OECD draft of Transfer Pricing Country-By-Country Tax Reporting

Barbara M. Angus, EY shares her views on CNBC-TV18 on ‘The Firm’

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Country-By-Country Tax Reporting!

It’s the newest challenge facing multinational corporations across the world – country by country tax reporting. What does it mean and how soon will it be here; especially now that OECD has released a draft template in keeping with its BEPS principles? CNBC-TV18’s Menaka Doshi speaks to EY’s Barbara Angus on this.

Doshi: Let me start first my asking you to explain very simply to our viewers what exactly country-by-country tax reporting means?

Angus: Country by country reporting is an initiative of the OECD and the G20 countries that is intended to provide tax authorities with a big picture view of a company’s global operations. The concept is simple – a template of high level information about a company in each country in which it operates that will be provided to the tax authorities in every country where it operates. It is to be used by the tax authorities as an initial step of high level risk assessment in order to determine where further attention may be appropriate.

It is important to remember that the country by country initiative parallels another initiative of the OECD that is aimed at standardizing and expanding the transfer pricing documentation that companies provide to support their allocation of global results of the company across the entities that contribute to those results.

Doshi: As per the OECD draft which has just recently been put out and as per the conversations that you are picking up, would companies have to report these tax payments country wise i.e. jurisdiction wise or would it have to be entity wise - so even if there are more than one entity in one jurisdiction it would have to be broken down into all those entity wise reports?

Angus: The initial draft template that the OECD has released actually isn't country by country reporting; it is entity by entity reporting. So, global companies would be required to provide all of the specified information for each entity within the company group.

Companies often have multiple entities within a country for variety of different reasons – regulatory, legal, management purposes, because of historic acquisitions. Often those entities within a country are operated together and they often also report on a combined basis for tax purposes. So, this entity by entity reporting would require that, for example, in the case of information about taxes, the combined tax payment that is made on behalf of the group of entities within a country would be required to be separated and allocated among the companies. So, entity by entity reporting as provided in the template - it adds a lot of entries to the template but it may well be information that isn’t particularly useful for the high level risk assessment purposes. In fact too much data could detract from that high level risk assessment.

Doshi: How detailed must this reporting be? For instance some multi-nationals have already started reporting or attempting to report country by country tax payments, except the criticism there for instance Vodafone where they have only reported absolute tax payments and they haven’t really contextualized that with the revenue earned in that jurisdiction or the profitability in that jurisdiction. As per the OECD template what do we know in terms of the specific information that has been sought from companies?

OECD Draft Template
Information required by each MNC group entity

  • Place of effective management
  • Important business activity code
  • Revenues

OECD Draft Template
Information required by each MNC group entity

  • Earnings before income tax
  • Cash basis income tax paid
  • Total withholding tax paid
  • Stated capital & accumulated earnings

OECD Draft Template
Information required by each MNC group entity

  • Number of employees
  • Total employee expense
  • Tangible assets
  • Intercompany payments

Angus: The draft template that the OECD has put out requires quite detailed reporting. It is really quite different than the core concept of high level information about profits taxes, economic activity across countries. What the template requires is 17 different data points for each entity in a group. So, information regarding revenues, income, a variety of different measures of taxes, employees, assets and a series of information about inter-company payments. This is information that companies typically don’t maintain in this form for any other purpose. So, it is information that would need to be developed for purposes of this template and again it is in addition to the more detailed granular transactional information that companies will provide as part of the new approach to transfer pricing documentation.

Doshi: So, what are you telling clients? How should they prepare for this? We are only at the first draft stage and we are probably many months, if not a couple of years away, from a final directive stage so to speak but how do companies prepare for this? What are some of the challenges that you anticipate?

Angus: There are couple of considerations that companies need to take into account now in order to prepare. One is to begin to consider the data that they have, the form in which they keep their data for their financial reporting processes and what kind of system and process changes and additions would be needed to produce this information in the form that it is likely to be required when the template is finalized. At the same time the template is in draft form and the OECD has stressed the importance of input from stakeholders. So, we think that companies really should consider actively engaging with policy makers to be part of the dialogue on how to develop a template that provides the information that the tax authorities are looking for and do so in a way that allows companies to use their best available information.

In terms of challenges, there are a few going forward. One challenge really is getting to the right balance in terms of what the template looks like to provide the information that is needed without undue additional burden and to balance the template with the additional and more detailed information that is provided as part of transfer pricing documentation. Another challenge is the question of whether ultimately countries will adopt the same template or will there be a variety of versions of the template. So, companies are faced with producing multiple versions of the template for each of the different countries in which they operate. Then finally an important consideration and a challenge going forward will be ensuring that the confidentiality of this information is protected. Much of this information is quite competitively sensitive. So, maintaining the protections that the tax laws provide regarding the confidentiality of this information will be really important.

Doshi: I know this is one of the 15 things that the OECD laid out in its effort to tackle base erosion and profit shifting. Will this transparency that country by country tax reporting inevitably mean a rise in tax liability for multi-national corporations across the world?

Angus: The transparency initiative is an important element of the larger project that the OECD is engaged in. It really goes hand in hand with the other action items as part of the OECDs base erosion and profit shifting project - focusing on reassessing various elements of the international tax rules and making sure that the international tax rules country to country and most importantly the interaction of rules across countries operate in the way that is intended and have kept pace with the way that the companies operate. It is important to have rules that provide certainty to business, that minimize the potential for disputes between business and government and also between governments. The transparency element of the OECD project and the broader project is aimed at all of that.

Doshi: This is going to be a challenging transition. Thank you for throwing some light on this early draft put out by the OECD on country by country tax reporting.