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Country-By-Country Reporting: The Transfer Pricing Game-Changer
August, 27th 2015

This month's feature examines proposals for new tax information reporting requirements for large multinational businesses as part of wider and ongoing changes to the international tax system – proposals which have been described by international tax experts as the most significant development in the field of transfer pricing since TP rules themselves first began to be introduced over 40 years ago.

The OECD And Base Erosion And Profit Shifting (BEPS)

The call for multinational entities to report certain information about their business activities and tax position in each country in which they have branches and subsidiaries forms just one part of the Organisation for Economic Cooperation and Development's (OECD's) wider base erosion and profit shifting (BEPS) work.

It was noted in the OECD's report entitled "Addressing Base Erosion and Profit Shifting", published in February 2015, that due to imperfect interaction between nations' tax regimes, multinationals have been permitted to legitimately structure their tax affairs using profit-shifting arrangements to pay minimal rates of tax, limiting their exposure to corporate tax rates as high as 30 percent, faced by fiscally immobile businesses in some OECD member states.

In July 2013, the OECD released the BEPS Action Plan, consisting of 15 specific actions designed to give governments the domestic and international mechanisms to effectively close loopholes in the international tax system. Action 13 of the BEPS Action Plan calls on countries to develop rules regarding transfer pricing documentation to enhance transparency for tax administration. The Action Plan states that the rules to be developed will include a requirement that MNEs provide all relevant governments with needed information on their global allocation of the income, economic activity and taxes paid among countries according to a common template.

CbC Discussion Draft

On January 30, 2014, the OECD released its Discussion Draft on Transfer Pricing Documentation and Country-by-Country Reporting. This formally introduced the concept of a standardized three-tier format on transfer pricing documentation including a master file, a local file and a country-by-country reporting template. The master file would provide an overview of the MNE. The local file would need to include a detailed transfer pricing study, a group organization chart, as well as the taxpayer's financial statements. The CbC report was designed to specify some basic items of financial data in each country where an MNE is organized.

Taken together, these three documents will require taxpayers to articulate consistent transfer pricing positions, will provide tax administrations with information to assess transfer pricing risks, make determinations about where audit resources can most effectively be deployed, and, in the event audits are called for, provide information to commence and target audit inquiries.

CbC Guidance

On February 6, 2015, the OECD published guidance in relation to the implementation of the proposed CbC reporting obligations. This document recommended that the master file and local file elements of the new transfer pricing documentation standard be implemented through local country legislation or administrative procedures and that the master file and local file be filed directly with the tax administrations in each relevant jurisdiction as required by those administrations.

The guidance note recommends that the first CbC Reports be required to be filed for MNE fiscal years beginning on or after January 1, 2016. As it has been proposed that MNEs should be allowed one year from the close of the fiscal year to which the CbC Report relates to prepare and file the CbC report, this would mean the first CbC Reports would be filed by December 31, 2017, with some reports being filed later, in 2018.

The report also recommends that all MNE groups should be required to file the CbC Report each year, except for certain groups, including groups with annual consolidated group revenue in the immediately preceding fiscal year of less than EUR750m (USD850m) or a near equivalent amount in domestic currency. Thus, for example, if an MNE that keeps its financial accounts on a calendar year basis has EUR625m in consolidated group revenue for its 2015 calendar year, it would not be required to file the CbC Report in any country with respect to its fiscal year ending December 31, 2016.

It is believed that this reporting threshold will exclude approximately 85 to 90 percent of MNE groups from the requirement to file the CbC Report, but that the CbC Report will nevertheless be filed by MNE groups controlling approximately 90 percent of corporate revenues.

Model Template For The Country-By-Country Report

The model template for the CbC report in Annex III to Chapter V of the amended Transfer Pricing Guidelines consists of three tables.

Table One provides an overview of allocation of income, taxes and business activities by tax jurisdiction. It consists of 11 columns with the following headings:

Tax Jurisdiction;
Revenues, including Unrelated Party Revenues, Related Party Revenues and Total Revenues;
Profit/Loss Before Income Tax;
Income Tax Paid (on a cash basis);
Income Tax Accrued – Current Year;
Stated capital;
Accumulated earnings;
Number of Employees; and
Tangible Assets other than Cash and Cash Equivalents.
Table Two is a list of all the Constituent Entities of the MNE group included in each aggregation per tax jurisdiction. It asks for the following information:

Tax Jurisdiction;
Constituent Entities Registered in the Tax Jurisdiction;
Tax Jurisdiction of Organization or incorporation if different from Tax Jurisdiction of Residence; and
Main Business Activity(ies), which is divided into 13 sub-headings including: o Research and Development;
Holding or Managing Intellectual Property;
Purchasing or Procurement;
Manufacturing or Production;
Sales, Marketing or Distribution;
Administrative, Management or Support Services;
Provision of Services to unrelated parties;
Internal Group Finance;
Regulated Financial Services;
Holding shares or other equity instruments;
Dormant; and
The Reporting MNE should determine the nature of the main business activity(ies) carried out by the Constituent Entity in the relevant tax jurisdiction, by ticking one or more of the appropriate boxes.

Table Three enables the MNE to provide any further brief information or explanation considered necessary or that would facilitate the understanding of the compulsory information provided in the country-by-country report.


The Implementation Package states that jurisdictions should have in place and enforce legal protections of the confidentiality of the reported information. Such protections would preserve the confidentiality of the CbC Report to an extent at least equivalent to the protections that would apply if such information were delivered to the country under the provisions of the Multilateral Convention on Mutual Administrative Assistance in Tax Matters, a tax information exchange agreement, or a tax treaty that meets the internationally agreed standard of information upon request as reviewed by the Global Forum on Transparency and Exchange of Information for Tax Purposes.

Country Developments

Although the final BEPS recommendations won't be released until December 2015, some governments are already beginning to incorporate the proposed CbC requirements into national legal frameworks, or have started to think about doing so.

Spain has taken an early lead in this regard, having issued a Royal Decree confirming the introduction of CbC reporting rules from January 1, 2016.

The United Kingdom Government is also advancing its proposals to introduce CbC reporting in the UK. Draft legislation published in December 2014 provides that the obligation to file a CbC report would be introduced in two stages. The measure will enable regulations to be made at a later date to give effect to the scope and detail of the obligation. Regulations enabled by this measure would be made once the OECD has set out guidance on the filing of CbC reports as well as on sharing of information between relevant countries, and after a period of consultation in the UK.

The Australian Government, on August 6, 2015, released exposure drafts and explanatory materials to implement CbC reporting. The new legislation would require entities with annual global revenues of AUD1bn (USD730m) or more to file an annual statement with the Commissioner of Taxation.

In June 2015, the European Union launched a consultation on how the EU should respond to the OECD's proposals under Action 13. The EU asks in the consultation paper whether Brussels should proceed with the public disclosure of certain information on the tax and financial affairs of multinational companies. The consultation also seeks stakeholders' input on which companies should be required to disclose information, to whom should it be disclosed, and what should be included in those disclosures. This followed a vote by the European Parliament's Legal Affairs Committee on May 7, 2015, in support in support of a draft law requiring the public disclosure of CbC reports from certain corporations.

The Dutch Secretary of State for Finance has also said the Dutch Government supports the public disclosure of CbC reports. In a letter sent on May 28, 2015, to the European Tax Commissioner Pierre Moscovici, Eric Wiebes wrote: "I would like to inform you that the Netherlands Government very much welcomes the various initiatives with regard increasing transparency relating to tax matters."

The United States is expected to adopt its own obligations on CbC reporting by multinationals, which, although catered to the US, will be largely based on the OECD's proposed framework. Brian Jenn, Attorney Advisor at the US Treasury's Office of Tax Policy, previously said at a conference that the Government will develop a "form for taxpayers to file that looks like the country-by-country reporting template." The US would then share this form with other tax authorities under the framework of existing double tax and tax information exchange agreements. However, it is anticipated that the US is unlikely to adopt wholesale the CbC reporting framework proposed by the OECD.


Concerns And Criticisms

Tax practitioners from all over the world largely reacted negatively to the OECD's Discussion Draft on transfer pricing documentation when it was published in January 2014. Many of the concerns center of the increased compliance costs the new requirements will impose on both businesses and tax authorities.

In its observations on the discussion draft, PwC said the reporting requirements would go significantly beyond current practice. Most importantly, they would require new information that is costly for taxpayers to gather while being of limited use to tax auditors. Some of this information may not be available to taxpayers at all. For example, some companies don't track related and unrelated revenues separately in their accounting systems. Furthermore, something as seemingly simple as stating the number of the group's full-time employees also isn't going to be as easy to present accurately as it sounds.

Many have also expressed concern about the future of the arm's length principle. This is essentially because CbC reporting would likely pave the way to unitary taxation of multinationals. At least for now, tax authorities seem particularly willing to obtain holistic information about multinationals, practitioners from the UK, Australia, India and the US have said, but there remains uncertainty about the long-term impact of these increased disclosures on the functioning of the arm's length principle.

In July 2015, Insurance Europe and the Pan European Insurance Forum jointly responded to the OECD's BEPS work and the EU's corporate tax action plan, which echoes many aspects of the BEPS project. On CbC reporting, the two bodies said: "Effective compliance with the new CbC reporting regime will require significant preparation and it is therefore important that companies receive clear and timely guidance regarding the definition of the data to be reported. Insurance business models are unique and this needs to be recognized when the information on the CbC reporting template is considered."

Confidentiality of information in the CbC files is also a major concern for businesses expecting to be caught by the new documentation requirements. For example, in a letter submitted to G-20 President Australia on September 17, 2014, the International Chamber of Commerce (ICC) warned that the public disclosure of information on the finances and operations of multinationals would undermine the initiative and would harm the relationship between taxpayers and tax authorities. Commenting on the proposals, Chair of the ICC Commission on Taxation, Christian Kaeser, said: "The relationship between taxpayers and tax authorities should be characterized by openness and trust. Disclosure of tax data would negatively impact this important dynamic."

In summary, the CbC reporting requirements are going to require a lot of investment by both multinational companies and tax authorities. Companies, particularly those with many subsidiaries and related entities, will need to invest heavily in new information gathering and reporting systems to ensure that necessary information is collected from various parts their group. Companies will also have to ensure that such information is presented as accurately as possible to lessen the risk of more frequent transfer pricing audits. Likewise, tax authorities must invest in new systems to ensure that they are able to handle the sheer volume of data that is going to flow their way under CbC reporting, and to make best use of this information. Developing nations, lacking the resources and technical know-how, are expected to have particular difficulties implementing these new requirements.

The way the BEPS project is shaping up, and given that several countries are already acting on the OECD's recommendations, CbC reporting looks like an inevitability. However, given doubts about how CbC reporting will work in the real world, this is something of a journey into the unknown, and until it becomes the norm in the world of transfer pricing, multinationals and governments are going to be on a steep learning curve.

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