Multinational corporations have the benefit of operating globally, which allows them to select the best and most profitable bases for all their operations. From establishing worldwide factories to building markets that cater to different countries, the benefits of globalization are seemingly endless for these companies.
However, operating a multinational company also comes with complex financial considerations. Taxation is top among these. Though some businesses have managed to sidestep the expense of high taxes in particular areas, this practice is likely coming to an end as the United States negotiates agreements for the exchange of tax information with other countries. Its first agreement with the Netherlands offers a look at what’s in store:
Taxation and National Economies
Globalization seems to shrink the world while simultaneously expanding economic opportunities. As capital and labor move freely from one part of the world to another, it’s easy for companies to lose track of the complete trail that takes a product from research and development to manufacturing and sales, along with the taxes that should accompany these activities. While globalization benefits many types of trade agreements, it can also present some troubling situations in regard to finances.
Handling taxation alongside globalization is a challenge recognized as early as the 1920s. At that time, the primary issue was that of double taxation. When domestic tax systems interacted with one another, companies were at risk of becoming subject to dual taxes, which had a distinctly negative impact on international growth and global trade.
Corporations Maneuvering Around Tax Laws
Today, the concern isn’t overtaxing, but rather under-taxing large multinational corporations. Companies with operations in multiple countries might see an opportunity to minimize their taxes by exploiting lower tax rates in particular parts of the world. Sophisticated tax planners have become savvy at maneuvering around tax laws to minimize their businesses’ tax expenses.
Though this might benefit the individual corporation, it has a negative impact on the global economy. The Organization for Economic Co-operation and Development (OECD), which includes 35 member countries, sees this as a practice that must be addressed. The OECD drafted a detailed Action Plan on Base Erosion and Profit Sharing (BEPS) that provides clear guidelines for stopping companies that hope to shift profits to jurisdictions with lower or no taxes.
The Purpose of the BEPS Action 13 Report
The OECD’s BEPS Action 13 report offers a template to guide tax reporting and tax jurisdiction for multinational enterprises. It includes country-by-country reporting standards that address bilateral tax conventions, multilateral conventions on administrative assistance regarding tax issues, and Tax Information Exchange Agreements. The package is designed to help implement improved tax reporting. Its model legislation can be adopted by countries who want to require the ultimate parent entity of a group to file a country-by-country report in its jurisdiction of residence.
The United States and Country-by-Country Reporting
Though the United States is a member of the OECD, it has not signed the Multilateral Competent Authority Agreement (MCAA) on the Exchange of Country-by-Country (CbC) Reports. This means the U.S. must negotiate agreements individually with various countries to address how to handle taxation.
Countries around the world have been negotiating to implement either the CbC MCAA or other similar directives with one another. As of May 2017, the OECD reported more than 700 bilateral exchange relationships between over 30 jurisdictions in regard to the proper exchange of CbC Reports.
The United States has both primary and secondary laws in place for country-by-country reporting. Local filing is not required, and parent surrogate filing is voluntary in the parent jurisdiction. The first fiscal year covered for filing by the ultimate parent entity began June 30, 2016.
The U.S. Government’s Agreement With The Netherlands
As the United States has elected to negotiate country-by-country tax reporting individually, its agreements with individual jurisdictions have become extremely important. Multinational corporations must pay close attention to the legal requirements for every area where they do business.
The agreement with the Netherlands was signed in April 2017 and is the first of its kind for the United States. It conforms to the rules and requirements set forth in the OECD’s action plan and allows for the automatic exchange of information on multinational companies’ income as well as the taxes paid.
This means when a company files its taxes with the United States Internal Revenue Service (IRS), the IRS will then share this information freely with the Dutch Tax and Customs Administration if the corporation is a Netherlands resident for tax purposes or has a permanent establishment in that country. Both parties established in the agreement that they have the appropriate safeguards in place for confidentiality of this information.
Tax Information Exchanges with the U.S.
The United States issued rules in 2016 that outline how multinational corporations must address country-by-country taxes. The parent entity of any U.S. multinational enterprise group with a revenue of $850 million or more must file Form 8975, Country-by-Country Report with the IRS.
Though the Netherlands agreement is the first of its kind as it applies to multinational corporations, Tax Information Exchange Agreements (TIEAs) addressing other issues are in place between the United States and other countries. The United States established a TIEA with Panama in November 2010, with Monaco in September 2009, with Liechtenstein in 2008, and with Aruba in 2003. In 2002, the U.S. negotiated TIEAs with Jersey, Isle of Man, Guernsey, Netherlands Antilles, British Virgin Islands, and the Bahamas. In 2001, it signed a TIEA with the Cayman Islands, and in 2000 it established a TIEA with Antigua and Barbuda.
Why the Netherlands Agreement Is Important
The tax agreement between the Netherlands and the United States represents a changing landscape for multinational corporations. It’s important for any multinational company to note how tax requirements and regulations are evolving. Shifting taxes to the country with the most favorable rates and legislation won’t be a viable option going forward. Finance professionals must learn to adjust to the changing tax regulations and budget accordingly for proper taxation anywhere these corporations do business.
If you’re passionate about finance and accounting, you can become one of the essential tax professionals helping multinationals navigate these legal changes. Visit the New England College – Master of Science in Accounting Online program to learn more about advancing along this career path. An online Masters in Accounting can equip you with the knowledge you need to work with multinational corporations on critical financial issues.