Clark Armitage Comments on Country-by-Country Reporting in Law360
Large multinationals should use the global blueprints of their business operations, which involve detailed information they're required to submit under international tax rules, to assess their own potential weaknesses and spot any red flags before foreign auditors do.
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Just as these reports are a risk assessment tool for tax administrations, they're a risk assessment tool for taxpayers, according to Clark Armitage, an international tax attorney at Caplin & Drysdale. He said the reports aren't as valuable for businesses, which presumably have documented their transfer pricing, but they can help highlight areas of weakness.
Different factors can cause a potentially questionable situation in a jurisdiction. Armitage said a multinational should look at a country where it has, for example, 30% of its employees but only 5% of its profits.
"Once you do take a look at that country, you're going to assess the strength of your transfer pricing there and be ready to defend," he said.
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It's possible that information from country-by-country reports can be abused, but a tax administration's decisions would have to be sustained by that country's local system, according to Armitage at Caplin & Drysdale.
"If a particular country comes in and makes an adjustment that seems clearly to rely on something that's not what the local law permits, then presumably that taxpayer can defeat the adjustment in a local administrative process or in court," he said.
Armitage added that if a company is unsuccessful in challenging the adjustment, then "you have to wonder whether it's really an improper use" of the information from the report.
"I think every situation has to be looked at as a discrete matter," he said.
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Excerpt taken from the article “Multinationals Should Use Int'l Tax Reports To Look Inward” by Natalie Olivo for Law360 Tax Authority.