Global Tax Alert (News from Transfer Pricing and Americas Tax Center) | 9 August 2016

Canada introduces country-by-country reporting legislation

  • Share

Executive summary

On 29 July 2016, following on the Organisation for Economic Cooperation and Development’s (OECD) Base Erosion and Profit Sharing (BEPS) initiative, the Canadian Department of Finance released draft legislative proposals that would implement certain measures from the 2016 budget, including those addressing country-by-country reporting. The draft proposals would apply to fiscal years of multinational enterprises (MNEs) that begin after 2015. The draft legislation follows the final recommendations issued by the OECD in October 2015.

The draft legislation will add new Section 233.8 — Country-by-Country Reporting (CbCr) — to the Canadian Income Tax Act. The proposed legislation will require that a country-by-country report in prescribed form be filed in prescribed manner with the Minister by entities of an MNE group, unless the MNE is an excluded MNE group. An excluded MNE group is defined as an MNE group having less than €750 million in consolidated group revenue in the preceding fiscal year.

The prescribed form of filing has not yet been determined, but it is expected to largely follow the reporting template released by the OECD. Data required to complete the OECD template includes detailed information by jurisdiction regarding related and unrelated revenues, profits or loss before income tax, income tax paid on a cash basis, accrued income tax during the year, stated capital, accumulated earnings, number of employees and tangible assets.

The legislative proposals can be viewed at
http://www.fin.gc.ca/n16/16-093-eng.asp.

Interested parties are invited to provide comments on the draft legislative proposals by 27 September 2016
fin.legislation-taxation-legislation-taxation.fin@canada.ca.

Detailed discussion

Filing obligations

Reporting would be required by the MNE’s ultimate parent entity where that entity is resident in Canada, or by a constituent entity of the MNE group resident in Canada where the ultimate parent is either not obligated to file a country-by-country report in its home jurisdiction, or there is no mechanism or an ineffective mechanism for the Canada Revenue Agency (CRA) to receive the report via exchange of information with the home jurisdiction government. The reporting requirement can be fulfilled by an MNE entity that is not the ultimate parent entity — a surrogate parent entity — fulfilling the CbCr requirement in a jurisdiction that requires such reports and has an operative and effective exchange-of-information mechanism with Canada.

Time for filing

The country-by-country report must be filed before the later of 12 months after the ultimate parent’s fiscal year end or within 30 days of a notification by the Minister to an MNE entity of a “systemic failure” — this being essentially the ineffectiveness of an existing exchange of information mechanism between Canada and the MNE ultimate parent’s home jurisdiction.

Penalties

Penalties are set out in the draft legislation for failure to comply with the new reporting requirements. The penalties dealing with the failure to furnish foreign-based information will apply to the country-by-country report. These penalties can reach C$12,000 per report, or C$24,000 in situations where a demand has been issued by the Minister to file the report.

Implications

CbCr is a key component of the global trend towards greater tax transparency by MNEs.

For Canadian MNE members, the draft proposals provide long-anticipated direction on the compliance requirements for CbCr in Canada. Canadian MNE members should consider whether their MNE will be an excluded MNE under the legislation and, if not, what steps are necessary to ensure Canadian compliance bearing in mind the home jurisdiction of the ultimate parent. Although the draft legislative proposals do not currently include adoption of the other elements of BEPS Action 13 (master file and local file), Canadian companies should be mindful of their implementation by other countries and therefore the importance of the integration of the three elements.

Canadian ultimate parent entities should consider the local requirements for CbCr in the various jurisdictions in which the MNE operates. Penalties may also apply in these other jurisdictions, in the event the Canadian report is not filed on a timely basis to be available for automatic exchange with the competent authority of the other jurisdiction.

Canadian subsidiaries of MNEs should confirm that their ultimate parent entity is located in a jurisdiction that obliges the ultimate parent to file a CbCr report in its home jurisdiction, and whether the home jurisdiction has an effective mechanism for the CRA to receive the report via exchange of information. If this is not so, the Canadian MNE member should identify which entity in the MNE group will act as the surrogate parent entity in Canada for the group.

From a compliance perspective, Canadian MNE entities must take steps to ensure the MNE ultimate parent is aware of the Canadian requirements and be prepared to ensure that the required data is gathered and available for reporting on a timely basis. Since the Canadian reporting requirements will apply to 2016 fiscal years, and given the challenges many corporate tax departments may face collecting data in legal entity format, this preparation should be commenced as soon as possible.

From a risk management perspective, taxpayers must bear in mind that CbCr will be used by tax authorities to assess transfer pricing risk. There are a number of strategic decisions to be made when completing the template. These should be considered in light of how the tax authorities are likely to interpret the data. Accordingly, we recommend that companies perform a “dry-run” of the country-by-country report using 2015 fiscal year data. This will allow management to identify and resolve information-gathering issues and potential risks raised by the country-by-country report results.

EY has developed a CbCr approach along with a CbCr assessment tool to help companies establish an efficient and sustainable process to collect the information, review the results and file the required information.

For additional information with respect to this Alert, please contact the following:

Ernst & Young LLP (Canada), Toronto

  • Andrew Clarkson
    +1 416 943 2146
    andrew.clarkson@ca.ey.com
  • Tara Di Rosa
    +1 416 943 2671
    tara.dirosa@ca.ey.com
  • Sean Kruger
    +1 416 941 1761
    sean.kruger@ca.ey.com
  • Ken Kyriacou
    +1 416 943 2703
    ken.kyriacou@ca.ey.com
  • Andrew Ross
    +1 416 943 5499
    andrew.ross@ca.ey.com
  • Tom Tsiopoulos
    +1 416 943 3344
    tom.tsiopoulos@ca.ey.com

Ernst & Young LLP (Canada), Quebec and Atlantic Canada

  • Rachel Spencer
    +1 514 879 8214
    rachel.spencer@ca.ey.com
  • Wael Tfaily
    +1 514 879 6695
    wael.tfaily@ca.ey.com
  • Alfred Zorzi
    +1 514 874 4365
    alfred.zorzi@ca.ey.com

Ernst & Young LLP (Canada), Ottawa

  • Rene Fleming
    +1 613 598 4406
    rene.fleming@ca.ey.com
  • Paul Mulvihill
    +1 613 598 4339
    paul.f.mulvihill@ca.ey.com
  • Tony Wark
    +1 613 598 4322
    tony.wark@ca.ey.com
Ernst & Young LLP (Canada),Prairies
  • Lawrence Greer
    +1 403 206 5031
    lawrence.a.greer@ca.ey.com
Ernst & Young LLP (Canada),Vancouver
  • Tina Berthaudin
    +1 604 891 8207
    tina.berthaudin@ca.ey.com
  • Greg Noble
    +1 604 891 8221
    greg.noble@ca.ey.com
  • Matthew Sambrook
    +1 604 899 3559
    matthew.sambrook@ca.ey.com
  • Adrian Tan
    +1 604 891 8318
    adrian.tan@ca.ey.com

EYG no. 02369-161Gbl