On 6 February 2015, the OECD issued guidance on the implementation aspects of Country-by-Country (“CbC”) Reporting for tax, following up from its report in September describing a three-tiered (master file, local file and CbC Report) approach to transfer pricing documentation. This represents one of the most significant milestones in the OECD’s Base Erosion and Profit Shifting (“BEPS”) initiative.
The OECD, G20 and tax administrations see it as the single most important achievement of the international tax transparency agenda.
Entry into force – The first CbC Reports are required for fiscal years beginning on or after 1 January 2016.
Exemption for small international groups – There is to be an exemption for groups with total revenues of less than €750 million (but the appropriateness of this will be reviewed in 2020). There will be no other exemptions: all industries will be included, as will investment funds and all ‘non-corporate’ entities.
Consistency of data disclosed – The OECD emphasised the importance of applying the standard CbC Reporting template in view of decreasing taxpayer administrative costs. Confidentiality - Information provided in the CbC Reports will not be available to the public and will only be exchanged between tax authorities through existing mechanisms under double tax conventions (or as enabled through the OECD’s proposed multinational instrument).
Appropriate use – Jurisdictions are directed to use the CbC Report to assess high-level transfer pricing risk but may also use it to assess other BEPS-related risks.
Filing mechanisms – CbC Reports will be filed with the jurisdiction of the ultimate parent entity of a group within one year from the close of the fiscal year concerned. A requirement to file locally or to the next tier parent entity may be required if the ultimate parent jurisdiction does not require CbC Reporting or if there is no adequate mechanism for the timely exchange of CbC Reports (or there is a failure to do so in practice).
Government-to-government exchange of information – The OECD will develop an ‘implementation package’ to facilitate automatic exchange of information amongst tax authorities by the end of April 2015.
Effective risk assessment
The primary purpose of CbC reporting is as a risk assessment tool for tax administrations. The OECD specifically recognise in their release that the need for countries “for more effective dispute resolution may increase as a result of the enhanced risk assessment capability following the adoption of a CbC Reporting requirement”.
We can help your business Giving the new country-by-country reporting requirements and the increased scrutiny of transfer pricing by tax authorities it will be key for business to closely monitor the new OECD developments and prepare the necessary documentation in view of the new stringent documentation requirements and a potential in-depth transfer pricing audit.