Executive summary
On 13 September 2018, the Organisation for Economic Co-operation and Development (OECD) released additional guidance to give greater certainty to tax administrations and multinational enterprise (MNE) groups on the implementation and operation of Base Erosion and Profit Shifting (BEPS) Action 13 Country-by-Country (CbC) Reporting (CbCR). Accordingly, the existing guidance on the implementation of CbCR (the Guidance) has been updated to address the following issues: (i) the treatment of dividends for purposes of “Profit (loss) before Income Tax,” “Income Tax accrued (current year)” and “Income Tax paid (on cash basis)”; (ii) the use of shortened amounts in Table 1 of CbC reports; and (iii) the number of employees to be reported where the financial data of a Constituent Entity is reported on a pro-rata basis. The updated Guidance also includes a summary table of the existing interpretative guidance on cases of mergers, demergers and acquisitions.
Moreover, the OECD also published additional exchange relationships that have been activated under the Multilateral Competent Authority Agreement on the exchange of CbC reports (CbC MCAA) with respect to Bermuda, Curaçao, Hong Kong and Liechtenstein.
Detailed discussion
Background
On 5 October 2015, the OECD released its final report on Action 13 (the final report), Transfer Pricing Documentation and Country-by-Country Reporting, under its BEPS Action Plan.1 The report introduced a standardized three-tiered approach to transfer pricing documentation for MNEs consisting of a master file, a local file, and a CbC report.
To give greater certainty to tax administrations and MNE groups on the implementation and operation of CbCR rules, the OECD has been issuing additional guidance since June 2016.2 The OECD updated the said Guidance in December 2016,3 April 2017,4 July 2017,5 September 2017,6 November 2017,7 and February 2018.8
The OECD has also released other materials to support countries introducing CbCR. For example, in September 2017 the OECD issued two handbooks (one on the effective implementation of CbC reporting and another on effective tax risk assessment),9 and a report on the appropriate use of information contained in CbC Reports.10
On 13 September 2018, the OECD released a new update to the Guidance, and published additional exchange relationships that have been activated under the CbC MCAA with respect to Bermuda, Curaçao, Hong Kong and Liechtenstein.
Treatment of dividends from other constituent entities
The BEPS Action 13 final report explains that the column of Revenues in Table 1 of the CbC report should exclude payments received from other Constituent Entities (CEs) that are treated as dividends in the payor’s tax jurisdiction. However, the final report did not address whether the same approach should apply to the column on Profit (loss) before Income Tax.
As the Action 13 final report did not provide specific instructions on this issue and jurisdictions may have taken different approaches, the Guidance takes a flexible approach allowing jurisdictions to maintain their own approach. However, the Guidance encourages the Inclusive Framework members to require their taxpayers to indicate in Table 3 whether dividends received from other CEs are included in “Profit (loss) before Income Tax” in Table 1 and, if so, for which jurisdictions.
Additionally, for consistency, where dividends from other CEs are included in “Profit (loss) before Income Tax” in Table 1, any income tax accrued or income tax paid on these dividends should be reported in the relevant column(s).
Use of round amounts in Table 1
The Guidance clarifies that amounts in Table 1 should be reported in full whole units, and therefore any rounding to shorten amounts is not permitted. By way of example, the guidance explains that an amount of 123 456 789 should not be reported in thousands, and accordingly shortened, for example, to 123 457.
Number of employees
Where the financial data of a CE is reported on a pro-rata basis (for example, when accounting rules require proportionate consolidation in the presence of minority interests), the number of employees of the CE should also be reported on a pro-rata basis.
The Guidance encourages members of the Inclusive Framework on BEPS to require as soon as possible their taxpayers to include the following statement in Table 3 of the CbC report when using proportionate consolidation: “The number of employees of the Constituent Entity A (specified) in Jurisdiction X (specified) is reported on a pro-rata basis in accordance with the pro-rata reporting of the financial data of A.”
Table summarizing the guidance on Mergers/Demergers/Acquisition
The Guidance includes a summary table on the existing interpretative guidance on the approach to be applied in cases of mergers, demergers and acquisitions.
Activated exchange relationships for Country-by-Country Reporting
The OECD also published additional exchange relationships that have been activated under the CbC MCAA. Currently, together with the exchange relationships under the European Union Council Directive 2016/881/EU and the bilateral competent authority agreements for exchanges under Double Tax Conventions or Tax Information Exchange Agreements, there are over 1,800 automatic exchange relationships established among jurisdictions committed to exchanging CbC reports. With this update, a set of newly established bilateral exchange relationships under the CbC MCAA were published with respect to Bermuda, Curaçao, Hong Kong and Liechtenstein.
The full list of automatic exchange relationships that are in place and an update on the implementation of the domestic legal framework for CbCR in jurisdictions are available on the OECD website.
Implications
Since the OECD released the Action 13 final report, there has been ongoing and increasing activity around CbCR requirements. The Guidance marks the eighth release by the OECD regarding practical questions that have arisen concerning the implementation and operation of CbCR. Although some of the new Guidance should be implemented by jurisdictions before it is applicable to taxpayers, it is important to anticipate these changes and understand their impact in the preparation of the CbC reports for reporting fiscal year 2017.
The Guidance will continue to be updated with any further guidance that may be agreed by the Inclusive Framework on BEPS. Taxpayers should continue to closely monitor new or amended reporting requirements and how countries implement or react to the new Guidance.
The additional exchange relationships under the CbC MCAA are a positive development as it will reduce the need for local filing for MNE groups located in Bermuda, Curaçao, Hong Kong and Liechtenstein.
Endnotes
1. See EY Global Tax alert, OECD releases final report on transfer pricing documentation and Country-by-Country reporting under Action 13, dated 21 October 2015.
2. See EY Global Tax alert, OECD releases additional Guidance on implementation of Country-by-Country reporting, dated 29 June 2016.
3. See EY Global Tax alert, OECD updates guidance on Country-by-Country Reporting and launches new site on country-specific implementation, dated 5 December 2016.
4. See EY Global Tax alert, OECD updates its Guidance on Country-by-Country Reporting, dated 7 April 2017.
5. See EY Global Tax alert, OECD releases update of Guidance on the Implementation of Country-by-Country Reporting, dated 19 July 2017.
6. See EY Global Tax alert, OECD releases further guidance on Country-by-Country Reporting, dated 7 September 2017.
7. See EY Global Tax alert, OECD releases additional guidance on Country-by-Country Reporting, dated 4 December 2017.
8. See EY Global Tax alert, OECD releases country approaches to Country-by-Country Reporting Guidance and adds additional questions, dated 9 February 2018.
9. See EY Global Tax alert, OECD publishes two handbooks on Country-by-Country reporting, dated 3 October 2017.
10. See EY Global Tax alert, OECD releases further guidance on Country-by-Country Reporting, dated 7 September 2018.
