Country by country reporting (CbCR) was introduced by the OECD as part of Action Point 13 of the Base Erosion Profit Shifting (BEPS) project sponsored by the G20 and OECD. The OECD’s adoption of CbCR is part of a new, three-tier, transfer pricing documentation requirement for multinational enterprises (MNEs) alongside a master file and local file. The CbCR obligation is set out in Chapter V of the OECD’s new Guidelines on transfer pricing (issued with the BEPS recommendations).
CbCR is intended as a tool for tax authorities to risk assess MNEs’ transfer pricing. This will greatly increase transparency for local tax authorities through the reporting of key financial metrics across a group. The effect of this new visibility will be:
- Increased transfer pricing risk from the availability of annual headline data across a group to each tax authority
- The need to ensure that transfer pricing policies are appropriately tailored for the facts, circumstances and requirements of each territory – one size is now even less likely to fit all
- To further raise the profile of transfer pricing and its tax effects among MNEs’ stakeholders.
The UK has been a staunch supporter of the BEPS project. During October 2015, the same month the BEPS reports were finalised, the UK released draft regulations on CbCR. Final regulations are effective in the UK from 1 January 2016.
What Are The Reporting Requirements?
CbCR requires the following information to be provided annually in a standard template for each territory where the group has a taxable presence:
- Revenues, split between related and unrelated parties
- Earnings before income tax (but after expenses and exceptional items)
- Income taxes paid on both a cash and accrued basis (to local and other countries), including withholding tax
- Stated capital and accumulated earnings
- Number of local employees
- Tangible assets (but not cash or equivalents).
Who Will CBCR Affect?
The CbCR is a direct filing requirement for UK parented MNEs exceeding the £586m turnover threshold ( equivalent to the €750m set out by the OECD). CbCR must contain data for all of the MNE’s entities, regardless of its size, in each jurisdiction. Only the parent entity of a MNE will be required to file CbCR, with other tax authorities then sharing the document.
There are two types of penalties associated with CbCR:
- £300 penalty for not filing on time (plus a daily £60 penalty is then applied for each day filing remains outstanding after the assessment of the £300 penalty)
- £3,000 penalty for providing inaccurate information.
Materiality of the related party transactions is relevant in the Master File and Local Country Files but not for CbCR. However, MNEs subject to CbCR should disclose all related party transactions and dealings. If they only disclose transactions which they regard as ‘material’ within CbCR, they are likely to be subject to filing penalties for incomplete information. OECD definitions where relevant, eg in the context of OECD-model treaty definitions, would appear to prevail over local country rules.
Meeting The Challenge Of CBCR
CbCR asks three key questions of multinationals:
1. Are transfer pricing policies current and robust?
CbCR provides tax authorities with a much clearer picture of an MNE’s finances. MNEs will need to have comfort that their transfer pricing policies remain current – in line with the business model and substance – and have not fallen behind commercial activity.
2. Does our implementation of the transfer pricing policy give us expected results?
CbCR is focused wholly on results. These results should be tested against transfer pricing policy and supporting comparables to ensure implementation is robust. The level of extra detail for the CbCR template’s ‘blank page’ should also be addressed to ensure that disclosure is appropriate.
3. Do we have the processes to efficiently extract and confirm the required information?
Meeting the requirements of CbCR also requires efficient processes to extract and provide the appropriate information with confidence. Testing the business’s ability to achieve this and identifying systems or reporting issues early will be critical. Tax authorities will use CbCR data to risk review local operations of an MNE. A key part of a business’s preparation for the introduction CbCR should be to anticipate these reviews and take any remedial action necessary so that it can have confidence in its filings.
What To Do Next If A Group Is Subject To CBCR?
- Test the robustness of your transfer pricing policy and its support
- Conduct a ‘dry run’ of CbCR to review the outputs for unintended or unexpected outcomes and related tax and transfer pricing risk (this can be combined with wider process testing such as for SOX, JSOX or SAO)
- Take steps to address any policy, process or disclosure issues identified and manage stakeholder expectations.
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