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BEPS: the US perspective

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For different reasons, US multinationals and the US federal government are both growing increasingly concerned about the BEPS project.

Both US companies and the US federal government have a significant interest in BEPS and its ultimate impact. For US companies, taxes are often the third largest category of expense, behind only labour and new materials.

Accordingly, in an increasingly global business environment, companies are concerned that BEPS could potentially result in a significant increase in overall taxes.

For the US federal government, in an era when it continues to run up huge deficits, the last thing it needs is for its corporate tax revenue to be put at significant risk, which is what could happen as a result of BEPS.

Among the specific concerns of US multinationals are the following:

  • Perhaps the biggest concern is the danger of various countries taking BEPS measures unilaterally, resulting in significant double taxation.
  • Another major concern is the significant increase in administrative costs, both in producing the ‘country by country’ reports and also in responding to the inevitable increase in follow-up requests from tax authorities around the world.
  • Finally, some companies even see the potential for introducing some sort of formulary appointment as a partial, or perhaps total, replacement of the arm’s length standard.

From the US government’s perspective, top US tax administrative and policy officials have a separate list of concerns:

  • A Treasury department official has said that while BEPS may make some sense for addressing certain ‘arbitrage’ opportunities (such as hybrid mismatches, interest expenses, treaty abuse and intangibles), it is unclear whether a consensus could be reached on issues such as the digital economy. The concept of a virtual permanent establishment inevitably creates ‘winners and losers,’ and he is concerned that the US will often be the loser in terms of its tax base.
  • The same Treasury official has also questioned whether a ‘failure’ of BEPS to reach clear international norms would inevitably lead to international tax chaos. He has suggested that a world in which tax administrators work through issues on a bilateral basis may actually be preferable to the situation where each country unilaterally applies vague principles arising from the BEPS project.
  • The Commissioner of Internal Revenue has said that country by country reporting would be difficult for the IRS because it would result in thousands of information requests from tax authorities around the world.
  • Finally, another IRS official has warned that implementation of the BEPS initiatives will cause the IRS to shift its focus from outbound taxation to inbound taxation in order to protect the US corporate tax revenue base from assertions by other countries on the right to tax that revenue.

The bottom line is that there is significant scepticism of and concern with the BEPS project from the perspective of both US companies and the US federal government.