Strategizing International Tax Best Practices – by Keith Brockman

Posts tagged ‘country by country report’

CbC timing: OECD’s intent fails

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.

 

 

 

Luxembourg: CbC reporting

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:

  • The ultimate parent entity (UPE) is not obliged to file a CbC report in its country of residence,
  • The UPE is obliged to submit a CbC report, but there is no automatic exchange of CbC reports between Luxembourg and the country of residence of the UPE or
  • The UPE is obliged to submit a CbC report,and there is automatic exchange of CbC reports, but due to systematic failure, no effective exchange of information takes place.

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.

http://www.ey.com/Publication/vwLUAssets/Luxembourg_introduces_draft_law_on_country-by-country_reporting/$FILE/2016G_02418-161Gbl_TP_Luxembourg%20introduces%20draft%20law%20on%20country-by-country%20reporting.pdf

US: Country-by-country (CbC) reporting

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.

http://www.ey.com/Publication/vwLUAssets/Final_US_country_by_country_reporting_regulations_analyzed_in-depth/$FILE/2016US_01933-161US_Final%20US%20CbC%20reporting%20regulations%20analyzed%20in%20depth.pdf

US: International update

EY’s Global Tax Alert highlights some significant areas of proposed reform:

  • Section 385 debt/equity regulations proposed for Labor Day issuance, noting there is alot of uncertainty until then based on the Proposed Regulations, including the impact on physical and/or notional cash pools.
  • US House tax reform blueprint to be released this month.
  • Country-by-country (CbC) voluntary reporting is being acknowledged as a gap and problematic for US based MNE’s, thus one US CbC global report is not anticipated to be the result, requiring multiple CbC reporting required by relevant countries.  For countries that have agreed to accept voluntary filing, it would be beneficial to provide a simple public chart by the administration for taxpayer access.

http://www.ey.com/Publication/vwLUAssets/Report_on_recent_US_international_tax_developments_-_3_June_2016/$FILE/2016G_01361-161Gbl_Report%20on%20recent%20US%20international%20tax%20developments%20-%203%20June%202016.pdf

EU: CbC marches on

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.

BEPS update; no slowing down

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:

http://www.ey.com/Publication/vwLUAssets/The_Latest_on_BEPS_-_9_May_2016/$FILE/2016G_00921-161Gbl_The%20Latest%20on%20BEPS%20–%209%20May%202016.pdf

Highlights:

  •  Australian Tax Office (ATO) release of 4 tax alerts for issues of concern, a Diverted Profits Tax (DPT) is to be implemented, hybrid mismatch arrangements will be addressed in legislation, and the effective date for the new/revised OECD’s arms-length principle standards will move forward to 1 July, 2016.
  • Ecuador: the most recently version, as of 1/1 of a taxpayer’s year, of the OECD’s Guidelines will be used as transfer pricing reference absent domestic rules.
  • Hungary: A “modified nexus” IP approach will come into force.
  • Netherlands: The innovation box rules will be amended to comply with OECD’s Action 5 guidelines.
  • New Zealand: Domestic anti-avoidance rules will trump double treaty arrangements.
  • Taiwan: CFC rules will be promulgated.  
  • Turkey: An “electronic place of business” draft legislation would empower taxation.
  • Ukraine: A working group is forming anti-BEPS measures for consideration.
  • US: Treasury is trying to extricate itself from its 1-year lag in obligatory country-by-country (CbC) reporting, although global acceptance is not expected.

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.

ECOFIN’s draft directive re: CbC

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:

  • 2016 CbC reporting to the Member State where it is resident
  • Optional provision for non-EU parent companies; 2016 reporting is optional via its EU subsidiaries and such “secondary reporting” will be mandatory for the 2017 tax year.   
  • Automatic exchange of CbC reports between EU Member States

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.

 

 

 

 

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