As MNE’s are preparing for the country-by-country (CbC) reporting in 2017 for the 2016 tax year, it is readily apparent that the OECD’s intent of Dec. 31, 2017 is readily being eroded by several countries.
For example, US has proposed reporting (obligatory for the 2017 tax year) as of Sept. 15 of the following year, aligned with timing for filing of the federal income tax return.
China has imposed a May 31 date, if a Cbc report is required, aligned with its tax return due date.
Other countries are choosing different dates for CbC reporting, as well as Master File and Local File reporting, that impose additional compliance and timing demands on all MNE’s, based on the earliest date chosen by a country in which it operates.
What does this mean? Earlier preparation, compressed timelines, mismatching of Master File, Local File and CbC reports, notwithstanding its intended comprehensive alignment.
Additionally, all US MNE’s must now review rules to determine if a surrogate filing entity is required for the 2016 CbC report as the US report is not obligatory. The stated filing entity must be communicated by this year-end, 2016, with varying penalty amounts applicable for non-reporting.
As a simple idea is turning into a tsunami of complexity, tax administrations will have to understand how such information is beneficial for transfer pricing risk analysis, as most people will concede that a CbC report has no direct relationship to transfer pricing.
Mexico has has announced its proactive e-auditing plan, as detailed in EY’s Tax Alert.
This type of audit will require a new skill set by the business:
- E-mail governance, as the lack of a response signifies deemed acceptance of an assessment
- Proactive audit management, not relying on letters and physical meetings
- Coordination with Corp. HQ/Regional Tax for advance appeal planning
- Pre-audit electronic reconciliation
- Electronic cross-reference processes during the year for self-verification to identify gaps
- IS expertise to ensure proper governance
This type of auditing, as well as joint audits, etc. signify a new trend for tax administrations having to cope with less resources and the intent to capture a fair share of tax.
With the recent decision re: Ireland state aid by the European Commission, the litigious stage now commences by Ireland, as the order has been provided to collect the state aid, with interest, from the multinational.
As the relevant rulings were not brought forward for approval upon their commencement by Ireland from the European Commission, the Commission now has the right to consider if such rulings are state aid.
This determination will not probably be final for several years as it progresses through the courts, however it does indicate a further trend of uncertainty re: transfer pricing rulings granted by EU Member States. Coupled with the intent of BEPS, the legal aspects of transfer pricing may start to sway towards a perceived “intention” for fairness and non-discrimination, with a “fair tax” flag being waved ever more rigorously.
This uncertainty will provide further chaos with new international tax perspectives being displayed in the public domain.
The EY Global Tax Alert is provided for reference.