Ablean Saoud and Tim Keeling discuss the challenges country by country reporting could pose for organisations with a globally mobile workforce.
The Organisation for Economic Co-operation and Development (OECD) Base Erosion and Profit Shifting (BEPS) project is perhaps the most far reaching change ever seen in global tax policy. Broadly, the stated aim of BEPS is to ensure alignment of taxation with economic substance and value creation, and Action 13 (Country-by-Country (CbC) reporting) sets a framework to collect standardised data from multinationals as to where profit, tax and economic activity is occurring around the globe. CbC reporting is effective in Australia for tax years beginning on or after 1 January 2016.
In understanding where the economic substance of multinationals is located, a key focus will be placed by tax authorities on the number of employees that the multinational has in each country. HR and mobility teams need to be working with their tax and transfer pricing teams as the CbC report requires reporting of “employees on a full-time equivalent basis”. The determination of which employees qualify as “full-time equivalents” is left to the judgement of the taxpayer subject only to the requirement that the determination be reasonable and that it be applied consistently among all of the jurisdictions and from year to year.
Reporting on “full-time equivalents” on a global basis will present challenges to organisations as differences may exist across countries. Other definitional issues to be considered include:
Perhaps the most challenging definitional issues will be the treatment of independent contractors, leased employees, contingent workers or outsourced employees.
Whilst the stated goal of CbC reporting is to enhance transparency for tax administrations and allow for the better assessment of the transfer pricing risks of multinationals, the CbC regulations do not place specific limitations on the use of the data reported. A CbC report filed with the Australian Taxation Office (ATO) may be exchanged with other tax jurisdictions, and the ATO can request CbC reports lodged with foreign tax authorities. These reports may also be shared with state and local tax authorities. Therefore, these disclosures could potentially lead to additional audits by various tax authorities on whether pension/superannuation contributions are being made appropriately or other employment tax withholding and reporting obligations are being fulfilled.
It’s important for the HR and mobility teams to discuss CbC with their tax and transfer pricing teams to agree on the approach. Together, the HR and tax teams will need to:
These rules represent yet another new aspect of managing a global workforce and further encourage close coordination between the HR and tax functions within global companies.