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Executive summary
On 4 October 2022, the OECD published the compilation of the outcomes of the fifth annual peer review (the Compilation) of the minimum standard on Action 13 (Transfer Pricing Documentation and Country-by-Country Reporting) of the BEPS project. The Compilation covers 134 jurisdictions and reflects that implementation of CbCR has been found to be largely consistent with the Action 13 minimum standard. However, 28 jurisdictions have received a general recommendation to either put in place or finalize their domestic legal or administrative framework and 27 jurisdictions have received one or more recommendations to make improvements to specific areas of their reporting frameworks.
On 13 October 2022, the OECD updated its publication Guidance on the Implementation of Country-by-Country Reporting (the Guidance (pdf)). The updates to the Guidance provide clarifications on the following topics: (i) use of positive and negative figures in Table 1; (ii) reporting permanent establishment information in Table 2; and (iii) treatment of certain short accounting periods or long accounting periods.
Detailed discussion
Background
In October 2015, the OECD released the final reports on all 15 focus areas of the BEPS Action Plan.1 Action 13 establishes CbCR requirements as a minimum standard, which is subject to peer review. On 1 February 2017, the OECD released terms of reference for the peer review on implementation of BEPS Action 13 on CbCR,2 including the items to be reviewed in three key areas: (i) the domestic legal and administrative framework; (ii) the exchange of information framework; and (iii) the confidentiality and appropriate use of Country-by-Country (CbC) reports.
The peer review process is a staged approach, which is intended to allow for the early detection of inconsistencies with the minimum standard as well as to provide jurisdictions with the opportunity to take action to address inconsistencies. Each phase of the peer review focused on different key aspects of jurisdictions’ implementation. During phase one of the peer review, the review focused on the domestic legal and administrative framework as well as certain aspects of confidentiality. During phase two, the review focused on the exchange of information framework and appropriate use. For phase three and onwards, the review covers all three key aspects of jurisdictions’ implementation.
On 23 May 2018, the OECD released the first compilation of annual peer reviews, reflecting the review of 95 jurisdictions that provided legislation or information pertaining to the implementation of CbCR.3 The second compilation of annual peer reviews, covering a total of 116 jurisdictions, was released on 3 September 2019.4 The third compilation of annual peer reviews, covering a total of 131 jurisdictions, was released on 24 September 2020,5 and the fourth compilation of annual peer reviews, covering a total of 132 jurisdictions, was released on 29 October 2020.6
To give greater certainty to tax administrations and multinational enterprise (MNE) groups on the implementation and operation of CbCR rules, the OECD has also been issuing CbCR guidance since June 2016.7 The OECD has updated the Guidance in December 2016,8 April 2017,9 July 2017,10 September 2017,11 November 2017, February 2018,12 September 2018,13 November 2019,14 and December 2020.15
The OECD has also released various other materials to support jurisdictions introducing CbCR. In September 2017, for example, the OECD issued two handbooks (one on the effective implementation of CbCR and another on effective tax risk assessment for tax administrations)16 and a report on the appropriate use of information contained in CbC reports.17 In November 2019, the OECD published a summary of what was described as common errors made in preparing CbC reports, and in December 2019, the OECD published a summary of CbCR notification requirements.
Fifth annual peer review report on CbCR
On 4 October 2022, the OECD published the compilation of the outcomes of the fifth annual peer review of the minimum standard on CbCR under Action 13 of the BEPS project. The individual section on each jurisdiction generally reflects the status of implementation as of 31 March 2022, with the exception of the information on the exchange of CbC reports which reflects the status as of 31 December 2021.
According to the executive summary accompanying the Compilation, the fifth annual peer review covers 134 jurisdictions[xviii] that provided legislation and/or information relating to their implementation of CbCR, covering almost all MNE groups with consolidated group revenue equal to or exceeding €750 million. Seven Inclusive Framework member jurisdictions[xix] were not included in the peer review, either because they joined the Inclusive Framework after 1 December 2020 (at which point it was too late to incorporate them into this peer review) or because they opted out of the peer review in accordance with the peer review terms of reference. Jurisdictions opting out of the peer review are required to confirm that they do not have any resident entities that are the Ultimate Parent Entity of an MNE group with revenue above the consolidated revenue threshold and that they will not require local filing of CbC reports. Each of the jurisdictions reviewed received its own individual report, all of which together make up the Compilation.
Where legislation is in place, the implementation of CbCR has been found to be largely consistent with the Action 13 minimum standard. However, 28 jurisdictions have received a general recommendation to either put in place or finalize their domestic legal or administrative framework. Of the jurisdictions that have already introduced the legislation, 27 jurisdictions received one or more recommendations to make improvements to specific areas of their framework.
The Compilation further reports that 82 jurisdictions have multilateral or bilateral competent authority agreements in place, resulting in more than 3,000 exchange of information relationships. Of the jurisdictions included in this peer review, 88 have undergone an assessment by the Global Forum on Transparency and Exchange of Information for Tax Purposes concerning confidentiality and data safeguards in the context of implementing the automatic exchange of information standard and did not receive any action plan in this regard. As it contains non-public information on jurisdictions’ internal systems and procedures, the outcomes of that assessment are not published and no further details of the review of confidentiality are provided in this Compilation. In addition, 64 jurisdictions have provided detailed information about the appropriate use of CbC reports, enabling the Inclusive Framework to obtain sufficient assurance that measures are in place in such jurisdictions to ensure the appropriate use.
Work will continue to monitor the implementation and operation of CbCR by members of the Inclusive Framework and the progress that is made by jurisdictions in addressing the recommendations that they have received.
Updated guidance on the implementation of CbCR
On 13 October 2022, the OECD released additional guidance on the implementation of CbCR covering the following topics: (i) use of positive and negative figures in Table 1; (ii) reporting permanent establishment information in Table 2; and (iii) treatment of certain short accounting periods or long accounting periods.
Use of positive and negative figures in Table 1
The BEPS Action 13 report provides that in completing the CbCR template, an MNE group may choose to use data from its consolidation reporting packages, from separate entity statutory financial statements, regulatory financial statements or internal management accounts, so long as it consistently uses the same sources of data from year to year. However, the Guidance explains that uncertainty has arisen as to whether specific amounts should be included in Table 1 as positive or negative amounts. To this end, the Guidance includes a chart indicating the situations in which a given number should be reported in Table 1 as a positive or a negative amount. For example, Stated Capital and the Number of Employees should be positive amounts, and Accumulated Earnings could be either a positive or negative amount.
Reporting permanent establishment information in Table 2
The BEPS Action 13 report provides that a Constituent Entity that is a permanent establishment should be listed in Table 2 by reference to the tax jurisdiction in which it is situated, and the legal entity of which it is a permanent establishment should be noted. To give greater certainty to tax administrations and MNE groups, the Guidance includes an example illustrating how a permanent establishment is to be reported in Table 2.
Certain short accounting periods or long accounting periods
The BEPS Action 13 report includes general instructions on the period covered by an MNE group’s annual CbC report. In general, the CbC report template should cover the fiscal year of the Reporting MNE (i.e., the ultimate parent entity of an MNE group). For Constituent Entities, at the discretion of the Reporting MNE, the template should reflect on a consistent basis either: (i) information for the fiscal year of the relevant Constituent Entities ending on the same date as the fiscal year of the Reporting MNE or ending within the 12-month period preceding such date; or (ii) information for all the relevant Constituent Entities reported for the fiscal year of the Reporting MNE.
When the Reporting MNE chooses to apply approach (i) above, some of the information contained in Table 1 may relate to a period that does not correspond with the fiscal year of the Reporting MNE (e.g., if the Reporting MNE has a reporting period of less than or more than 12 months). In such cases, the length of the reporting fiscal year of the Reporting MNE may differ from the length of the fiscal year of Constituent Entities (e.g., a Constituent Entity may have two fiscal years, or no fiscal year, that ends within the 12-month period preceding the date of the end of the Reporting MNE’s fiscal year). The Guidance includes examples illustrating how these situations should be reflected in Tables 1, 2 and 3.
Implications
Since the OECD released the Action 13 final report, there has been ongoing and increasing activity around the CbCR requirements. The Guidance has been updated multiple times to address practical questions that have arisen in the implementation and operation of CbCR. The Guidance will continue to be updated with further guidance that is agreed on by the Inclusive Framework jurisdictions. Taxpayers should factor updates to the Guidance into their compliance and reporting processes and should continue to monitor how jurisdictions implement such updates.
The peer review Compilation underscores the widespread implementation of CbCR requirements around the world and the increased sharing of tax and financial data among tax authorities. Moreover, CbCR plays an important role in ongoing developments in several related tax policy areas, such as the OECD/G20 BEPS 2.0 project, the International Compliance Assurance Program, and the new European Union requirements on public CbCR. The use of CbCR data for other purposes heightens the importance of the minimum standard on CbCR under BEPS Action 13 and the peer review process with respect to this minimum standard.
For additional information with respect to this Alert, please contact the following:
Ernst & Young Belastingadviseurs LLP, Rotterdam
- Ronald van den Brekel
- Marlies de Ruiter
Ernst & Young Belastingadviseurs LLP, Amsterdam
- David Corredor-Velásquez
- Konstantina Tsilimigka
Ernst & Young Limited (New Zealand), Auckland
- Matt Andrew
Ernst & Young LLP (United States), Global Tax Desk Network, New York
- Jose A. (Jano) Bustos
Ernst & Young LLP (United States), Washington, DC
- Barbara M. Angus
For a full listing of contacts and email addresses, please click on the Tax News Update: Global Edition (GTNU) version of this Alert.
