting, Del. J. Corp. L. (Feb. 7, 2016),