OECD Country-by-Country Reporting: What You Need to Know
By Elaine Young, Advisory Manager, Radius
In late 2015, the Organization for Economic Cooperation and Development (OECD) released new transfer pricing and country-by-country reporting (CbCR) guidelines. Under the new CbCR requirements, certain multinational enterprises (MNEs) will be required to provide additional information to international tax authorities on their global business operations, economic activities and transfer pricing policies.
These CbCR reports will in turn be scrutinized and used by local tax authorities as part of their global tracking of MNEs’ transfer pricing positions.
This post summarizes the key aspects of the new CbCR requirements and how they may affect your business.
Background and Key Takeaways
To date, at least 44 countries have enacted or indicated their intention to enact the CbCR guidelines into their local legislation, including the US, Canada, Japan and the UK. The list of participating countries is only expected to grow. Even non-OECD countries such as Singapore and Hong Kong have recently announced their commitment to adopt the global implementation of CbCR requirements as Base Erosion Profit Shifting (BEPS) Associates. Here is some more background on the initiative:
- According to the OECD/G20’s “Action 13: Guidance on the Implementation of Transfer Pricing Documentation and Country-by-Country Reporting,” the new CbCR requirements will apply to MNEs with consolidated group revenue of more than €750 million (or “near equivalent in domestic currency”).
- Affected MNEs will need to adopt a three-tiered approach to transfer pricing documentation. This approach consists of the following tiers (see page three of the OECD Action 13 guidance document mentioned above for more information):
- A master file containing high level information regarding the MNE’s business operations and transfer pricing policies.
- A local file containing detailed transfer pricing documentation for each country that the MNE operates in.
- A Country-by Country Report (CbC Report) disclosing the amount of revenue, profit before income tax, income tax paid and accrued, number of employees, stated capital, retained earnings and tangible assets for each tax jurisdiction the MNE does business in.
- CbC Reports must be filed annually in the tax jurisdiction where the parent company is headquartered. Depending on the adoption date for the concerned country, the first CbC Report could be filed as early as December 31, 2017 (that is, for December 31 fiscal-year-end companies operating in countries with CbCR reporting requirements effective from January 1, 2016). The CbC Reports will be shared between tax jurisdictions through automatic exchange of information mechanisms in place between countries.
- The OECD’s CbCR guidelines are recommendations only, and the OECD acknowledges “that some jurisdictions may need time to follow their particular domestic legislative processes in order to make the necessary adjustments into law.” For these reasons, there are and will likely be potential differences in reporting requirements between adopting countries. For instance, some countries have mandated CbC reporting at different effective dates or at lower revenue thresholds. Some countries have a requirement to file CbC Reports even when the parent company is not situated in that country.
What the CbCR Requirements Mean for You
Regardless of whether CbCR applies to your organization, it is clear that accurate and complete transfer pricing documentation is no longer a “nice-to-have” but a “need-to-have.” Tax authorities around the world are aggressively auditing related-party cross-border transactions and transfers. Noncompliance with the CbCR requirements may result in hefty penalties and fines, increased multi-jurisdictional simultaneous tax audits and potential criminal sanctions.
In short, businesses of all sizes should not underestimate the new CbCR requirements. Even multinationals that do not meet the current group-revenue threshold should actively stay abreast of CbCR developments in their countries of operation and plan for possible CbCR compliance requirements. A good place to start is an annual review of global transfer pricing positions and associated documentation. At the very least, all businesses should ensure that proper intercompany agreements are in place to support any intercompany transactions.
Some Additional Information and Actions to Consider
- MNEs that may be close to the CbCR threshold should review their existing transfer pricing documentation as soon as possible to identify any documentation gaps or compliance and reporting difficulties. Forecasted global consolidated revenue should be reviewed quarterly to identify any CbCR requirements in advance.
- Due to the fact that the new CbCR regulations vary by participating country, companies should regularly review local CbCR regulations enacted in each relevant jurisdiction to ensure compliance.
- The amount of information to be disclosed in the CbC Report is extensive; sustainable and efficient internal processes should be devised to gather the required information annually.
- MNEs may no longer be able to rely on domestic safe harbors to avoid the preparation of transfer pricing documentation.