2015-Issue 2—A fresh set of implementation guidelines was issued early in February by the Organisation for Economic Co-operation and Development (OECD) on Action 13 — Transfer Pricing Documentation and a Template for Country-by-Country Reporting of the base erosion and profit shifting (BEPS) initiative. While there are still a lot of open questions and uncertainty about the country-by-country report (CbC Report), the new guidance gives multinational enterprises (MNEs) valuable insight on key points related to the report. The new guidance relates to: (i) the timing for preparing and filing the CbC Report, (ii) the MNEs that should be required to file the CbC Report, (iii) the conditions under which jurisdictions should obtain and use the CbC Report and (iv) a framework for mechanisms under which governments may exchange the CbC Report together with the work plan for developing an implementation package. This edition of Tax Advisor Weekly provides a brief overview of the history of BEPS and Action 13 as it pertains to country-by-country reporting, a review of the 2014 deliverables on Action 13, and a summary of the new guidance issued by the OECD.
Base Erosion and Profit Shifting (BEPS)
It is undisputed that both the public and governments view the rise of international tax planning and strategies used by MNEs as a major threat to their existing tax base and their sovereignty. Since 2013, the OECD, working with the G-20 countries, has been studying the base erosion and profit shifting problem and developing a comprehensive action plan to equip countries with the necessary tools to tackle this problem. While the OECD does not have the authority to legislate in any country, its recommendations regarding BEPS are expected to be widely adopted and become law in member and non-member countries alike. The initial OECD action plan encompasses 15 action points; this article focuses on a critical component of one of them: country-by-country reporting.
On September 16, 2014, the OECD released its 2014 deliverables to the general public regarding the first wave of action plans (1, 2, 5, 6, 8, 13 and 15). One of the initial OECD deliverables is Action 13 — Transfer Pricing Documentation and a Template for Country-by-Country Reporting. This action point addresses the need for countries to obtain better information from MNEs to properly analyze a MNE’s operations and intercompany transactions in connection with a transfer pricing examination. One essential component of Action 13 is the requirement that MNEs provide to the tax authorities information on the global allocation of profit, economic activities and taxes on a country-by-country basis.
Country-by-county reporting is expected to be widely adopted very quickly. Even now, while there is still a lot of information and guidance pending, countries such as the United Kingdom and Spain are moving to incorporate the CbC Report into their tax compliance obligations. More countries are expected to join in the near future. The information required by the CbC Report and the practical difficulties in gathering and presenting this information are of significant concern to MNEs. There has been substantial commentary and discussion by the public and the OECD regarding this new reporting obligation. Fortunately, some of these comments are beginning to make their way into the guidelines provided by the OECD as detailed below.
MNEs will need to report annually, and for each tax jurisdiction in which they do business, the amount of revenue, profit before income tax, and the income tax paid and accrued. Also, the MNE will have to report its total employment, capital, retained earnings and tangible assets in each tax jurisdiction. Finally, the MNE will need to identify each group entity for which the financial information is reported, the country of incorporation or tax residence, and the nature of the main business activities carried out by that entity. According to the OECD, the report should include all tax jurisdictions in which the MNE group has an entity resident for tax purposes, regardless of the size of the business operations within that jurisdiction.
What Is the Country-by-Country Template?
The country-by-country template was proposed by the OECD to implement the objectives of Action 13. It provides the tax authorities with the information necessary to see where the MNE’s profits are coming from and how those profits match with the MNEs’ resources in each country.
- The first page of the template is to be analyzed at the country level. It requires that the MNE list out the following by tax jurisdiction: revenues, profit, income taxes paid, stated capital and accumulated earnings, number of employees, and tangible assets other than cash or cash equivalent.
- The second page concentrates on an entity-level approach explaining the main business activity per entity in each tax jurisdiction.
- The final page is left for MNEs to provide additional information or analysis to facilitate the understanding of the country-by-country report.
Practical Issues for MNEs and the Latest Guidance
There are several practical issues that the CbC Report will create for MNEs. The OECD addressed some of these points in the initial deliverable in 2014, and some in the guidance issued earlier this month, but others are still being considered and are expected to be addressed later this year. Some of the points already covered include:
- It is expected that the CbC Report should be filed by the ultimate parent entity of a MNE group in its country of tax residency. The CbC Report should then be shared, through an automatic exchange of the information, with the jurisdictions in which the MNE group operates, but only with those that fulfil the conditions listed below on obtaining and using the information within the CbC Report.
- Countries should require the CbC Report for fiscal years beginning on or after January 1, 2016. If the financial information of the parent of the MNE group needed to prepare the CbC Report is not available by the time the report is due, then countries should allow an extension of time to file the report until one year after the close of the fiscal year of the MNE group’s parent. This means that in some cases, the first CbC Report may not be filed until December 31, 2017 (or later for fiscal years ending not on December 31). As a result, if these recommendations are followed, there should be no CbC Reports required covering periods before January 1, 2016.
- The MNE’s fiscal year relates to the consolidated reporting period for financial statement purposes and not to taxable years or to the financial reporting periods of individual subsidiaries.
- The CbC Report should include all tax jurisdictions in which the MNE group has an entity resident for tax purposes, regardless of the size of business operations in that tax jurisdiction. Every entity that is a separate business unit of the MNE group (company, corporation, trust, partnership, etc.) and included in the consolidated group for financial reporting purposes needs to be included in the report. If the financial statements exclude an entity solely because of its size or materiality, that entity should be included in the report.
- Permanent establishments (PEs) that prepare separate financial statements should be included in the report presenting the data for the country in which the PE is located and carving that data out from the data of the entity that has the PE.
- The new guidance recommends that countries implement an exemption from the general filing requirement for MNE groups with annual consolidated group revenue in the immediately preceding fiscal year of less than €750 million (about US$850 million) or a near equivalent amount in domestic currency. According to the OECD, this threshold will exclude about 85 to 90 percent of MNE groups from the requirement to file the CbC Report. Note that the OECD also recommended that countries provide no other exemptions from reporting.
- For MNE groups generating income from international transportation, which may be allocated to a single taxing jurisdiction under a treaty, the OECD recommends that the CbC Report be filed with respect to such income only against the name of the jurisdiction to which the relevant treaty provisions allocate the taxing rights.
- Reports should be filed in local language, but countries should consider accepting the report in a commonly used language or provide sufficient time for translation.
- The source of the data from which the report is prepared should be consistent from year to year. MNEs may consider using statutory financials, management accounts, consolidation packages or other regulatory reporting information to prepare the report. If statutory financials are used, then there should be an appropriate translation from the functional currency of the reporting MNE using the average exchange rate for the year. Adjustments need not be made, however, for differences in accounting principles applied from tax jurisdiction to tax jurisdiction.
Guidance on Conditions to Obtain and Use a CbC Report
Some of the major concerns for MNEs include: (1) the protection of the data that will be reported in the CbC Report, (2) the improper use of such data by the taxing jurisdictions, (3) the lack of consistency in the application of the rules and (4) the manner in which the reports will be used. The latest guidance from the OECD addresses some of these concerns for MNEs by setting forth the conditions under which countries should obtain and use the CbC Report.
Perhaps at the top of the list of concerns for MNEs is the damage that the MNE may suffer from a leak of the sensitive information in its CbC Report. The OECD recommends that countries implementing the CbC Report should establish and enforce legal protections of the confidentiality of the information. The OECD suggests that the protection should be at least equivalent to the protection afforded to information gathered through the Multilateral Convention on Mutual Administrative Assistance in Tax Matters, a tax information exchange agreement (TIEA) or a tax treaty. Countries that do not implement the necessary protections to the confidentiality of the information or the use of it may not be entitled to get the automatic exchange of the information from the country where the CbC Report is filed.
In terms of consistency, the OECD recommends that countries use their best efforts to use the CbC template and not request more or less information than is currently proposed under that template. Based on initial commentary from some jurisdictions, it is expected that some countries will deviate from the CbC template and will require additional information on their CbC Report. Unfortunately, MNEs will have to wait until each country implements these new rules to determine the information that will be required in each country, knowing that the countries are not fully bound by the recommendations of the OECD.
Perhaps the most principled recommendation of the OECD in its latest guidance is about the use of the information by the jurisdictions. According to the OECD, jurisdictions will commit to use CbC Reports for assessing high-level transfer pricing risks, which is consistent with the overall objective of CbC Reports. However, the OECD opened the door to a wide array of uses by suggesting that countries may also use CbC Reports for assessing other “BEPS-related risks.” In other words, any information from the CbC Report that helps a country assess a risk covered by the wide scope of BEPS is fair game.
Finally, countries should not propose adjustments to the income of a taxpayer based on the income allocation formula derived from the data in the CbC Report. If such adjustments are made, then the jurisdiction’s competent authority should promptly concede the adjustment in any competent authority proceeding. Of course, there is no guidance on what happens when there is no competent authority proceeding or treaty procedure to address the improper use of the information. The improper use of the information remains, even after this initial guidance, a major concern for MNE groups.
Alvarez & Marsal Taxand Says:
There is significant pressure globally for increased transparency by MNEs, and country-by-country reporting is an inevitable result of that pressure. This means that MNEs have to make sure they devote the right amount of time and resources to Action 13. Before the first year of country-by-country reporting begins, MNEs should make sure they have a clear and consistent message when it comes to the information that they are going to be placing on the template, knowing that there will risks of leaks, inconsistency and improper use by jurisdictions. As a result, MNEs need to update their existing systems and reporting procedures now in order to gather and analyze the data that will be reported in the CbC Report.
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The information contained herein is of a general nature and based on authorities that are subject to change. Readers are reminded that they should not consider this publication to be a recommendation to undertake any tax position, nor consider the information contained herein to be complete. Before any item or treatment is reported or excluded from reporting on tax returns, financial statements or any other document, for any reason, readers should thoroughly evaluate their specific facts and circumstances, and obtain the advice and assistance of qualified tax advisors. The information reported in this publication may not continue to apply to a reader's situation as a result of changing laws and associated authoritative literature, and readers are reminded to consult with their tax or other professional advisors before determining if any information contained herein remains applicable to their facts and circumstances.
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