Tax activists slam U.S. reporting exemption for defense firms


Tax activists this week criticized a U.S. government move to exempt large defense contractors from a financial disclosure rule meant to fight international tax dodging, saying the need for a national security exemption was unproven.

The Financial Accountability and Corporate Transparency (FACT) Coalition’s criticism came after the U.S. Treasury and Internal Revenue Service sided in late March with defense contractors that had asked the agencies for the exemption.

The new rule, part of a global tax accountability push that the United States has largely supported, requires U.S.-based multinational corporations with revenues exceeding $850 million to report revenue annually on a country-by-country basis.

The disclosure is meant to give tax authorities a clearer idea of a company’s business commitments in specific countries, especially low-tax nations where multinationals often funnel revenues to minimize their tax liabilities.

But defense contractors, represented by both the Aerospace Industries Association (AIA) and the National Association of Manufacturers (NAM), argued that the reporting rule would also result in disclosure of other information.
“We are concerned that militarily sensitive information would be contained in or extractable from country-by-country reports envisioned by the proposed rule, particularly with respect to reporting on personnel, sales, and tangible assets in each country,” the AIA said in a March 2016 letter to the IRS.

AIA’s members include contractors such as General Dynamics Corp, Lockheed Martin Corp, Northrop Grumman Corp, Raytheon Co. and Boeing.

Treasury and the IRS sided with the contractors and exempted entities with more than 50 percent of annual revenue derived from contracts with the U.S. Department of Defense or other U.S. intelligence or security agencies.

The IRS said in a March 30 notice that they had sought input on a possible national security exemption when crafting the original rule. Subsequent consultations with the Defense Department and Treasury prompted the exemption, the IRS said.

But, in a letter this week to the Treasury, the FACT Coalition, which represents 100 groups including organizations on tax fairness, government ethics and international poverty, said the agencies had provided no “reasoned analysis justifying creation of the national security exception.”
“The notice’s creation of an immediate national security exception to the (country-by-country) reporting requirement is arbitrary and capricious,” the FACT Coalition wrote in the April 30 letter.

The IRS could not immediately be reached for comment on the FACT letter. The Treasury did not immediately respond to a request for comment.

The country-by-country IRS rule was intended to align with 2015 recommendations from the Organisation for Economic Co-operation and Development, an international group of advanced economies that has been working to curb corporate tax dodging.

The FACT letter said the IRS failed to acknowledge that the Defense Department, when crafting the original rule, had said that country-by-country revenue information “generally does not pose a national security concern.”