Strategizing International Tax Best Practices – by Keith Brockman

EY’s Global Alert highlights the draft Spanish regulations that would introduce Country-by-Country (CbC) reporting, effective 1/1/2016.

  • Best Practice Observations: The text in bold represents verbiage that should be closely followed, as it may have global implications for flexibility required in CbC reports filed for different jurisdictions.  It is hopeful that the final regulations will entertain additional simplicity and global consistency.  
    • Initially, the test for reporting groups is literally subjective as to “similar terms” of CbC reporting for other jurisdictions.  For example, is reporting in one currency (i.e. US GAAP) equivalent to meeting this test?  What differences, if any, will be acceptable for this determination?  
    • Additionally, the requirement for reporting information in the currency of each jurisdiction implies that a different, or supplementary, approach may be needed for CbC reporting.  To the extent that the OECD final Guidelines are not deemed to be acceptable for Spanish tax authorities, this unilateral “bottoms up” approach will be problematic, complex and costly for everyone.    

Executive summary
On 18 March 2015, the Spanish Government released the draft bill of the new Spanish Corporate Income Tax (CIT) Regulations which complement the provisions included in the new Spanish CIT Law1 that entered into force on 1 January 2015. The CIT Regulations are expected to be adopted in the first half of 2015 and enter into force on 1 January 2016.

This Alert summarizes the new country-by-country (CbC) reporting obligations and the amendments to the transfer pricing rules.

Detailed discussion
On 1 January 2015, a new Spanish Corporate Income Tax Law entered into force (special attention must be drawn to transitory regimes) introducing amendments that are in line with the Organisation for Economic Co-operation and Development (OECD) Base Erosion and Profit Shifting (BEPS) project.

In line with these amendments, changes to the CbC reporting obligations and current transfer pricing documentation requirements have been included in the first draft of the Spanish CIT Regulations. These rules, as currently drafted, are aligned with Action 13 of the OECD’s BEPS Project which aims to develop rules regarding transfer pricing documentation to enhance transparency for tax authorities. In particular, the proposed rules generally follow the approach included in the document issued on 6 February 2015 by the OECD named Action 13: Guidance on the Implementation of Transfer Pricing Documentation and Country-by-Country Reporting (the Guidance).2

Among other changes, the Draft Regulations also address the possibility of using measures of central tendency to determine the point in the range that satisfies the arm’s length principle to minimize the risk of errors derived from comparability defects, as envisaged by OECD Transfer Pricing Guidelines (paragraphs 3.57 and 3.62).

CbC reporting obligations
The proposed CbC reporting obligations would generally apply to Spanish tax resident entities which are “head” of a group (as defined under the Spanish transfer pricing rules), and are not at the same time dependent of any other entity, to the extent the consolidated group’s revenue in the immediately preceding fiscal year exceeds €750 million.

The rules would also apply to Spanish entities and permanent establishments which are, directly or indirectly, held by a non-Spanish resident head entity which is tax resident in a country which (i) has not established CbC reporting obligations in similar terms to Spain; or (ii) has not signed an automatic exchange of information agreement with Spain in relation to these obligations. The wording of the regulations is not clear on how this new rule would apply in practice.

The draft rules establish that the CbC report will have to include the following information per country on an aggregate basis:

a) Group’s revenue, distinguishing between that derived from related and unrelated parties

b) Accounting result before CIT or a tax of similar or analogous nature

c) CIT (or tax of similar or analogous nature) effectively paid, including withholding taxes

d) CIT (or tax of similar or analogous nature) accrued, including withholding taxes

e) Share capital and equity at the end of the fiscal year

f) Average number of employees

g) Tangible assets and real-estate investments, different to treasury and receivables

h) List of resident entities, including permanent establishments, and the main activities these are engaged in

i) Other information that is considered relevant and, if applicable, an explanation on the data included in such information

The information to be provided in the CbC report should be denominated in the local currency of each jurisdiction.

According to the draft of the CIT Regulations, CbC reporting obligations will need to be complied with for fiscal years beginning on or after 1 January 2016; reporting must be completed within a 12 month period from the close of the fiscal year to which the CbC report relates (i.e., companies with a fiscal year ending on 31 December 2016, would be required to file the CbC report by 31 December 2017). A specific tax form will be published by the tax authorities for these purposes.

Transfer pricing documentation requirements
The transfer pricing documentation requirements are modified in very similar terms to the revised standards included in the report on Action 13 released by the OECD on 16 September 2014,3 as follows:

Master file: The data to be included in the Master file is significantly increased to include detailed information on the organizational structure of the group, its business activities, intangibles, Intercompany financial activities, as well as the financial and tax situation of the group (including information on any Advance Pricing Agreement and other tax rulings the group may have obtained.
Entities belonging to groups with an aggregate net turnover lower than €45 million in the preceding year would be exempt from the preparation of the master file.

Local file: Similarly, the information to be included in the Local file is also increased requesting detailed information relating to specific material intercompany transactions.
A simplified local file is foreseen for entities belonging to groups with an aggregate net turnover lower than €45 million in the preceding year. Moreover, small and medium size entities (net turnover lower than €10 million) would be deemed to comply with the local file requirement by filling out a specific form that will be issued by the tax authorities. Information on certain specific transactions will not be excluded (certain business activities carried out by individuals, transfers of businesses and participation in entities, as well as transactions related to real estate property or intangibles).

Impact
The legislative evolution of this proposed measure will be closely monitored and covered in future Tax Alerts but multinational groups with a presence in Spain should focus on the actions that may be necessary to ensure their ability to produce the required information, including preparing protocols for gathering the information and developing internal processes and responsibilities with regard to the new reporting obligations.

Endnotes
1. Law 27/2014 on Corporate Income Tax published in the Spanish Official Gazette on 28 November 2014.

2. See EY Global Tax Alert, OECD issues implementation guidelines for country-by-country reporting under BEPS Action 13, dated 9 February 2015.

3. See EY Global Tax Alert, OECD releases report under BEPS Action 13 on Transfer Pricing Documentation and Country-by-Country Reporting, dated 23 September 2015.

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