IRD gets more ammo to fight multinationals

Multinational companies will be required to disclose country-specific information about their global tax affairs, if the OECD gets its way.

This will strengthen the arm of domestic tax authorities in their investigations of multinationals' transfer pricing arrangements.

As one of its first deliverables under the all-encompassing Base Erosion and Profit Shifting (BEPS) action plan, the OECD has just released a discussion document suggesting multinationals be required to disclose how their global income is allocated among all the countries in which they operate and how much tax they have paid in each country.

Tax authorities worldwide can then see how the profits and tax reported by the multinational company in their country compares with other countries.

In addition, the OECD recommends multinationals disclose to all tax authorities details of their global intangible assets, intercompany financing arrangements and transfer pricing disputes currently being faced or rulings obtained in various countries. 

If a company is facing a transfer pricing challenge in one country, other countries will be tempted to have a crack at it as well.

This type of country-by-country reporting should concern companies. There will be additional costs in ensuring systems can extract the additional information in the form the OECD requires. It will result in yet more tax authority inquiries and disputes with tax authorities around the world.

The OECD also wants disclosure of other economic information, such as employee numbers, sales and tangible assets, along with each country's royalties, and interest and service fees paid to other group entities.

For example, if our IRD sees that a foreign multinational earns most of its profits in a low tax country, yet most of its employees and assets seem to be in high tax countries (including New Zealand) where its customers are based, it would likely commence a transfer pricing investigation.

But a little knowledge can be a dangerous thing. It may be a slippery slope where tax authorities, armed with this new information, start to form views about transfer pricing outcomes.

Global companies must set their intercompany transfer prices in accordance with local regulations and most countries follow prescribed OECD transfer pricing guidelines. This impacts the reported profits in individual countries.

Allocating global profits based on an allocation key (called "formulary apportionment"), such as employees numbers and/or assets, is not standard transfer pricing practice. It is fraught with problems and inevitably leads to more disagreements as countries compete for a greater share of a company's global tax pie.

New Zealand's disclosure requirements for multinational companies have been relatively light compared with many other countries. IRD will no doubt welcome the opportunity to get a more complete tax profile on a multinational company operating in New Zealand. But New Zealand companies will have to disclose similar information that foreign tax authorities can use.

In contrast, Australia already requires companies to complete a 13-page schedule, detailing their intercompany transactions, as part of their tax return. It is proposing to publish a list of the profits and tax paid in Australia by companies earning more than A$100 million ($108 million).

The OECD states clearly that its move is intended as a reporting mechanism for tax authorities, not for the public. Multinationals are, rightly, sceptical but base erosion and profit shifting has become a political football. Increasingly, the public is demanding greater transparency of a company's global tax affairs to determine whether it is acting morally.

With these new disclosure requirements imminent, multinationals can best prepare by maintaining sound transfer pricing documentation and/or seeking a ruling from IRD in the form of an advanced pricing agreement.

- Mark Loveday is a transfer pricing partner at EY