Congressional Leaders Advise Treasury to Embrace BEPS With Caution
On June 9, 2015, Senator Orrin Hatch, the chairman of the Senate Finance Committee, and Rep. Paul Ryan, the chairman of the House Ways and Means Committee, wrote to Jacob Lew, the Secretary of the U.S. Treasury, concerning U.S. involvement in the G-20 BEPS initiative (“BEPS”). Until recently, the U.S. Congress has shown little awareness of, or interest in, BEPS, but the Congress now appears to believe that BEPS may have an adverse effect on U.S. business and the U.S. fisc and is pressuring the Treasury to justify its participation in implementation of some of the BEPS recommendations.
Concern with Country-by-Country Reporting
Congress now seems especially concerned by BEPS Action 13, which addresses transfer pricing documentation and country-by-country (“CbC”) reporting. Sen. Hatch and Rep. Ryan state in their letter that they are concerned “the Treasury has appeared to agree that foreign governments will be able to collect the so-called ‘master file’ information directly from U.S. multinationals without any assurances of confidentiality or that the information collection is needed.”
Sen. Hatch and Rep. Ryan also question the IRS’s authority to implement CbC reporting. Their letter states: “[w]e believe the authority to request, collect and share this information with foreign governments is questionable.” The letter make two major requests: First, Treasury should provide “a legal memorandum detailing [the Treasury’s] authority for requesting and collecting this CbC information from certain U.S. multinationals and master file information from U.S. subsidiaries of foreign multinationals.” The letter also requests “a document: (i) identifying how the CBC reporting and other transfer pricing documentation obtained by the IRS on foreign multinationals operating United States will be utilized, and (ii) providing the justification for agreeing that sensitive master file information on U.S. multinationals can be collected directly by foreign governments.” The letter includes a potential threat: “In the event we do not receive such information, Congress will consider whether to take action to prevent the collection of the CbC and master file information.”
In the author’s view, the Treasury’s power to collect the CbC information is well within the authority granted by Congress to the IRS in section 6038, which is broadly written. That information generally may be exchanged with treaty partners pursuant to the exchange of information and administrative assistance article of U.S. tax treaties. If that information is not to be collected by the IRS, Congress would have to enact a law narrowing the scope of section 6038.
The U.S. Position on BEPS
The justification for Treasury agreeing to the collection of master file information has not been discussed in public. However, the purpose of collecting the master file information is to facilitate the global enforcement of the arm’s-length standard. U.S. income tax treaties typically include an article addressing the taxation of transactions between “associated enterprises” and this article includes the arm’s length standard.
Although the United States has strongly embraced the arm’s-length standard for many years, the letter implies that Sen. Hatch and Rep. Ryan believe that enhanced global enforcement of the arm’s-length standard is not beneficial to the U.S. fisc or U.S. multinationals. In the context of BEPS, they probably are correct. There is an expectation among U.S. multinationals and their advisors that BEPS is intended (at least in part) to target U.S. multinationals and will result in an increase in their non-U.S. effective tax rate once implementation begins. This will come, inter alia, through stricter enforcement of transfer pricing rules. As the United States, by statute and by treaty, eliminates double taxation of foreign source income through a foreign tax credit, an increase in the foreign effective tax rate of U.S. multinationals translates into a lower residual U.S. tax on foreign source income in the long run.
While this outcome may not be in the best interest of the United States, rejecting the G-20s efforts to improve enforcement of the arm’s-length standard would make Treasury less influential in multilateral discussions of transfer pricing issues at a time when U.S. leadership is essential. To date, the United States has been successful at limiting the more extreme attempts to circumvent the arm’s-length standard out of the discussion drafts on transfer pricing issues. Thus, while the Treasury may face criticism from Congressional leadership, Treasury may be viewed as simply doing the best it can with the hand it has been dealt. The letter may, in fact, prove useful to Treasury at some point as it can point to Congressional reluctance to support BEPS as a rationale for its position.
 Section 6038(a) provides, inter alia,
“Every United States person shall furnish, with respect to any foreign business entity which such person controls, such information as the Secretary may prescribe relating to . . . transactions between such entity and— such person, any corporation or partnership which such person controls, and any United States person owning, at the time the transaction takes place— . . ..
The Secretary may also require the furnishing of any other information which is similar or related in nature to that specified in the preceding sentence or which the Secretary determines to be appropriate to carry out the provisions of this title. [emphasis added]”
 However, some countries have enacted aggressive transfer pricing legislation outside the BEPS process.
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