Strategizing International Tax Best Practices – by Keith Brockman

The OECD has provided a discussion memorandum in advance of its 12-13 November public consultation on the Revised Discussion Draft on Transfer Pricing Aspects of Intangibles and the White Paper on Transfer Pricing Documentation.  The memorandum presents questions for discussion in addressing implementation issues of a country-by-country reporting template.  A summary of the memorandum is provided, with a link for reference:

http://www.oecd.org/ctp/transfer-pricing/memorandum-transfer-pricing-documentation-and-country-by-country-reporting.pdf

The memorandum outlines two questions, with alternatives provided for each:

What information should be required?

A. The most critical item will be a report of income earned in a country, with the following approaches outlined.

  • Net income before tax for each legal entity
  • Taxable income per tax returns
  • Accounting segment reporting rules
  • Internal consolidating income statements
  • Other

B. Taxes paid by country

  • Cash or accrual basis
  • National vs. local income taxes
  • Non-income taxes

C. Measures of economic activity

  • Revenues by customer location
  • Tangible assets by location
  • Employees / payroll
  • Research expenditures by company/country
  • Marketing expenditures by company /country
  • Location of intangibles by country
  • Location of senior management (e.g. 25-50 most highly compensated employees of group)
  • Other

An interesting comment is also provided for insight: “A key question is whether such reporting will provide any meaningful guidance for risk assessment purposes about the location of real economic activity.”  It is noted that the emphasis seems to focus on economic activity, with little mention of transfer pricing functions, assets, or risks.

What mechanisms should be developed for reporting or sharing country-by-country data?

  • Template completed by parent company and shared  via treaty exchange of information mechanisms
  • Exclusion of information to countries where adequate provisions do not exist to protect confidentiality
  • Template inclusion in global master file to every country in which there is an affiliate subject to tax
  • Other

These developments provide valuable insight into the future trend of transfer pricing documentation that will provide numerous challenges for every multinational.

 

 

 

 

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