Royal Dutch Shell PLC has published their 2018 tax contribution report, including country-by-country (CbC) statistics.
Public transparency of CbC reports has been in the vision of the EU (Dec. 6, 2019 blog), although it has not yet passed.
Shell’s report reflects a proactive effort to promote global transparency, and is an exemplary model to follow.
Click to access shell_tax_contribution_report_2018.pdf
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.
The draft country-by-country (CbC) law has been forwarded to Parliament, in alignment with the EU Directive for 2016 tax year reporting.
A surrogate parent entity should file a CbC report with the Luxembourg tax authorities in one of the following cases:
As the terminology includes “obliged” vs. voluntary filings in some countries, the filing entity and disclosure rules should be reviewed. Additionally, there are significant penalties for late/non-filing.
The EY Global Tax Alert, linked for reference, provides additional details.
The US administration has released final regulations on its CbC reporting requirements. This guidance provides voluntary filing for a 2016 calendar year US MNE, whereas 2017 is the required reporting year, due in 2018. The OECD has also issued guidance to provide impetus for countries to accept voluntary filings by US MNE’s with IRS, rather than rely solely on its legislation for 2016. However, this premise should be carefully reviewed, as countries have already enacted legislation and may not wish to change it.
Additionally, the filing period for a US MNE is Sept. 15th for a calendar year taxpayer, accelerating the Dec. 31st date proposed by the OECD.
This guidance will have widespread impact and contains many clarifications that should be understood prior to collecting data.
EY’s Global Tax Alert highlights some significant areas of proposed reform:
EY’s Global Tax Alert, attached for reference, provides details on the continuing momentum of the country-by-country (CbC) reporting rules in the EU. These rules will certainly be applied by some EU countries in 2016, thus US and other non-EU based multinationals should start to seriously consider options for separate and/or surrogate entity filings in EU and other jurisdictions for the 2016 tax year.
Note, it is likely the continuing transparency momentum will continue and likely to obligate multinationals to more disclosures going forward. Thus, it is imperative the key stakeholders are aligned currently and ongoing.
Global Tax Alert | 25 May 2016
ECOFIN formally adopts directive on country-by-country reporting in the EU
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On 25 May 2016, the Economic and Financial Affairs Council of the European Union (ECOFIN) which is made up of the Finance Ministers of all European Union (EU) Member States unanimously voted in favor of the amendments to the EU directive on exchange of information (the Directive). The revision, that will implement the recommendations of Organisation for Economic Co-operation and Development (OECD) Base Erosion and Profit Shifting (BEPS) Action 13 on country-by-country reporting, is one of the elements of the European Commission’s Anti-Tax Avoidance package from January 2016.2 According to the ECOFIN, “the principal aim of the directive is to prevent multinationals from exploiting the technicalities of the tax system, or mismatches between different tax systems, in order to reduce of avoid their tax liabilities.”
The Directive requires multinationals to report information on revenues, profits, taxes paid, capital, earnings, tangible assets and the number of employees on a country-by-country basis. This information must be reported for fiscal years starting on or after 1 January 2016, to the tax authorities of the Member State where the group’s ultimate parent entity (UPE) is tax resident. If the UPE is not resident in the EU, the report would have to be filed through a surrogate parent (EU or non-EU based) or the EU based subsidiaries. The Directive would give Member States the option to either require secondary filing for fiscal years starting on or after 1 January 2016 or to defer that obligation to financial years starting on or after 1 January 2017.
The Member States adopted the amendments without discussion, following the agreement reached at the previous ECOFIN meeting held on 8 March 2016. Thus, the details of the Directive remained virtually unchanged to what had previously been reported.3
Next steps
The Directive will require EU Member States to implement a country-by-country reporting obligation in their national legislation in line with the requirements of the Directive within 12 months from the date of its entry into force.
The first reports will have to be filed within 12 months from the end of the fiscal year to which they relate. Member States will have to exchange them within 3 months thereafter, except for the reports relating to fiscal years starting on or after 1 January 2016 where the term would be 18 months after the end of the fiscal year. The European Commission will adopt the necessary practical arrangements for upgrading the existing common platform for automatic exchange in the EU to fit the needs of the new requirements.
Endnotes
1. Council Directive 2011/16/EU of 15 February 2011 on administrative cooperation in the field of taxation.
2. See EY Global Tax Alert, European Commission releases anti-tax avoidance package designed to provide uniform implementation of BEPS measures and minimum standards across Member States, dated 28 January 2016.
3. See EY Global Tax Alert, EU Council publishes updated Draft Directive on implementation of country-by-country reporting, dated 23 March 2016.
The drive for additional transparency, among efforts by countries to implement anti-avoidance rules that trump tax treaties, continues with the latest round of BEPS updates, as EY’s Global Tax Alert provides added insight:
Click to access 2016G_00921-161Gbl_The%20Latest%20on%20BEPS%20–%209%20May%202016.pdf
Highlights:
The impact of BEPS is still accelerating, although the efforts by countries to avoid treaty provisions will provoke additional disputes and double taxation. Accordingly, the veil of anti-BEPS legislative efforts overshadows mutual transparency and collecting a fair share of tax while avoiding double taxation. Thus, all multinationals should be extra vigilant in the new era of international tax for additional documentation and support for significant transactions with low-tax countries.
The EU Economic and Financial Affairs Council (ECOFIN) has drafted a directive, subject to European Parliament’s opinion, for EU consistency of country-by-country (CbC) reporting.
The proposed EU legal instrument provides for:
http://www.consilium.europa.eu/en/press/press-releases/2016/03/08-corporate-tax-avoidance/
This surprising draft directive will alleviate some concerns by US headquartered MNE’s (as 2016 CbC reports will probably not be required), although only within the EU. To the extent non-EU Member States have CbC reporting obligations for the 2016 tax year, a Surrogate Entity or local filing may still be required for US MNE’s.
The EU is still recognized as a leader in pushing forward BEPS Action items, and this directive would provide much-needed consistency among Member States for CbC reporting. This development is important to monitor going forward, as well as observing other non-EU countries for a follow-the-leader approach.
The OECD’s Task Force on Tax and Development met in Paris, France, on 1 March 2016, to discuss the new inclusive framework proposed by the OECD for the global implementation of the BEPS project and to support developing countries on their domestic resource mobilisation efforts. Over 180 participants attended.
Co-Chaired by South Africa and the Netherlands, the Task Force is a multi-stakeholder advisory group set up to help to improve the enabling environment for developing countries to collect taxes fairly and effectively.
Recognition and participation in the Tax Inspectors Without Borders partnership was also an agenda item, including present (and future) toolkits for developing countries as a practical resource to implement BEPS Actions.
Participants also highlighted the need for the documentation toolkit to provide clear guidance on how the Country-by-Country Report should be used for risk assessment purposes.
The Task Force will endeavor to take the following steps, commencing with the first meeting in Kyoto Japan, 30 June- 1 July 2016.
A copy of the press release is provided for reference:
Click to access co-chairs-statement-task-force-tax-development-march-2016.pdf
Best Practices – To address mutual transparency, OECD and the member countries should be willing to share the contents, and objectives, of the various toolkits under preparation to better understand the risk process and actions by tax administrations around the world.
The EU, now recognized as the accelerator of BEPS for its Member States, have issued a roadmap of priorities and objectives for the near future. A link to Deloitte’s World Tax Advisor is provided, and the attached article therein.
I have highlighted certain parts of the roadmap worth watching:
Click to access dtt-tax-worldtaxadvisor-160226.pdf
European Union:
Dutch presidency issues EU-BEPS roadmap
The Netherlands, which currently holds the presidency of the council of the EU, issued an ambitious EU-BEPS “roadmap” on 19 February 2016 that sets out plans to move forward with previous EU proposals, as well as future efforts on areas relating to the OECD’s base erosion and profit shifting (BEPS) project. The roadmap includes the following:
The Code of Conduct group will start work on the following:
The EU Tax Avoidance Package contains a proposed amended EU Directive that would include CbC reporting as an automatic element of exchange of information between Member States.
Highlights:
The proposal also addresses reporting by Surrogate Entities, although restricted to EU Member States.
This proposal pushes the EU initiative of being the global leader in post-BEPS implementation and providing direction for the rest of the world. Accordingly, the proposal may be precedent setting for other jurisdictions and mandatory reading to understand CbC expectations and perceptions.
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.
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:
The definition of a Surrogate Entity, in addition to BEPS Action 13, are included for reference.
Click to access beps-action-13-country-by-country-reporting-implementation-package.pdf
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.
Finland has proposed its new country-by-country (CbC) reporting requirements, having an effective date of 1/1/2017, as further summarized in EY’s Global Tax Alert provided for reference. Other countries have legislated CbC 2016 effective dates, thus a Finland multinational that does business in other countries requiring a 2016 effective date CbC report will be looking to adopt a surrogate country for its 2016 tax year.
This delay in effective date, while the intention may have been to help Finnish headquartered multinationals, presents significant complexities for their 2016 CbC reporting requirements. However it does the provide the Finnish / US tax authorities another year to ensure reporting processes are in place to review, and exchange, CbC information.
This legislation mirrors the US proposed regulations (i.e. Final Regulations yet to be issued), which delays the effective date past 2016.
This complexity, although anticipated by the OECD’s BEPS Actions in identifying a surrogate mechanism, understates the practical uncertainties that loom ahead. For example, some issues are called into question:
Post BEPS complexity increases with delayed reporting years for CbC reporting. It may take some time to fully understand all the nuances and complexities of surrogate reporting to ensure potential CbC disclosures are timely met and penalties avoided.
With these complexities becoming reality, countries should clarify CbC reporting in their respective jurisdiction by CbC surrogates.
Click to access 2016G_CM6162_TP_Finnish%20Government%20submits%20CbC%20reporting%20proposal.pdf
The timing for implementation of country-by-country (CbC) reporting for non-US jurisdictions is of significant importance to US multinationals, due to the wording of the Proposed Regulations (23 Dec 2015 post).
The Proposed Regulations would require CbC reporting by US MNE’s starting in 2017, thereby not having such requirement in 2016. If there are no changes in the Final Regulations, US MNE’s will be required to submit CBC reports in many jurisdictions around the world. Some countries, such as Mexico, that aim to provide additional reporting items beyond the OECD model would present additional complications for a US MNE. Contemporaneous deadlines will also have to be met, that are prior to the US deadline.
Additionally, if an election provision is adopted in the Final Regulations, this may not solve the dilemma, as many countries are drafting legislation providing that if the parent jurisdiction does not require CbC reporting, then a separate CbC report has to be filed in their local jurisdiction. A literal reading of such language would result in a required domestic filing, as an election is not a “per se” requirement.
Similar complications will arise in countries that do not adopt CbC reporting for the tax year 2016.
Monitoring of the timing implications for CbC reporting should be a high priority to be addressed currently, with timelines established for the preparation of back-up reporting plans around the world.
The US Treasury has released proposed Regulations setting forth details for country-by-country (CbC) reporting by US-based multinationals. A link to the proposed Reg’s is provided:
Click to access 2015-32145.pdf
The proposed Reg’s have been issued for comment, and two significant timing issues arise in the current version:
Although the proposed Reg’s are conformed to the OECD model and have been purposeful in its comments on confidentiality and the exchange of information provisions for CbC reporting, the timing mismatch for the 2016 tax year presents a complexity that hopefully will be overcome in the Final Regulations. If no changes are made to the effective date, the 2016 tax year would be a dysfunctional method of reporting around the world, based on whom are considered surrogate entities or determining which countries have rules that provide for direct submission to their tax authorities absent a US requirement.
Additionally, the submission of the CbC report by Sept. 15 accelerates the year-end timing envisioned by the OECD. This acceleration should be expected by multinationals, thereby leaving less time to coordinate and review the information via developing an efficient and sustainable CbC reporting process.
Strategizing Multinational Tax Risks 
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