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August 15, 2016

On 29 June 2016, the Organisation for Economic Co-operation and Development (OECD) announced additional guidance on the practical implementation of its Country-by-Country (CbC) Reporting program, published in final form on 5 October 2015 as Action 13 of the Base Erosion and Profit Shifting (BEPS) initiative. The larger BEPS program contains 15 intertwined initiatives that generally seek to limit base erosion and profit shifting by promoting transparency, coherence and substance in tax filings. Country-by-Country Reporting is a transparency initiative which recommends taxing authorities require taxpayers to provide aggregate annual business and financial information in each jurisdiction where they do business. Specifically, the new CbC Reporting guidance provide clarification in these four areas:

  1. Transitional filing options for Multinational Enterprises (MNEs) or “parent surrogate filings” (to address gap years)
  2. The application of CbC Reporting to investment funds
  3. The application of CbC Reporting to partnerships
  4. The impact of currency fluctuations on the agreed EUR 750 million filing threshold

Each topic is discussed below.

Parent Surrogate Filing

The OECD has addressed the “gap year” filing issue with a recommendation for “parent surrogate filing” in those countries not implementing CbC Reporting by the recommended date. The gap year issue arises where an Ultimate Parent Entity of an MNE Group is resident in a country (such as the United States) which has not implemented CbC Reporting legislation to be effective from 1 January 2016. This delay causes confusion for jurisdictions which have implemented a local country filing obligation effective from the beginning of 2016, where normally MNE Groups with a Constituent Entity in that jurisdiction would be required to provide certain local items in a local CbC file to the taxing authority. However, the OECD was aware that certain jurisdictions would lag in legislative enactment and has allowed for “parent surrogate filing” as a solution.

Parent surrogate filing is the OECD term for voluntary CbC reporting, which the international tax community has been pressing laggard jurisdictions into allowing since hints of potential gap year headaches began to surface. Parent surrogate filing allows the Ultimate Parent Entity of an MNE Group to voluntarily file its CbC Report for fiscal periods ending on 1 January 2016 in those jurisdictions where it may reside. 

The key relief provided by parent surrogate filing is the removal of local country filing requirements in all jurisdictions where they would normally be necessary. However, this removal of responsibility requires several conditions be met:

  1. The Ultimate Parent Entity must make available a CbC Report conforming to the requirements of the Action 13 report to the taxing authority of its jurisdiction of tax residence by the filing deadline.
  2. The jurisdiction of the MNE Group’s Ultimate Parent Entity’s residence must have CbC Reporting laws in place by the first reporting deadline, although there is no requirement that those laws be already in effect.
  3. A Qualifying Competent Authority must be in effect between the jurisdiction of tax residence of the Ultimate Parent Entity and that of the local jurisdiction before the filing deadline.
  4. The jurisdiction of residence should not have notified the local jurisdiction of a “systemic failure” (reflecting a suspension of automatic exchange for reasons outside the terms of the agreement).
  5. Two notifications should have been provided:
    1. The Ultimate Parent Entity has notified its resident jurisdiction no later than the last day of reporting for the MNE Group of the arrangement.
    2. A Constituent Entity of the MNE Group has notified the local jurisdiction that it is neither the Ultimate Parent Entity nor the Surrogate Parent Entity, stating the identity and tax residence of the Reporting Entity no later than the last day of reporting for the MNE Group.

For U.K. companies with a foreign parent in a country which has not introduced CbC Reporting as of yet (e.g., the U.S.) or does not have an effective exchange mechanism with the U.K., a U.K. CbC Report must be submitted for the U.K. sub-group unless the Ultimate Parent Entity voluntarily files or another Constituent Entity files in a territory with an effective exchange agreement with Her Majesty's Revenue and Customs (HMRC). However, it is imperative to follow the guidelines closely and to remember to file the required notifications with HMRC. Such notifications include providing HMRC with the details of the Constituent Entity that has filed the report, where that entity is tax resident, in which jurisdiction it filed the report and the date the report was filed.

Countries indicating they will allow voluntary parent surrogate filing are the following:

  • Japan
  • Switzerland (draft legislation awaiting legislative approval)
  • United States

Investment Funds

The new guidance provides a reminder that there is no general exemption for investment funds. Further, the governing principle to determine whether an investment fund is part of an MNE Group is to follow the accounting consolidation rules (e.g., International Financial Reporting Standards [IFRS]).


As with investment funds, the accounting consolidation rules provide the governing principle for determining whether a partnership is a Constituent Entity of an MNE Group, and thus subject to CbC Reporting.

The new guidance provides advice on how to report on partnerships — whether they are classified as permanent establishments or considered to be stateless entities. For stateless entities, the guidance advises that the partnership’s items should be included in a line in Table 1 of the CbC Report meant for stateless entities. Further, Table 2 of the CbC Report should include a row for stateless entities, with a sub-row for “each stateless entity including partnerships that do not have a tax residence.” This treatment effectively parallels the reporting for Constituent Entities with a tax residence. Further, the report notes that the field in Table 2 for “tax jurisdiction of organisation or incorporation if different from tax jurisdiction of residence” should contain the jurisdiction under whose laws the partnership is organised.

The report further advises including a note explaining that “stateless income” will be includable and taxable in the jurisdiction of tax residence of the partners. Any partners that are Constituent Entities within the MNE Group “should include their share of the partnerships items in their jurisdiction of tax residence.”

Meanwhile, a permanent establishment of a partnership is included in the CbC Report in a manner identical to that of any other permanent establishment.

Impact of Currency Fluctuations on the CbC Reporting Threshold

As described in Action 13, the CbC Reporting threshold is EUR 750 million or a near equivalent amount in domestic currency, translated in January 2015. But what happens when the “domestic currency” threshold becomes a moving target due to currency fluctuations, for example exceeding the 2015 threshold when the value of the Euro moves? The new guidance says that filing requirements will not be created by currency fluctuations after January 2015. In effect, the January 2015 exchange rates will be locked in for the sake of the threshold — at least until the OECD reviews the CBCR thresholds, perhaps in 2020.

A&M Says

Multinational groups headquartered in jurisdictions which have delayed CbC Reporting implementation (including the U.S., Japan and Switzerland) should consider voluntarily filing parent surrogate reports in the U.K. or elsewhere. Further, U.K. entities should remain mindful of the filing status of their group’s parent entities, as failure to voluntarily file in late implementing jurisdictions will create a filing obligation for the local U.K. entity. Further, the accounting rules provide the governing principles for determining whether investment funds and partnerships are part of MNE Groups. Lastly, as it stands, currency fluctuations after January 2015 will generally not trigger filing requirements if those fluctuations alone push group consolidated revenue above the reporting threshold of €750 million.