Selva Ozelli: IRS joins fight against corruption in offset trade deals
Wednesday, May 31, 2017 at 8:22AM
Selva Ozelli in Airbus, Austria, Internal Revenue Service, OECD, offset

Bill Steinman recently wrote a post for the FCPA Blog about compliance risks in offset obligations. I'd like to continue that discussion, this time with some information about international cooperation to clean up offset transactions, and how the U.S. Internal Revenue Service is playing a role.

To review, “offset agreements” are industrial compensation requirements imposed by foreign governments as condition to purchase of goods, technology, intellectual property (IP) and services from nondomestic suppliers. Offsets typically are used in the aerospace and defense sector.

Offset transactions have been often abused for corruption. For example, in Austria, a €2 billion ($2.24 billion) deal for 18 Eurofighter combat jets required Airbus to invest into Austria twice the value of the aircraft deal. In the end, more than $100 million of this offset amount was reportedly lost to bribery and corruption.

To fight that sort of graft, the OECD or Organization for Economic Co-operation Development adopted new tax compliance reporting requirements called the Country-by-Country Report (CbCR).

So far, 58 countries have adopted the CbCR, which is intended to bring a certain amount of transparency to offset arrangements entered into by aerospace and defense multinational companies.

The CbCR will be automatically exchanged with other governments via tax treaties, Tax Information Exchange Agreements (TIEA), and Multilateral Competent Authority Agreements (MCAA). EU countries propose to make CbCRs publicly available.

In the United States, for the first time this year, aerospace and defense companies with annual revenues of at least $850 million (Multinational Enterprises or MNE) will be obligated to file CbCR via IRS Form 8975 on Oct 16, 2017.

MNE will disclose to tax authorities information regarding offset arrangements with offset advisors, indirect offset partners, and offset subcontractors, on a country-by-country basis as follows:

MNE won't be required to report cash or cash equivalents, intangibles, or financial assets, or technology or intellectual property transfers made to foreign governments.

The United States will automatically exchange filed CbCR with Tax Treaty and TIEA countries.

The final U.S. regulations do not provide for public disclosure of CbCR and the preamble to the regulations state that the CbCR would benefit from the confidentiality requirements, safeguards and appropriate use restrictions provided under the competent authority provisions of U.S. tax treaties.

Nevertheless, U.S. taxpayers have expressed concerns that a CbCR could be made publicly available in other jurisdictions that are less stringent about confidentiality or have proposed legislation for the public disclosure of CbCRs.

MNE that fail to file a CbCR could be subject to penalties federal tax rules, and to penalties under rules imposed by the 57 other countries that have agreed to exchange CbCR. The U.S. Supreme Court said in Pasquantino v. U.S. (2005) that federal wire fraud charges could be brought against violators of foreign tax laws.

In light of the above, offset departments of MNE are urged to coordinate with their tax and legal departments to minimize unintended consequences from failing to file a CbCR this year.

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Selva Ozelli is a tax attorney and legal and accounting analyst, with special expertise on the extraterritorial application of the FCPA via international tax rules.

Article originally appeared on The FCPA Blog (http://www.fcpablog.com/).
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