The OECD has published its consultation document: Review of Country-by-Country Reporting (BEPS Action 13). Comments are requested no later than March 6th.
Chapter 1 contains general topics concerning the implementation and operation of BEPS Action 13, including the MNE group experience of CbC reporting implementation by jurisdictions, the use of CbC reports by tax administrations and other aspects of BEPS Action 13, being the master file and local file.
Chapter 2 contains topics concerning the scope of CbC reporting, including the definition of an MNE group, and the level and operation of consolidated group revenue threshold.
Chapter 3 contains topics concerning the content of a CbC report, including whether aggregate or consolidated information should be provided in Table 1, whether information in Table 1 should be presented by entity rather than by tax jurisdiction, and whether additional or different information is needed.
One key item in the report is in Section 12: Should Table 1 information be presented on an entity or jurisdictional basis? There are arguments pro and con, and this is an important item to monitor.
EY’s Global Tax Alert details several important global developments worth watching:
Phase 2 US tax reform – individual taxes, what else?
OECD’s first peer review reporting on BEPS Action 13: TP Documentation and County-by-Country (CbC) reporting (attached herein for reference)
EU Directive on cross-border reportable arrangements, reporting to commence in 2020 although effective date will be June/July 2018.
The reportable arrangements are a must read for international tax colleagues to understand the impact of arrangements planned for currently that may become a transparent arrangement to be reported in the EU.
The OECD CbC report is also helpful to understand the trend that CbC reports will generate ongoing, and the viewpoint of the countries that administer this process.
The OECD BEPS Actions, including CbC reporting, significantly impact international tax compliance burdens and challenges going forward. Additionally, US tax reform still has experts deliberating their practical application, notwithstanding future legislation.
The 2016 draft of the UN TP Manual includes India’s latest expression of alignment, as well as differing views from the OECD BEPS Actions 8-10 and 13.
Accordingly, the Indian tax administration is of the view that the guidance flowing from the final report of the BEPS project on Actions 8-10 should be utilized by both the transfer pricing officers (TPOs) and taxpayers in situations of ambiguity in interpretation of the law. However, India has not endorsed the guidance in the BEPS report pertaining to low value adding intra group services under Action 10 and has not opted for the simplified approach. Further, India has endorsed the recommendations contained in the BEPS final report on Action 13, which supported the three-tiered documentation regime comprising a Local File, a Master File and a Country-by-Country Report and has already carried out legislative changes in its domestic law.
India is known for its creativity, non-technical aggressive positions, and the number of years required to appeal initial assessments. Some of these positions, currently in litigation and dispute, have been reiterated as a further stance in their hard line position on transfer pricing to enhance its economic fisc. Accordingly, interested international tax practitioners should be cognizant of these positions, as other countries will surely “look and see” if such positions could also benefit their economic fisc similarly.
OECD’s BEPS Action 13 provides for a Surrogate Entity substitution concept if the headquarter jurisdiction of a multinational does not provide for country-by-country (CbC) reporting for the 2016 tax year. The concept is ideal, if a CbC reporting country considers this Surrogate Entity concept in its legislation.
A review of CbC legislative actions by different countries reveals that such legislation will be inconsistent and will require the multinational to file separate CbC reports in various countries, irrespective of its choice of appointing a surrogate country that has an extensive tax treaty network with exchange of information provisions.
For example, the legislative language of Spain does not provide for the Surrogate Entity concept, thereby requiring a Finnish (and possibly U.S., dependent on Final Regulations) based multinational to file the 2016 Spanish CbC report in Euros. One of the Spanish tax authority representatives recently expressed an opinion that no advance rulings/arrangements will be acceptable for CbC Surrogate Entity filing: The law is the law.
Several issues for consideration by a multinational thinking of a Surrogate include:
Every country’s CbC adopted legislation will require review to determine if a Surrogate filing is acceptable.
For countries that will require a local filing, adoption of such country’s CbC rules will be required re: content, timing, reporting currency, etc.
Upon conclusion of the dynamic review, the CbC template may require adaptation for local filings of countries that have OECD + CbC legislation, adding details beyond those prescribed in BEPS Action 13.
Most countries have penalties (fines/civil/criminal) applicable for failure to file a CbC report.
The definition of a Surrogate Entity, in addition to BEPS Action 13, are included for reference.
The term “Surrogate Parent Entity” means one Constituent Entity of the MNE Group that has been appointed by such MNE Group, as a sole substitute for the Ultimate Parent Entity, to file the country-by-country report in that Constituent Entity’s jurisdiction of tax residence, on behalf of such MNE Group, when one or more of the conditions set out in subsection (ii) of paragraph 2 of Article 2 applies.
Thirty-one countries have signed the OECD’s multilateral competent authority agreement (MCAA) for the automatic exchange of country-by-country (CbC) reports, excluding the U.S.
The signatory countries are:
The position of the US, noticeably absent from the list, is to enter into bilateral agreements with appropriate countries that have safeguards and governance in place, as well as countries that have an income tax treaty or tax information exchange agreement in effect.
OECD BEPS Action 13 provided models for the recommended CbC reporting options; a multilateral agreement, a double tax convention model and a model based on a tax information exchange agreement.
It will be critical to monitor the development of the CbC exchange process, in addition to timing mismatches and the necessity to identify a surrogate country, with additional complexities to consider.
The EU Council has provided a Directive that would introduce legislation ensuring the EU maintains its leadership role in anti-BEPS recommendations, as well as providing good tax governance for the rest of the world. EY’s summary of the Directive is provided for reference:
Automatic exchange of tax rulings would be effective 1/1/2017.
Changes would be introduced for the EU Code of Conduct.
EU anti-BEPS proposal to include the following BEPS Actions:
2: Hybrid mismatches
3: CFC rules
4: Interest limitations
6: General anti-abuse rule (noting its inclusion for the Royalty & Interest Directive, similar to the Parent-Subsidiary Directive)
7: PE status
13: Country-by-Country (CbC) reporting
Common Corp. Tax Base (absent later consolidation phase) proposal to be introduced in 2016
The EU continues its pace to maintain its global lead in addressing anti-BEPS concerns, which will impact non-EU countries around the world. Thereby, it provides another set of rules that would be mandated to achieve EU conformity.
Denmark has published its requirements for country-by-country reporting (CbCR), effective for the 2016 tax year by ultimate Danish parent companies. The content of the report aligns with OECD BEPS Action 13, including the reporting date by the end of 2017.
There are notification requirements re: a “surrogate parent entity” for which the parent jurisdiction will be entering into exchange information agreements for CbCR.